In last night's address to Congress, Trump said the following about reciprocal tariffs:
Other countries have used tariffs against us for decades, and now it's our turn to start using them against those other countries. On average, the European Union, China, Brazil, India, Mexico and Canada ... and countless other nations charge us tremendously higher tariffs than we charge them. It's very unfair. India charges us auto tariffs higher than 100%. China's average tariff on our products is twice what we charge them. And South Korea's average tariff is four times higher. Think of that, four times higher. ... This is happening by friend and foe. This system is not fair to the United States, and never was. And so on April 2 ... reciprocal tariffs kick in, and whatever they tariff us, other countries, we will tariff them. That's reciprocal, back and forth. Whatever they tax us, we will tax them. If they do non-monetary tariffs to keep us out of their market, then we will do non-monetary barriers to keep them out of our market. It's a lot of that too. They don't even allow us in their market. We will take in trillions and trillions of dollars and create jobs like we have never seen before. I did it with China, and I did it with others, and the Biden administration couldn't do anything about it because it was so much money they couldn't do anything about it. We have been ripped off for decades by nearly every country on Earth, and we will not let that happen any longer.
I had some quick thoughts when Trump first announced his "reciprocal trade and tariffs" plan, and subsequently I put together something longer as a Baker Institute commentary. My main points in that piece are kind of obvious, but sometimes all you can do is state the obvious:
- Unilateral tariffs as a way to push for reciprocity would be an administrative nightmare and economically harmful to the US economy.
- Existing trade agreements establish a balance that previous US administrations wanted. US trade deficits do not mean that these US negotiators signed bad deals, because trade deficits are driven by macroeconomic factors.
- If the US wants to recalibrate the balance in its trade agreement, for example by focusing trade negotiations on lowering foreign tariffs rather than on issues such as intellectual property protection, that would be fine with me.
- Non-tariff barriers are complicated and a set of internationally agreed rules on when these are protectionist (and therefore illegitimate) is the best approach to dealing with them.
- Trade agreements are a good way to promote reciprocal trade liberalization, and were used for decades with great success. I hope U.S. trade policymakers will learn from these past successes (and current failures), and revive the old approach some day.
The piece concludes with the following:
Trump’s reciprocity memo appears to signal a unilateral move to raise U.S. tariffs in response to foreign tariffs and trade barriers. This approach is likely to cause serious problems for U.S. trade policy and for the trading system.
If the Trump administration were to attempt a unilaterally imposed “reciprocal” approach to trade and tariffs, it would come up against many administrative and methodological challenges. Calculating a U.S. tariff to be applied to each trading partner, taking into account both tariffs and other trade barriers in that country, will not be easy and the result is likely to look arbitrary. If the administration tries to match foreign tariffs and barriers on a product by product basis, it will be even more difficult.
In addition, the U.S. tariffs would lead to retaliation by trading partners, further damaging both the U.S. and global economies, and undermining U.S. influence in the process. It would functionally mean the U.S. is no longer participating in the world trading system it helped create, as it would be a flagrant violation of the rules of the WTO and all the FTAs it has signed. With most other countries continuing to uphold the system between each other, the U.S. risks losing influence by remaining on the sidelines. A more effective approach would be to engage and shape the rules from within.
When the dust settles on the current approach, the experience of the past may provide a way forward. After the Smoot-Hawley tariffs caused significant economic harm during the Great Depression, President Franklin D. Roosevelt implemented a U.S. trade policy centered on governments mutually agreeing to lower tariffs through trade agreements. This contributed to growth and prosperity in the U.S. and around the world in the ensuing decades. With recent alternative approaches to U.S. trade policy causing so many economic and political challenges, historical success stories may, at some point, receive a second look and a revival.
