The GDP Impact of Reciprocal Tariffs is a 0.59% Decline; Adding Auto Tariffs Increases the Decline to 0.71%–0.76%
On April 2, President Trump announced the implementation of reciprocal tariffs. With regard to Japan, the administration’s unique calculation—including non-tariff barriers—assumes that U.S. products face an effective tariff of 46%. Based on this assumption, a tariff of approximately half that rate, 24%, will be imposed. This scenario is close to the worst-case projection that was previously anticipated.
The additional 24% tariff is estimated to lower Japan’s nominal and real GDP by 0.59% over a relatively short period, such as one year. Additionally, the Trump administration has officially announced a 25% tariff on all automobile imports. If this auto tariff is added on top of the reciprocal tariff, Japan’s nominal and real GDP could decline by 0.76%, approximately 0.8%. If the auto tariff is not included within the reciprocal tariffs, the total GDP impact would be a decline of 0.71%, about 0.7%.
Japan's average annual real GDP growth rate is only around 0.5%, so a GDP reduction of 0.7%–0.8% would be a significant blow. It could even trigger an economic recession, which must be carefully considered.
The additional 24% tariff is estimated to lower Japan’s nominal and real GDP by 0.59% over a relatively short period, such as one year. Additionally, the Trump administration has officially announced a 25% tariff on all automobile imports. If this auto tariff is added on top of the reciprocal tariff, Japan’s nominal and real GDP could decline by 0.76%, approximately 0.8%. If the auto tariff is not included within the reciprocal tariffs, the total GDP impact would be a decline of 0.71%, about 0.7%.
Japan's average annual real GDP growth rate is only around 0.5%, so a GDP reduction of 0.7%–0.8% would be a significant blow. It could even trigger an economic recession, which must be carefully considered.
Reciprocal Tariffs Are Arbitrarily and Poorly Designed
Japan’s average tariff rate is estimated to be in the 3% range. However, the Trump administration considers that "U.S. products effectively face a 46% tariff" because it includes non-tariff barriers in its calculations. These non-tariff barriers likely include automobile environmental and safety standards, domestic automobile subsidies, the consumption tax, and currency policies. However, the calculation method remains opaque and appears highly arbitrary.
Additionally, President Trump stated that rice imports into Japan face a 700% tariff, but this is based on outdated information. The Trump administration has repeatedly cited this figure, and while the Japanese government has pointed out the error, it has never been corrected. This further highlights the poor design of the reciprocal tariff system.
Additionally, President Trump stated that rice imports into Japan face a 700% tariff, but this is based on outdated information. The Trump administration has repeatedly cited this figure, and while the Japanese government has pointed out the error, it has never been corrected. This further highlights the poor design of the reciprocal tariff system.
The Average Reciprocal Tariff Rate is Around 23%, Potentially Lowering Global Real GDP by 0.64%
The reciprocal tariff rates are set at 34% for China, 20% for the European Union (EU), and 25% for South Korea. Similar to Japan, these rates are roughly half of what the Trump administration perceives as the actual tariff burden imposed on U.S. products.
Additionally, a minimum tariff of 10% will be imposed on all other countries. This package combines the uniform tariffs that Trump proposed during his election campaign with retaliatory measures against countries that impose what the administration considers unfairly high tariffs.
Interestingly, Canada and Mexico are absent from the Trump administration's country-specific list of reciprocal tariffs. This is likely because they are already subject to a uniform 25% tariff.
A preliminary calculation, using data on import values by country (assuming a 25% tariff for Canada and Mexico), estimates the average reciprocal tariff rate at 23.4%. According to an OECD (Organization for Economic Cooperation and Development) model, this 23.4% tariff could lower global real GDP by 0.64% over three years. Since this calculation assumes equivalent retaliatory tariffs imposed on the U.S., it may slightly overestimate the impact. Nevertheless, the U.S. economy itself would also suffer, with GDP projected to decline by 1.69%.
As already shown, the direct impact of the 24% reciprocal tariff on Japan’s GDP is estimated at 0.59%. However, when considering the impact on other countries as well, the total GDP decline for Japan could reach 0.82%.
Additionally, a minimum tariff of 10% will be imposed on all other countries. This package combines the uniform tariffs that Trump proposed during his election campaign with retaliatory measures against countries that impose what the administration considers unfairly high tariffs.
Interestingly, Canada and Mexico are absent from the Trump administration's country-specific list of reciprocal tariffs. This is likely because they are already subject to a uniform 25% tariff.
