Donald Trump Wants Reciprocity in Trade: Here’s a Closer Look

President Donald Trump is right about reciprocity—a fair balance of tariff concessions among countries has long been integral to U.S. trade policy. But his administration seems confused about how it works in the real world. And his plans—such as they are known—for imposing reciprocal tariffs on a country-by-country basis would be an administrative nightmare.

The White House announced Thursday that it was directing the U.S. Trade Representative’s Office and the Department of Commerce to launch an investigation into tariff and other trade practices around the world to establish the new reciprocal U.S. tariff rates. “It’s time to be reciprocal,” Trump told reporters earlier this week. “You’ll be hearing that word a lot. Reciprocal. If they charge us, we charge them.” But perhaps recognizing the complexity, the White House is moving slowly; trade advisor Peter Navarro said the administration would first “look at all our trading partners, starting with the ones with which we run the biggest trade deficits.”

Reciprocity, to be clear, is a powerful idea. The American people would never have supported the gradual removal of tariffs and other barriers to freer trade without a belief that other countries were doing the same. The growing sense that others—especially big developing nations such as China and India—are not making similar commitments has certainly weakened U.S. public support for the global trading system. In the best possible outcome, Trump’s reciprocity initiative could open the door to negotiating long-overdue corrections to those discrepancies. But poorly enacted, it would blow up what remains of global trade rules and leave American companies crippled in their ability to compete in international markets.

Reciprocity has been the foundation of U.S. participation in global trade negotiations since the 1930s. In 1934—chastised in part by the disaster of the 1930 Smoot-Hawley tariff increases, when other countries raised their own tariffs to retaliate against the United States—Congress empowered President Franklin D. Roosevelt to negotiate “reciprocal” tariff reductions with other countries. The 1934 Reciprocal Trade Agreements Act (RTAA) led to the negotiation of nearly two dozen agreements over the next five years to lower U.S. and foreign tariffs, including with the two largest trading partners, Canada and Great Britain.

At the time, both Congress and the president recognized that negotiating specific tariffs on a country-by-country basis would be impossibly complex; overburdened Customs agents would have been forced to determine the national origins of every product entering the country in order to levy the proper tax on the U.S. importer. Instead, starting in 1923, and then legislated by Congress in the RTAA [PDF], the United States embraced what would become known as the “most-favored-nation” (MFN) principle, in which U.S. tariffs on imports would be identical for all countries, with occasional exceptions for goods deemed unfairly traded or for free trade partners.

Reciprocity and the MFN principle turned out to be world-changing ideas that over the following decades persuaded most countries to lower tariffs and participate fully in global trade. In the United States, as trade economist Richard Baldwin has argued, the idea of reciprocity turned the politics of trade on its head. U.S. companies that were competitive in global markets—and after World War II, the United States was the most competitive manufacturing economy in the world—recognized they could only win tariff reductions abroad if the United States was also prepared to cut its tariffs at home.

Baldwin calls this “the juggernaut effect.” In the post–World War II global trade negotiations under the General Agreement on Tariffs and Trade (GATT)—the forerunner of the World Trade Organization (WTO)—countries recognized that to win tariff cuts in overseas markets they would have to cut their own tariffs. Baldwin argues that the embrace of reciprocity “rearranged the politics of tariff cutting inside each nation in a way that made liberalization a self-sustaining cycle.” Big exporting companies like Boeing or Caterpillar knew that to open new markets abroad they would have to stand up to protectionist lobbies such as steel or textiles that favored higher U.S. tariffs to protect against low-priced imports.

That cycle is no longer self-sustaining. The Trump administration’s tariff approach calls for “raising” tariffs to the level of other countries on a product-by-product basis. The last time Congress raised tariffs in the name of reciprocity was the McKinley Tariff of 1890 [PDF], which hiked duties to an average rate of nearly 50 percent on many products from countries that had “unequal and unreasonable” tariffs on U.S. imports. The price increases that resulted from the tariffs, coupled with a downward spiral in farm prices, created major political backlash against the Republican proponents of the tariffs and was followed by a severe depression from 1893 to 1896.

This time, Trump is signaling he would go much further. To put it simply, the United States would charge the same tariffs on imports that it faces on its exports. A favorite target for Trump is the European Union’s 10 percent tariff on imported cars; the United States charges just a 2.5 percent import duty on cars (though a hefty 25 percent on the light trucks and sport utility vehicles most Americans prefer).

But U.S. officials told reporters Thursday that the White House is seeking a more ambitious approach in which the tariff rate would also take into account foreign-government subsidies, exchange-rate depreciations, and the export-promoting effects of value-added taxes like those used in Europe. Calculating reciprocal tariffs based on such a stew of inputs is more or less impossible, though U.S. officials will presumably make best-guess estimates. And if other countries retaliate on a similar basis, it could produce a global spiral of tariff increases.

