Last week, I asked a lot of questions related to what we might expect from Trump's "reciprocal tariffs." Now we have a few answers in the Executive Order and a fact sheet from yesterday. Let's go through them.
Which statutes will they use as the basis for the tariffs? Clark Packard and Scott Lincicome of Cato describe the main possibilities here: IEEPA, Section 232, Section 301, Section 338, and Section 122.
They went with IEEPA for these tariffs, but I will note that I heard a lot of talk about Sections 338 and 122 as possibilities here. If the IEEPA tariffs are challenged successfully in court, the administration has these other statutes to fall back on.
When exactly will the tariffs be imposed? IEEPA tariffs can come pretty quickly, while tariffs under certain other statutes could require a longer process (although some tariffs might be imposed under already completed processes). To what extent will the April 2 announcement be used as the basis for a negotiation rather than the immediate imposition of tariffs?
In terms of the timing, this is from the White House fact sheet:
- Using his IEEPA authority, President Trump will impose a 10% tariff on all countries.
- This will take effect April 5, 2025 at 12:01 a.m. EDT.
- President Trump will impose an individualized reciprocal higher tariff on the countries with which the United States has the largest trade deficits. All other countries will continue to be subject to the original 10% tariff baseline.
- This will take effect April 9, 2025 at 12:01 a.m. EDT.
The tariffs will happen pretty quickly, and if there's going to be a negotiation, it had better start soon.
What methodology will they use for the calculation of a reciprocal tariff rate to be applied to each trading partner? Coming up with a credible methodology is going to be a big challenge.
See USTR's explanation here for how they got to their tariff numbers. As I said in the question, "[c]oming up with a credible methodology is going to be a big challenge." If what they were trying to do was make U.S. tariffs/non-tariff barriers "reciprocal" with those of foreign countries, I don't think they've achieved that. They describe their approach as a "proxy" methodology, and they never actually carry out a comparison of U.S. tariffs/non-tariff barriers with individual foreign country tariffs/non-tariff barriers to see if there is reciprocity. Maybe if this goes to court they can put together an additional analysis to present, but what they have now seems insufficient.
Will the reciprocal tariffs include a sectoral component? It seems clear that tariffs are coming on autos and various other sectors, but is that part of the reciprocal tariff package, or will it be separate?
I think this is a clear no, with carveouts for specific sectors from these "reciprocal" tariffs, although I've seen some people raise interpretive questions about this part of the EO.
Which countries will be hit the hardest? Treasury Secretary Scott Bessent recently referred to the "Dirty 15," meaning the countries that have the highest tariffs/barriers and large trade imbalances with the U.S.
You can see the EO Annex I list of countries hit with tariffs above 10% here. At the top are Lesotho at 50%, Cambodia at 49%, Laos at 48%, Madagascar at 47%, Vietnam at 46%, and Myanmar at 45%. Not exactly what I was expecting.
Which governments will retaliate and in what amounts? The reaction by other governments will depend on their domestic politics as well as their strategizing about how to get to the best outcome. Will any of the retaliation go beyond tariffs, and do creative things such as weakening intellectual property protections? And will products/services from Elon Musk and other Trump allies be targeted?
The retaliation questions are still open. It's worth noting here that the Trump administration is warning against retaliation:
Sec. 4. Modification Authority. ...
(b) Should any trading partner retaliate against the United States in response to this action through import duties on U.S. exports or other measures, I may further modify the HTSUS to increase or expand in scope the duties imposed under this order to ensure the efficacy of this action.
But no doubt there's going to be some retaliation. Further U.S. escalation in response to any retaliation could make the economic impact of all this much worse.
Will any countries make concessions in the hopes of being subject to lower U.S. tariffs? If so, how meaningful will these concessions be in terms of actual value to U.S. companies? Will they be designed to look meaningful without actually doing much, or will there be real opportunities for U.S. exporters?
Some countries may try to offer something up, and the Trump administration seems open to it:
Sec. 4. Modification Authority. ...
(c) Should any trading partner take significant steps to remedy non-reciprocal trade arrangements and align sufficiently with the United States on economic and national security matters, I may further modify the HTSUS to decrease or limit in scope the duties imposed under this order.
Will these concessions be carried out through formal trade deals? If so, what will these deals look like? Will there be an enforcement mechanism?
Seems possible, but who knows.
Will the reciprocal tariffs get tied in with non-trade issues such as security? For example, will foreign defense spending be brought into the mix? Of course, part of the foreign defense spending issue is trade related, as a lot of foreign defense spending involves buying from U.S. companies. Thus, foreign defense spending could either be brought in as a concession (through buying more U.S. products) or retaliation (through buying less). Also on defense spending, will the U.S. authorize the sale of military technology that it had not previously allowed, as part of broader deals with specific countries? And will certain countries shift away from reliance on U.S. military equipment, due to concerns about the direction of U.S. foreign and trade policy?
