WASHINGTON — President Donald Trump is making significant changes to the regulations that have shaped global trade for many years. The “reciprocal” tariffs he unveiled recently are expected to disrupt international businesses and create tensions with both allies and adversaries.
Since the 1960s, tariffs—essentially taxes on imports—have been established through lengthy negotiations among numerous countries. Trump aims to take control of this process.
“This obviously undermines a long-standing approach to trade,” commented trade lawyer Richard Mojica. “Trump is abandoning traditional methods, and this disruption will require widespread adjustments across the board.”
Trump argues that the United States faces significant and ongoing trade deficits, emphasizing that the country has not exported more than it imported since 1975. He claims that the system favors foreign companies, attributing this imbalance largely to the higher tariffs imposed by other nations on U.S. exports compared to the lower rates placed on imports to the U.S.
To address this situation, the president plans to increase U.S. tariffs to align with those of other nations.
An open proponent of tariffs, Trump utilized these measures during his first term, and in the early weeks of his second term, he has already enacted a 10% tariff on imports from China, increased U.S. taxes on foreign materials like steel and aluminum, and indicated a temporary pause on proposed 25% tariffs on Mexican and Canadian goods.
Economists generally express skepticism toward tariffs, as these taxes primarily burden importers and are frequently passed down to consumers. However, some believe Trump’s approach could encourage foreign nations to negotiate lower tariffs in return.
“It could potentially be mutually beneficial,” remarked Christine McDaniel, a former U.S. trade official associated with George Mason University’s Mercatus Center. “Countries have an incentive to bring down their tariffs.”
For example, India has already reduced tariffs on various imported items, such as motorcycles and luxury vehicles, while also promising to increase its U.S. energy purchases.
So, what are reciprocal tariffs, and how are they implemented?
In essence, these tariffs would require the United States to hike its taxes on foreign goods to mirror those charged by other nations on American products.
“If they set their rates, we will match theirs,” Trump stated in a recent briefing. “If their tariff is 25%, we will impose 25% as well. If it’s at 10%, we’ll adjust to that rate. If they have tariffs exceeding 25%, we’ll adopt those as well.”
Details about the administration’s approach remain sparse, with directives for Commerce Secretary Howard Lutnick to provide a thorough report on April 1 concerning the implementation of these tariffs.
Areas of ambiguity include whether the U.S. will examine each specific item within the tariff system—ranging from motorcycles to exotic fruits—and adjust rates accordingly, or instead utilize a broader assessment of average tariffs imposed by each nation versus those of the U.S.
“It’s a very unpredictable situation,” added Stephen Lamar, president and CEO of the American Apparel & Footwear Association. “It complicates long-term planning in any meaningful way.”
How did tariff disparities arise?
Generally, the U.S. imposes lower tariffs compared to its trading partners. Following World War II, the U.S. urged other nations to diminish trade barriers and tariffs, believing that free trade could foster peace and bolster American exports globally. For the most part, the U.S. kept tariffs low, allowing consumers to access affordable foreign products.
Trump has deviated from this historical agreement on free trade, asserting that unfair foreign competition has severely impacted American manufacturers and devastated industrial regions in the U.S. His administration previously levied tariffs on foreign steel, aluminum, and various items from China, with President Joe Biden largely continuing these protective measures.
The White House has pointed to specific examples of stark tariff imbalances, such as Brazil’s 18% tariff on ethanol imports compared to the paltry 2.5% tariff set by the U.S. The disparity continues with India imposing a hefty 100% tariff on imported motorcycles while the U.S. holds its tariff at merely 2.4%.
Is this indicative of the U.S. being exploited in trade?
The elevated foreign tariffs that Trump cites as a disadvantage have not been clandestinely inflicted upon the U.S. These rules were established through extensive negotiations known as the Uruguay Round, culminating in a trade agreement involving 123 countries.
Under this agreement, individual countries could determine tariffs on specific products. In accordance with the “most favored nation” principle, nations are not allowed to impose higher rates on one country without extending the same treatment to others. Consequently, the elevated tariffs Trump criticizes are not directed solely at the U.S.—they impact all trading partners equally.
Given the current context, Trump’s concerns about trade conditions appear misplaced. The U.S. economy has been doing better than many other developed nations, driven by robust consumer spending and considerable advancements in productivity. The U.S. economy expanded nearly 9% from just before the pandemic began until last summer, significantly outpacing Canada and the European Union. In fact, Germany experienced a contraction during this period.
Trump’s strategy involves more than just contesting foreign tariffs. He is also addressing other practices he deems as unfair, such as subsidies that give domestic producers a leg up over American products, health regulations perceived as impediments to foreign goods, and lax laws that facilitate the theft of intellectual property.
Determining an appropriate import tax to counteract these practices will introduce another layer of complexity to his reciprocal tariff agenda.
Furthermore, Trump’s administration is also in conflict with the European Union and other trading parties concerning so-called value-added taxes (VATs). These taxes act as a sales tax on products consumed within the borders of a country. Trump and his advisors consider these to be tariffs, as they affect U.S. exports.
However, many economists disagree for one fundamental reason: VATs apply equally to domestic goods and imports, meaning they do not specifically target foreign products and have not traditionally been regarded as trade barriers.
A significant complication arises from the fact that VATs constitute essential revenue for European governments. As noted by Brad Setser, a senior fellow at the Council on Foreign Relations, altering VAT structure in negotiations is virtually impossible as they are integral to national income.
Capital Economics’ chief North America economist, Paul Ashworth, highlights that the top 15 nations exporting to the U.S. have average VATs exceeding 14%, in addition to duties of 6%. As a result, potential U.S. retaliatory tariffs could escalate to 20%, considerably surpassing Trump’s campaign proposal for universal 10% tariffs.
In terms of tariffs and the trade deficit, some of Trump and his advisors suggest that imposing higher tariffs could help mitigate the long-standing trade imbalances.
However, history shows that tariffs have not effectively reduced trade deficits; in fact, the deficit surged to $918 billion last year, marking the second highest on record.
Economists attribute the trade deficit to distinctive characteristics of the U.S. economy. Due to the federal government’s significant shortfall and a culture of consumer spending, U.S. consumption and investment far exceed savings. Consequently, a portion of that demand is satisfied by imports.
The U.S. compensates for its trade deficit by borrowing from foreign sources, which includes the sale of treasury securities and other assets.
“It’s truly a macroeconomic imbalance,” asserted UCLA economist and former Treasury official Kimberly Clausing. “This issue stems from a lack of inclination to save and insufficient taxation. Until those fundamental issues are addressed, the trade imbalance will persist.”