The main U.S. targets are large developing countries such as China and India. Both countries had long closed their markets to imports, often maintaining tariffs exceeding 100 percent. When they joined the GATT and the WTO, they were recognized as developing countries and permitted to enjoy the benefits of tariff cuts across the world without making fully reciprocal cuts of their own.

With the growing wealth of China, India, and other large developing countries, that anomaly has become a much bigger problem. Last year, China ran a record trade surplus of nearly $1 trillion with the world, nearly a third of which ($295 billion) was with the United States alone, even though the United States has hiked its tariffs on China significantly under the Section 301 actions initiated in the first Trump administration. Other countries that maintain higher tariffs include Brazil and India, whose prime minister, Narendra Modi, visited the White House this week. As former U.S. trade negotiator Mark Linscott argues, the failure of reciprocity-focused tariff negotiations at the WTO, with a particular focus on those large developing economies, has allowed them to maintain unreasonably high tariffs.

The stalling of tariff cuts through WTO negotiations was one of the reasons many countries around the world upped their game in pursuing bilateral and regional free trade agreements as the vehicle for reciprocal tariff reductions. The European Union boasts of more than forty trade agreements with seventy countries spread across the globe, including agreements with the United States’ partners in the U.S.-Mexico-Canada Agreement (USMCA). In addition to USMCA, both Canada and Mexico are parties to free trade agreements with more than forty-eight countries, while even China and India have recently joined a number of regional or bilateral preferential arrangements. Globally, there are more than 370 regional or free trade agreements in force. However, since 2009, the United States has placed itself on the sidelines of such action, leaving its tariff arrangements with its trading partners largely frozen in time.

How Trump will achieve his desire for reciprocal tariffs remains murky. He has imposed, and then paused, 25 percent tariffs on Canada and Mexico, and imposed 10 percent tariffs on China, all using emergency powers. He plans to impose new 25 percent duties on steel and aluminum imports by doubling down on the national security investigation and findings under Section 232 of the Trade Expansion Act of 1962 that he used in his first term. But the legal basis for broad reciprocal tariffs is much harder to discern. All prior reciprocal tariffs have been imposed pursuant to negotiated agreements entered into under congressionally authorized processes, so achieving reciprocal tariffs this time around would seem to require congressional action. Some speculate Trump could dust off the old statute books to claim authority under Section 338, which grew out of Section 317 of the Tariff Act of 1922. Section 338 empowers the president to impose “new or additional duties” on imports from countries that discriminate against U.S. exports. But the authority has never been used in that way, and proving specific discrimination against American exports could prove challenging.

But the practical hurdles are perhaps bigger than the legal ones. If the tariffs are set to mirror precisely those charged by U.S. trading partners, it would mean that U.S. Customs and Border Protection would require different tariff schedules for each country—close to impossible for a short-staffed agency. Already, the Trump administration was forced to delay the immediate elimination of the de minimis exception for goods from China, which allows shipments of less than $800 to enter tariff-free under a truncated process, because Customs could not handle the volume of work associated with reviewing import documents and assessing duties on so many shipments.

Additionally, most companies and the Customs brokers that facilitate exports and imports do not pay much attention to the fine print of exactly where products are made, the so-called rules of origin. Rules of origin matter greatly for imports from free trade partners, for products covered by country-specific antidumping or countervailing duties, for goods coming from non-favored countries (such as Belarus, Cuba, North Korea, and Russia), and for preventing the import of products made with child or forced labor. But for all other shipments, there is no need to ensure rules of origin declarations are 100 percent correct, because it does not matter. Under the MFN rules, the tariffs are the same no matter where the goods were made.

It is also unclear whether the new U.S. tariffs will be calibrated to “bound” rates in other countries—which refers to the maximum tariff rate to which they have formally committed in the WTO—or to the actually applied rates. In developing countries especially, the actual rate charged is often well below their WTO obligation. If the goal is to match U.S. import tariffs to those charged on U.S. exports to a particular country, then the applied rates should be used, but those are frequently changed. Continuing to modify U.S. tariffs to keep up with those fluctuations could prove impossible.

Finally, raising U.S. tariffs in such a unilateral fashion would completely violate U.S. WTO obligations to keep tariffs within negotiated limits. That would put a stake through what remains of the WTO rules. Such wholesale violations would invite retaliation and discourage other countries from entering into a trade agreement with the United States, if the country will not keep up its end of the bargain.

Such developments would harm U.S. companies. Even those that could gain some small benefit from tariff protection would be overwhelmed by the complexity of importing under such a system. Many U.S. exports, especially dairy products, shoes, sugar, textiles, or tobacco, could be hit with higher tariffs if countries respond in kind by raising product-specific tariffs to U.S. levels. U.S. tariffs on sugar, for example, are much higher than in most other countries.

The lengthy investigation time directed by the president before any new tariffs would be imposed is encouraging. A serious effort to bring greater reciprocity into the trading system could benefit the United States. Other countries might reduce some tariffs unilaterally to head off U.S. actions. But a sudden, ill-thought-out initiative would leave American companies and consumers much worse off.