WASHINGTON (AP) — President Donald Trump is drastically changing the decades-old rules governing world trade. The “reciprocal’’ tariffs he announced on Thursday are expected to cause turmoil for global businesses and lead to tensions with both U.S. allies and adversaries.
Since the 1960s, tariffs — or import taxes — have been determined through negotiations involving numerous countries. Trump aims to take control of this process.
“Clearly, this disrupts a longstanding system,’’ commented Richard Mojica, a trade attorney at Miller & Chevalier. “Trump is throwing that out… This is clearly dismantling trade, necessitating adjustments across the board.”
Referring to the United States’ significant and ongoing trade deficits — with the U.S. not having outpaced its global purchases since 1975 — Trump argues that the advantages are skewed against American companies. He and his advisors suggest that one major factor is that other nations generally impose higher taxes on American exports compared to U.S. tariffs on their products.
Trump proposes a solution: raising U.S. tariffs to align with those charged by other nations.
The president is a staunch supporter of tariffs. He applied them during his first term and, just weeks into his second, has already imposed 10% tariffs on China; effectively increased U.S. taxes on foreign steel and aluminum; and threatened, then delayed for 30 days, 25% taxes on imports from Canada and Mexico.
Economists generally do not share Trump’s fervor for tariffs. They view them as taxes on importers, typically passed to consumers. However, it’s possible that Trump’s push for reciprocal tariffs could encourage other nations to negotiate and lower their import taxes.
“It could be a mutually beneficial outcome,” noted Christine McDaniel, a former U.S. trade official now at George Mason University’s Mercatus Center. “Countries have an incentive to lower those tariffs.”
She highlighted that India has already reduced tariffs on items ranging from motorcycles to luxury cars and has committed to increasing U.S. energy purchases.
What are reciprocal tariffs and how do they work?
In theory, they are straightforward: The United States would increase tariffs on foreign goods to match those imposed by other countries on U.S. products.
“If they charge us, we charge them,’’ the president told reporters on Sunday. “If their rate is 25%, ours will be 25%. If it’s 10%, ours will be 10%. And if it’s significantly higher than 25%, then that is what we’ll set ours at.”
However, the White House has been sparse with details, instructing Commerce Secretary Howard Lutnick to provide a report by April 1 on how these new tariffs will function.
Among the uncertainties, as noted by Antonio Rivera, a partner at ArentFox Schiff and a former U.S. Customs and Border Protection attorney, is whether the U.S. will evaluate the thousands of items in the tariff code — covering everything from motorcycles to mangos — and adjust rates individually for each country, or look at the average tariffs per country. Or they might resort to a different strategy entirely.
“It’s a pretty chaotic environment,” stated Stephen Lamar, president and CEO of the American Apparel & Footwear Association. “Planning in a sustainable long-term manner is quite difficult.”
How did tariffs get so lopsided?
Generally, American tariffs are lower than those of its trade partners. After World War II, the U.S. advocated for other nations to reduce trade barriers and tariffs, considering free trade as a mechanism to foster peace, prosperity, and bolster American exports globally. For the most part, it adhered to this principle, maintaining low tariffs and providing U.S. consumers with access to affordable foreign goods.
Trump has deviated from the traditional free trade consensus, asserting that unfair foreign competition has harmed American manufacturers and devastated manufacturing hubs in the Midwest. Throughout his first term, he imposed tariffs on foreign steel, aluminum, washing machines, solar panels, and a wide array of products from China. Following suit, Democratic President Joe Biden has largely retained Trump’s protectionist measures.
The White House has referenced several instances of particularly disproportionate tariffs: Brazil imposes an 18% tax on ethanol imports, including those from the U.S., whereas the U.S. tariff on ethanol stands at merely 2.5%. India’s tariffs on foreign motorcycles are 100%, while the U.S. imposes only a 2.4% tariff.
Does this mean the U.S. has been taken advantage of?
The elevated tariffs imposed by foreign nations that Trump frequently criticizes were not the result of secretive actions by these countries. The United States accepted them following years of intricate negotiations known as the Uruguay Round, culminating in a trade agreement with 123 nations.
As part of this agreement, countries can set their own tariffs on various products — but under the “most favored nation” principle, they cannot charge one country more than another. Thus, the high tariffs that Trump decries are not specifically targeted at the U.S.; they apply to all trading partners.
Trump’s complaints regarding U.S. trade relationships are particularly noteworthy against the current backdrop. The U.S., marked by strong consumer spending and significant productivity improvements, is outperforming other advanced economies. From just before the COVID-19 pandemic to the middle of last year, the U.S. economy grew by nearly 9% — compared to 5.5% for Canada and just 1.9% for the European Union, while Germany’s economy actually contracted by 2% during that period.
Trump’s plan goes beyond foreign countries’ tariffs
Unhappy with merely reorganizing the tariff structure, Trump is also targeting additional foreign practices perceived as unfair to American exports, which encompass subsidies favoring local producers over U.S. products; questionable health regulations used to inhibit foreign goods; and lax rules that promote the theft of trade secrets and intellectual property.
Determining an import tax that compensates for the impact of these practices will complicate Trump’s reciprocal tariff framework even further.
Additionally, the Trump administration is challenging the European Union and other trade partners over so-called value-added taxes (VATs). These taxes effectively function as a sales tax on products consumed within a country’s borders. Trump’s team considers VATs as tariffs since they apply to U.S. exports.
However, the majority of economists disagree, primarily because VATs are imposed on both domestic and imported products, meaning they do not specifically target foreign goods and have not historically been viewed as trade barriers.
Moreover, there is a significant challenge: VATs are crucial revenue sources for European governments. “Most countries will find it impossible to negotiate over their VAT… as it plays a vital role in their revenue structure,” remarked Brad Setser, a senior fellow at the Council on Foreign Relations, on X.
According to Paul Ashworth, chief North America economist for Capital Economics, the top 15 countries that export to the U.S. have average VATs exceeding 14%, alongside import duties averaging 6%. Thus, U.S. retaliatory tariffs could climb to 20% — significantly higher than Trump’s proposed universal 10% tariffs.
Tariffs and the trade deficit
Trump and several of his advisers argue that increased tariffs could help reduce the United States’ longstanding trade deficits.
However, history shows that tariffs have not succeeded in narrowing the trade gap: The deficit surged last year to $918 billion, marking the second-highest level recorded.
Economists contend that the trade deficit stems from distinctive aspects of the U.S. economy. The federal government operates a substantial deficit, and American consumers are inclined toward high levels of spending, leading to consumption and investment that significantly exceed savings. Consequently, a portion of this demand is directed toward overseas products and services.
The U.S. compensates for the trade deficit by effectively borrowing from abroad, partially by selling treasury securities and other assets.
“The trade deficit reflects a macroeconomic imbalance,” stated Kimberly Clausing, a UCLA economist and former Treasury official. “It arises from a lack of willingness to save and a lack of desire to tax. Until these issues are addressed, we will continue to experience a trade imbalance.”
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AP Retail Writer Anne D’Innocenzio in New York contributed to this story.
