The Economist
At first glance, they are a bureaucratic nightmare. On a closer look, they are even worse
“He started it,” is playground justice. It may soon be America’s trade policy. On February 13th Donald Trump announced he had decided, for what he later called “purposes of fairness”, to employ reciprocal tariffs. When the levies will go into effect, and how they will apply, is uncertain. A memorandum directs federal agencies to look into “non-reciprocal trade arrangements”, including value-added taxes (VAT) and non-tariff barriers, and to report on remedies by April 1st. Like teachers tasked with adjudicating a squabble, American officials now face the unenviable task of working out which trade partners are the worst behaved.
They may start with, in theory, the simplest task: equalising tariffs (matching those applied to American goods by other countries). America already levies taxes on a vast range of goods brought into the country. Its harmonised tariff schedule has 13,000 categories, from “artificial flowers, foliage and fruit and parts thereof” to “swords, cutlasses, bayonets, lances and similar arms”. If America decides that fairness means going tariff-for-tariff with all 180 or so trade partners, enacting that would produce around 2.3m individual tariffs and result in outsourcing its trade policy to countries with entirely different industrial structures and interests. This could lead to absurdities: Colombia levies a tariff of 70% on coffee to protect its plantations from foreign competition. America grows negligible quantities of its own. Neither 70% tariffs nor persuading Colombia to lower levies on non-existent American exports would increase domestic production.
Mr Trump might instead focus on the overall level of tariffs applied to American goods. Colombia levies an average tariff of 5.2% on American imports, compared with the average of 0.3% that America charges on Colombian imports. Choosing the right average, however, adds another layer of complexity. Instead of the simple average—calculated by dividing the sum of rates by the number of items—Mr Trump could base reciprocity on the trade-weighted average tariff, which adjusts for the volume of imports to which a levy applies. Doing so would avoid placing too much emphasis on high but irrelevant tariffs, such as those protecting Colombian coffee producers. At the same time, it might miss particularly egregious tariffs that prevent trade altogether.
Another wrinkle is VAT, which America does not levy. Although Mr Trump said other countries’ regimes would be treated as tariffs, there is no fairness argument here: VAT does not discriminate, as tariffs do, between domestic and foreign goods. A refund for VAT is offered to exports, a bugbear of some trade hawks, but this merely means that European exports to America pay as much tax as American-produced goods. It does not provide European producers with an advantage over American rivals.
Peter Navarro, an adviser to Mr Trump, has nevertheless called the EU the “poster child” for the VAT issue. Within the bloc, each member can choose its own rate, with a floor of 15%, as well as lower ones for some goods and exemptions for small firms. America could either choose to mirror such rates for each good, country and company, tying importers up in yet more red tape, or levy a flat tariff at the standard VAT rate for each country. That would hit Hungary, which has a rate of 27%, the hardest. For their part, non-EU countries would face lower tariffs: Canada’s federal goods-and-services tax is just 5%; Australia, Japan and South Korea all have consumption taxes levied at a basic rate of 10%.
Last, there are non-tariff barriers, such as food-safety standards. A White House fact sheet pointed out that the EU bans shellfish imports from 48 American states, for instance. Barriers also include things such as quotas or regulatory assessments at the border. The World Bank reckons that some 94% of European imports are subject to non-tariff barriers, compared with just 62% of those to America. Not all of them are discriminatory, as the burden of compliance can fall on both domestic and foreign producers. In any case, Mr Trump may decide to come up with his own more favourable definition. In his first term, the Office of the US Trade Representative, a federal agency, included data-protection laws and antitrust cases in a list of non-tariff barriers.
The Mar-a-Lago trade round
Countries in Mr Trump’s line of fire will respond. The president says he will cut tariffs if other countries make the first move, pledging his levies will be “no more, no less!” than those charged by foreigners. The World Trade Organisation, a multilateral body, requires countries to adopt a “most-favoured nation” approach, meaning that, in the absence of a specific trade deal, all countries must face the same tariffs. Although America has mostly abandoned the WTO, other countries take it seriously. They would have to come up with a workaround. Alternatively, they could give in to Mr Trump and cut levies across the board, producing a wave of trade liberalisation unseen since the 1990s. Consider it unlikely.
All this adds up to a vast amount of uncertainty, which is just how Mr Trump likes it. Dangling the threat of tariffs over the heads of trade partners grants him a negotiating tool that he can use to address any grievance he wishes. On February 13th a meeting between Mr Trump and Narendra Modi, the prime minister of India, ended with a pledge by India to purchase more American oil and gas. Mr Trump’s strategy might not work for ever, though. Financial markets, which barely reacted to the threat of reciprocal tariffs, appear to think Mr Trump is bluffing about his willingness to go through with them. America is more open to trade than many of its partners, which benefits, rather than harms, American consumers. Actually implementing reciprocal tariffs, not just threatening them, would raise prices. Other countries may eventually test this by looking to another playground slogan: “The only way to deal with bullies is to stand up to them.” ■
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This article appeared in the Finance & economics section of the print edition under the headline “Trump’s crosshairs”