Traded Guitars With Someone & Found Out Later My Guitar Was Counterfeit. How To Proceed?

Location: Tennessee

I recently traded guitars (my Telecaster for his Stratocaster) with someone from another state while I was on vacation with my family. I’ve been watching my local (TN) FB marketplace for months with no guitar for guitar matches for someone looking to trade, rather than sell. I finally found one in the city (SC) I was planning on visiting soon, so I set up a trade. The trade was roughly equal in value/quality/condition, with mine being the latest model with less wear. However, I had never been happy with the Telecaster body (it’s pretty much just a solid slab) & I was happy with the other guitar I’d bought, a Stratocaster, so I was looking for another Stratocaster with a bridge pickup configuration that matched the Telecaster. Was fine with “trading down” a bit to get something I knew would fit me better.

A few days after the trade, the other person contacted me claiming that the guitar I traded them was a counterfeit. At first, I thought it might be a scam. But a few days later, he sent me clear evidence, I realized he was right. (I'm sure he did not switch guitars, it's 100% the one I traded him.)

I now have a genuine Stratocaster and they have a fake Telecaster worth much less, and he wants to either trade back (which would involve 6 hours of total driving for us & burning one of my limited vacation days) or for me to pay them $700.

I don’t want to trade back under any circumstances at this point. Seems like the worst of all potential outcomes- lots of time/gas spent on both our parts, neither sure the other hasn’t done something to the respective guitars in the last few days, etc. However, to make the situation right, I did initially offer him $400 via a secured goods & services payment using a method of his choice after their email proving it was a knock-off.

In our initial messages setting up the trade, he had a few different guitars & originally said he'd sell the Stratocaster for a cash price of $750 if I didn't want to trade. I came to my $400 figure using his estimation of the $150 the Telecaster knock-off is worth used & $150 for the Fender hard case they kept (as I brought mine in a soft case to fit in our car). They’ve hinted at having “police friends,” implying they might take action if I don’t meet their higher follow-up demand.

I’ve done some research and it seems this is a civil matter, not criminal fraud, since there was no intent to deceive on my part and the trade was made in good faith. Realistically, there was no way I could have known the guitar was fake, it was a very good reproduction (all the metal hardware was stamped, the headstock lettering was integrated into the finish, not a sticker, etc.) I’ve been learning how to play guitar for just over a year now & it was the second one I bought, so I’m sure a much worse counterfeit could have slipped by me. But he regularly buys, sells, & trades guitars as a side thing & it passed his initial inspection when we met up as well.

I’m willing to pay a reasonable amount to settle it fairly, but I don’t want to be taken advantage of or pressured by him turning this into an opportunity to turn even more of a profit- the change-up from his initially offered cash sale price of $750 to his response to my offer with “This is a $1,000 guitar” seems… incongruent.

My questions:

1. Am I legally required to reverse the trade or compensate beyond my good-faith offer? Further, am I legally required to provide *any* compensation? Just keeping the Stratocaster & leaving him with no restitution is super scummy & not my plan. I’m just wondering how much of a leg I have to stand on in settling on a fair compensation price & how much leverage he has to blow this into a much larger issue.
2. Could this person actually involve law enforcement, or would it strictly be a civil issue? From my understanding, it would be a very different situation if I listed pictures of a genuine Fender, but shipped something fake, or if I was a store that could be proven to have a history of selling fakes. However, this is the first guitar I’ve purchased that’s ever left my possession & he inspected it in person before the trade, so (in my limited understanding/research) I don’t think this would be a criminal matter.
3. Would my $400 offer demonstrate reasonable good-faith effort if this ever escalated? (Either as a civil or criminal matter if it falls under that umbrella.)

Tl;dr- Traded guitars with someone. Discovered after the trade that the one I gave him was counterfeit. Definitely aware of my moral obligation to make things whole, but what are my legal obligations? I’ve sent him an offer to provide a payment to cover the difference in value he’s out, but he wants more- far higher than I believe is reasonable.