Trump's Reciprocal Tariffs Don't Add Up

Chad P. Bown (PIIE) and Alan O. Sykes (Stanford Law School)
June 14, 2017

President Donald Trump wants to make US tariffs reciprocal with those imposed by other countries. Gary Cohn, his chief economic adviser, explained this strategy recently, recounting a comment the president made to German Chancellor Angela Merkel and other Group of Seven leaders last month.

"Reciprocal is, if you've got a 30 percent tariff, you know what, we should have a 30 percent tariff," Cohn reported Trump as telling the Europeans.

Such a policy would throw decades of international commerce on its head, and it has many limitations. But before we get to those, it is worth taking up one issue the administration rightly says is challenging US negotiators in their dealings with Europe. Commerce Secretary Wilbur Ross described the conundrum in a May 25 letter to the Wall Street Journal.

Take the case of an automobile. A Volkswagen Beetle can be assembled in Mexico and exported to the European Union with no import tax. But if that same car were sent to Europe after being manufactured at a VW plant in Tennessee, the European Union would impose an import tariff of 10 percent.

Under the Trump "reciprocal tariffs" approach, the United States would raise its tax on imports of a BMW assembled in Germany to the European 10 percent tariff unless the European Union unilaterally lowered its auto tariffs to US levels of 2.5 percent.

But this mischaracterizes the simple cause of the current gap in tariff levels: Mexico and the European Union have voluntarily completed a free trade agreement that eliminates border taxes on virtually all commercial activity between their two economies. The United States has a similar trade deal with Mexico through the North American Free Trade Agreement, but it has never concluded one with the European Union.

But suppose the United States did impose 10 percent "reciprocal" tariffs on imports of German-assembled BMWs.

First, this would do nothing for American-based automakers seeking sales in Europe. Making American-made cars competitive in Europe with automobiles manufactured in Mexico or even South Korea, which also has a free-trade deal with the European Union, would require persuading the European Union to lower its tariffs to zero on American arrivals. Even lowering EU tariffs to the "reciprocal" US level of 2.5 percent may not be enough.

It is also difficult to understand why Trump expects the Europeans to unilaterally lower those tariffs.

To understand why, note that the United States currently imposes a 24 percent tariff on imports of some EU-made shirts. But the EU tariff on similar shirts arriving from America is only 12 percent. Imagine Trump's response if officials in Brussels had called and said: "Cut your shirt tariff to our level—unilaterally and right now—or we will retaliate."

The solution to the dispute over auto tariffs is to negotiate reductions to the European Union's rate, not to raise the American one. The question is how.

Another response would be for the Trump administration to re-engage the European Union on something similar to the bilateral talks on the Transatlantic Trade and Investment Partnership, which has been on hold since Trump came into office. Even better would be to broaden US-EU negotiations to include Japan, China, India, and other countries, and do it multilaterally, using the World Trade Organization.

Then if any two partners are unable to find matching tariff cuts bilaterally, Trump could take advantage of three-way deals to find something for everyone. The European Union offers access to autos, which the United States likes; the United States offers access to clothing, which India likes, and India offers access to chemicals, which the European Union likes. While any two bilateral arrangements may not end up being perfectly balanced, this "triangular trade" has been a key to successful multilateral trade negotiations since 1947.

But taking action unilaterally? No, getting the European Union to lower its auto tariffs requires something of value in return. Perhaps Washington could cut those shirt tariffs from 24 percent. Or it could reduce current American shoe tariffs from 37.5 percent or truck tariffs from 25 percent.

Secretary Ross has tried to explain why the administration is opposed this approach:

[B]ecause American auto tariffs are so much lower than those of other countries, the only way US trade negotiators can get trading partners to reduce their tariffs is by giving concessions against other US industries. This, then, requires the government to pick winners and losers in our own economy. Worse yet, we must do so in the context of tariffs that we've unilaterally lowered repeatedly in the past.

But the government already picks "winners and losers in our own economy" through its existing, uneven pattern of US import taxes.

First, the peculiarly high American tariffs on apparel and footwear are regressive, because they are a big budgetary expense for poorer households, as a percentage of their income.

Second, US tariffs for women's suits, sweaters, and pants are typically higher than for men's suits, sweaters, and pants. The government thus already discriminates against American women.

The only way to fix this is through an import tax that is uniform. Besides the competitiveness improvements that would result, this is yet another benefit of getting to low—like zero—tariffs.

Finally, the claim that the United States unilaterally lowered those import tariffs is an inaccurate portrayal of postwar history.

Dating back to the Reciprocal Trade Agreements Act of 1934, the United States has reduced its tariffs when its trading partners lower their rates. Lower reciprocal tariffs were the product of eight painstaking rounds of multilateral negotiations under the General Agreement on Tariffs and Trade.

And as for further US tariff cuts, the government did not simply give them away. Most partners—Mexico before the North American Free Trade Agreement, for example—started with much higher initial tariffs and liberalized more to get to free trade.

So the Trump administration is correct that US trade policy currently faces considerable challenges. But when it comes to understanding how trade negotiations and economics work for America, facts matter.