I'm going to flesh this out a bit more later, but I wanted to post something now on today's Trump administration memo on reciprocal trade and tariffs, which involves agency investigations of "the harm to the United States from any non-reciprocal trade arrangements adopted by any trading partners," as well as proposals for remedies. (The Trump administration did a report on similar issues during Trump's first term).
Trump's memo mentions four specific areas to look at in making U.S. trade relations "reciprocal" with its trading partners:
- Tariffs imposed on U.S. products
- Unfair discriminatory, or extraterritorial taxes, including VAT
- Non-tariff barriers or measures and unfair or harmful acts, policies, or practices, including subsidies, and burdensome regulatory requirements
- Exchange rates, wage suppression, and "other mercantilist policies"
There is also a final category of "any other practice" that imposes any unfair limitation on market access or any structural impediment to fair competition with the United States.
Setting U.S. tariffs reciprocally with each trading partner and trying to take into account each of these items sounds like an administrative and methodological nightmare. But putting that aside, let's talk briefly about each one.
Tariffs
- The tariffs imposed by many U.S. trading partners are actually not much higher than those of the U.S., so the scale of any unequal tariffs is probably less than Trump is imagining. Canada and Mexico are part of the USMCA, under which the three countries have eliminated virtually all tariffs on trade between each other. And according to the WTO, the average tariff rates imposed by the EU and Japan are 5.0% and 3.7% respectively, which is not much higher than the U.S. rate of 3.3%.
- At the same time, some developing countries do have significantly higher tariffs. It is worth noting that, in recent decades, U.S. demands in trade negotiations have gotten away from pushing for lower tariffs, and instead have focused on issues such as stronger intellectual property rules and protection of labor rights. If the tariff system is out of balance, with U.S. tariffs higher than those of trading partners, it is at least in part due to the U.S. emphasis on other issues. A shift back towards lowering foreign tariffs as the focus is possible, but it would likely mean giving up some of what the U.S. was able to achieve in these other areas.
- The data used for national tariff comparisons tend to focus on the standard tariffs that are set out in a government's tariff schedule, but there are other kinds of tariffs not included here. One example is anti-dumping tariffs, which are used to counter low priced imports, and can be imposed on specific products after an investigation by government authorities. For example, in 2024, the Biden administration imposed anti-dumping duties of 744.81% on Slovenian mattress imports. When you take into account tariffs of this type, U.S. tariffs don't look as low anymore.
Unfair Taxes
- Part of the focus here is on things like digital services taxes affecting U.S. tech companies, which a White House fact sheet mentions. I'm not a tax expert, but I am aware of the general problems of companies taking advantage of favorable tax treatment in certain countries to lower their tax bills and governments trying to fight back by capturing some tax revenue from companies that generate income in their country. From the outside, this all looks like a mess, and I've never had much hope that international coordination was going to get anywhere. With regard to Trump's proposal to respond to certain taxes with tariffs, I would think that would just lead to retaliation by the targeted countries.
- Concern about foreign VATs is a long-standing issue that Gary Hufbauer has written and talked a lot about over the years. Looked at on its own, the VAT is a non-discriminatory tax. But I think the issue arises because you have a U.S. system that relies heavily on incomes taxes that are not destination adjusted, whereas many other systems rely less on income taxes and more or destination-adjusted VATs. Does that situation lead to trade distortions or unfairness of some sort?
Non-tariff barriers
- Governments have been complaining for decades about how other governments' domestic regulations act as trade barriers, and there is an extensive set of rules in trade agreements that govern the issue. There has been some interesting GATT/WTO litigation about this over the years, sometimes productive and sometimes not in terms of resolving disagreements. Will unilateral tariffs imposed to counteract foreign government regulations be successful in inducing a change in policy? Or will they just lead to retaliation by the foreign government? As with the taxes noted above, my money is on the latter, but we'll see how this plays out.
Exchange Rates
- My view of currency manipulation is that it can be a real problem and it would be nice to have effective international rules to govern it. There are very brief rules on it in GATT Article XV:4, but something more detailed would be useful (some FTAs go a bit further). As with the previous two items though, I'm skeptical that unilateral tariffs imposed as a response will be helpful in addressing this issue.