The administration does mention alignment on "national security" in the EO, so security definitely seems tied in here.
Will there be lawsuits in U.S. courts against the reciprocal tariffs? If the calculation methodology looks arbitrary, that could be an important part of any legal challenge.
Lawsuits seems inevitable. As set out in the EO, the Trump administration's claim of a "national emergency" was based on the following:
Large and persistent annual U.S. goods trade deficits have led to the hollowing out of our manufacturing base; inhibited our ability to scale advanced domestic manufacturing capacity; undermined critical supply chains; and rendered our defense-industrial base dependent on foreign adversaries. Large and persistent annual U.S. goods trade deficits are caused in substantial part by a lack of reciprocity in our bilateral trade relationships. This situation is evidenced by disparate tariff rates and non-tariff barriers that make it harder for U.S. manufacturers to sell their products in foreign markets. It is also evidenced by the economic policies of key U.S. trading partners insofar as they suppress domestic wages and consumption, and thereby demand for U.S. exports, while artificially increasing the competitiveness of their goods in global markets. These conditions have given rise to the national emergency that this order is intended to abate and resolve.
I'm no IEEPA law expert, but I see plenty of arguments people can try here. For one thing, the view that a goods trade deficit constitutes a "national emergency" is a pretty big stretch. And even if it were an emergency, tariffs as the response don't make much sense. To address the overall deficit, you would want to focus on macroeconomic issues such as savings rates or currency levels, and while those are mentioned in the EO, they aren't addressed in a way that could deal with the trade deficit. And if you are worried about trade in manufactured goods in particular, as the administration seems to be, there are plenty of better ways to shift your economy away from services or agriculture or energy and towards manufacturing. It's also worth noting that the fact sheet says "annual U.S. goods trade deficits have led to the hollowing out of our manufacturing base," but there's pretty clearly no cause and effect here. And finally, taking an approach that tries to address trade deficits on a bilateral basis is extremely misguided.
Will the targeted countries file WTO/FTA complaints? Of course, the U.S. can appeal any adverse WTO panel report into the void, but governments may see value in bringing a WTO case for various reasons. And some of the affected countries have FTAs with the U.S., so they have that as an alternative as well.
You would think the answer will be yes, with lots and lots of complaints coming. But we'll see how governments decide to approach this.
Will affected countries step up their efforts to negotiate deeper trade deals with each other?
Possibly, although they may be a bit distracted by having to deal with the U.S. tariffs in the short term.
How will the stock market react? And what will be the broader impact on the U.S. economy? And how will Trump react to the stock market reaction and to the impact on the economy? It feels like the Trump administration has been testing the waters with its tariffs, seeing how the market and the economy react to its initial moves. My best guess is there are limits to what the administration can tolerate in terms of a negative economic reaction, and if things get too bad they may pull back a bit, but we'll see.
The stock market impact could be pretty bad. On the plus side, if you've been waiting for a market dip to get in, this may be your chance! With regard to Trump's reaction, is there some point at which he rethinks these tariffs? I suggested it could happen, but I'm not all that certain about it.
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There's one other thing I want to address. The EO says:
The post-war international economic system was based upon three incorrect assumptions: first, that if the United States led the world in liberalizing tariff and non-tariff barriers the rest of the world would follow; second, that such liberalization would ultimately result in more economic convergence and increased domestic consumption among U.S. trading partners converging towards the share in the United States; and third, that as a result, the United States would not accrue large and persistent goods trade deficits.
I have three points here:
- The Trump administration has not presented evidence that the U.S. leads the world in liberalizing tariff and non-tariff barriers. The U.S. has lots of these barriers, and I'm not sure where it would come out in a serious comparison with other developed countries.
- I'm not sure anyone expected "increased domestic consumption among U.S. trading partners converging towards the share in the United States," and in fact I think many people see U.S. consumption as higher than it probably should be.
- As to any assumptions about the U.S. and goods trade deficits, I think this result was driven in significant part by U.S. policies, which could be adjusted by the U.S. but have not been.
On the point about consumption, the EO also says:
... non-tariff barriers include the domestic economic policies and practices of our trading partners, including currency practices and value-added taxes, and their associated market distortions, that suppress domestic consumption and boost exports to the United States. This lack of reciprocity is apparent in the fact that the share of consumption to Gross Domestic Product (GDP) in the United States is about 68 percent, but it is much lower in others like Ireland (27 percent), Singapore (31 percent), China (39 percent), South Korea (49 percent), and Germany (50 percent).
I hear complaints from various people about differentials in savings rates across countries, but it's hard to understand their point. The U.S. is always on the high end, yet somehow the people arguing this issue seem to take the view that the U.S. is the normal one and others are "cheating" somehow. It is not clear to me how they come to this conclusion.
