Shenwan Hongyuan Group: What is the tax rate for US "equal tariffs"?

Shenwan Hongyuan Group Securities released a research report stating that on February 13th, Trump signed a "reciprocal trade and tariff" memorandum, announcing the introduction of value-added tax along with reciprocal tariffs. Value-added tax itself is trade war-neutral, but when combined with other measures, it can have unexpected effects on actual currency devaluation. The main points of Shenwan Hongyuan Group Securities are as follows: 1. Hot Topic Analysis: How high will the tariff rate be for the US "reciprocal tariffs"? - The goal of reciprocal tariffs: from tariffs to fiscal policy, targeting fiscal devaluation Looking at individual tax types, value-added tax is trade-neutral and not a core reason for trade barriers. It is a common practice in international trade to tax imported goods with value-added tax and provide tax refunds for exported goods. However, Trump believes that value-added tax regulates product prices, causing disadvantages for American goods in the international market. This judgment essentially focuses on the competitiveness of the entire tax system. Looking at the entire tax system, tariffs combined with value-added tax can simulate the effect of currency devaluation without adjusting the exchange rate, known as fiscal devaluation. Import tariffs can raise import prices, while value-added tax refunds for exports can lower export prices, combining the two has a similar effect to currency devaluation. The advantage is that it can achieve actual currency devaluation without involving monetary authorities. Without the cooperation of value-added tax, the US finds it difficult to achieve fiscal devaluation directly, putting its current tax system at a competitive disadvantage in global trade. The design of value-added tax helps in developing the manufacturing industry. In 2025, 175 countries globally use value-added tax, and the US is one of the few countries implementing sales tax. Due to constraints in monetary policy, achieving simulated devaluation through fiscal means may be one of its objectives. - The three-step strategy for fiscal devaluation in the US, tariffs, tax cuts, and border adjustment tax For the US, without value-added tax, fiscal devaluation can also be achieved through tariffs and internal tax cuts. The first step, increase tariffs to raise the price of imported goods; the second step, internal tax cuts to reduce export costs for businesses; the third step involves using the border adjustment tax proposed by Navarro in 2017 to simulate the effects of value-added tax refunds for exports, but this is more difficult. The key to the three-step plan is to maintain deficit neutrality. Reciprocal tariffs serve two main purposes. Firstly, to selectively increase prices of imported goods, the difference in tariffs between the US and other countries is mainly contributed by specific key products. Secondly, to maintain deficit neutrality through tariff revenues, difficulties in offsetting deficits with tariffs on Canada, Mexico, and China may force the US to increase reciprocal tariffs, while negotiations on reciprocal tariffs with allies such as Europe and the UK may be less than market expectations. - bypassing the Federal Reserve to achieve actual currency devaluation? Four major conditions may be difficult to meet The short-term success of fiscal devaluation in the US may be difficult to achieve actual currency devaluation. Referring to the European experience, successful fiscal devaluation requires maintaining fiscal neutrality, as seen in Spain in 2012; taxing does not lead to inflation, as seen in the failure in Germany in 2007; wages need to be flexible downwards, otherwise export costs may not decrease; and maintaining stable trade relations. The costs of reciprocal tariffs may be higher, and could lead to an increase in US tariff rates by 8 to 16 percentage points, and an increase in inflation by 0.8 to 1.8 percentage points. Reciprocal tariffs can be categorized into three scenarios: targeted reciprocation by specific countries, which may lead to an 8.2 percentage point increase in US tariff rates and a 0.8 percentage point increase in inflation; comprehensive reciprocal tariffs; further raising tariffs on competitors, possibly leading to uncontrollable inflation. Risk Warning: - escalation of geopolitical conflicts - US economic slowdown beyond expectations - Federal Reserve turning "hawkish" again.