A preliminary calculation, using data on import values by country (assuming a 25% tariff for Canada and Mexico), estimates the average reciprocal tariff rate at 23.4%. According to an OECD (Organization for Economic Cooperation and Development) model, this 23.4% tariff could lower global real GDP by 0.64% over three years. Since this calculation assumes equivalent retaliatory tariffs imposed on the U.S., it may slightly overestimate the impact. Nevertheless, the U.S. economy itself would also suffer, with GDP projected to decline by 1.69%.
As already shown, the direct impact of the 24% reciprocal tariff on Japan’s GDP is estimated at 0.59%. However, when considering the impact on other countries as well, the total GDP decline for Japan could reach 0.82%.
The Free Trade System Faces the Risk of Collapse
With the implementation of these reciprocal tariffs, U.S. tariff rates could exceed the 19.8% level seen in 1933, following the enactment of the Smoot-Hawley Tariff Act in 1930. At that time, retaliatory tariffs triggered a wave of global protectionism, leading to a contraction in world trade and economic stagnation, which is considered one of the contributing factors to World War II.
After World War II, the United States championed the promotion of free trade to prevent a repeat of past mistakes. However, the Trump administration is now significantly shifting this policy, threatening to dismantle the global free trade system. This shift will likely reduce economic efficiency and slow global growth.
It would be overly optimistic to assume that the reciprocal tariffs mark the end of the Trump administration’s tariff measures. The administration aims to eliminate trade deficits and revitalize U.S. manufacturing, and it is likely to consider additional actions to achieve these goals.
As for Japan, if the current reciprocal tariffs are deemed insufficient to eliminate the $86 billion trade surplus with the U.S. in 2024, the Trump administration may push for further tariff increases or demand measures to expand imports. Theoretically, imposing a 60% tariff on all Japanese exports to the U.S. could eliminate the trade surplus. However, such a move would lower Japan’s GDP by 1.4%, causing severe economic repercussions. The difficulties posed by the Trump administration’s policies for the Japanese and global economies are expected to persist.
After World War II, the United States championed the promotion of free trade to prevent a repeat of past mistakes. However, the Trump administration is now significantly shifting this policy, threatening to dismantle the global free trade system. This shift will likely reduce economic efficiency and slow global growth.
It would be overly optimistic to assume that the reciprocal tariffs mark the end of the Trump administration’s tariff measures. The administration aims to eliminate trade deficits and revitalize U.S. manufacturing, and it is likely to consider additional actions to achieve these goals.
As for Japan, if the current reciprocal tariffs are deemed insufficient to eliminate the $86 billion trade surplus with the U.S. in 2024, the Trump administration may push for further tariff increases or demand measures to expand imports. Theoretically, imposing a 60% tariff on all Japanese exports to the U.S. could eliminate the trade surplus. However, such a move would lower Japan’s GDP by 1.4%, causing severe economic repercussions. The difficulties posed by the Trump administration’s policies for the Japanese and global economies are expected to persist.
Domestic Opinion Shifts and Financial Market Turmoil Could Prompt a Reassessment of Trump’s Tariffs
One potential brake on Trump’s tariff policies is domestic opposition in the U.S., driven by rising prices and economic deterioration caused by the tariffs. If American citizens and businesses strongly demand a policy change, the administration might be forced to reconsider. Additionally, a significant decline in stock prices could further push public sentiment in this direction.
However, even if such factors lead the Trump administration to reassess its tariff strategy, it could take over six months for any changes to materialize. A more immediate reconsideration might occur if the tariffs trigger a financial crisis-like situation.
However, even if such factors lead the Trump administration to reassess its tariff strategy, it could take over six months for any changes to materialize. A more immediate reconsideration might occur if the tariffs trigger a financial crisis-like situation.
Profile
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Takahide KiuchiPortraits of Takahide Kiuchi
Executive Economist
Takahide Kiuchi started his career as an economist in 1987, as he joined Nomura Research Institute. His first assignment was research and forecast of Japanese economy. In 1990, he joined Nomura Research Institute Deutschland as an economist of German and European economy. In 1996, he started covering US economy in New York Office. He transferred to Nomura Securities in 2004, and four years later, he was assigned to Head of Economic Research Department and Chief Economist in 2007. He was in charge of Japanese Economy in Global Research Team. In 2012, He was nominated by Cabinet and approved by Diet as Member of the Policy Board, the committee of the highest decision making in Bank of Japan. He implemented decisions on the Bank’s important policies and operations including monetary policy for five years.
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