What we know about Trump’s reciprocal tariffs – and what we don’t

Another day at the White House, another memo signed about trade. Last Thursday, February 13, President Donald Trump unveiled "reciprocal tariffs" that will hit American allies and competitors.

Audiences were primed for an explosive event with Trump himself tweeting in his preferred upper case, that it was a big day in his three-week-old term:

"THREE GREAT WEEKS, PERHAPS THE BEST EVER, BUT TODAY IS THE BIG ONE: RECIPROCAL TARIFFS!!! MAKE AMERICA GREAT AGAIN!!!"

It sounds simple, but the actual complexity of such a system is mindboggling. There are roughly 12,500 tariff lines in the US domestic tariff schedule. There are 165 other countries in the World Trade Organization (WTO). If each line were adjusted by partner, the US will be administering over 2 million tariff variations.

In fact, the current global trading system was built precisely to better manage the level of difficulty in levying tariffs individually against each trade partner. Under the General Agreement on Tariffs and Trade (GATT) and now under the World Trade Organization (WTO), members agreed through eight successive rounds of multilateral negotiations on specific tariffs to be applied to each product. Once settled, this approved tariff amount is automatically granted to all other GATT/WTO members through what is called "Most Favoured Nation," or MFN.

The MFN rates are not equal. They are the product of painstaking negotiations that allowed members to provide as much access to everyone as possible while still providing an opportunity to protect sensitive sectors. Protection was granted if and only if all members agreed, including for some American sectors such as sugar. Eight rounds of agreements resulted in significantly lower MFN rates across all members.

Developing countries that joined the GATT in the early days were granted greater latitude to shelter behind higher tariff walls while developed economies have generally lower rates. New members to the organization, including China and Vietnam, have had to make much steeper cuts.

If the plan were simply to mirror or reciprocate tariff line for tariff line, the situation would be extraordinarily complicated but could be understood.

This is not the idea, however. One of the three memos released by Trump on Thursday makes this clear. It bundles five different components into what the US will unilaterally decide to be a final tariff value against its trading partner’s merchandise:

• The current level of tariff imposed by the trading partner on US goods;
• "Unfair, discriminatory, or extraterritorial taxes" imposed on American businesses, workers, and consumers (the Trump team includes in this value-added taxes and goods and services taxes);
• Costs to US businesses, workers, and consumers of the other country’s non-tariff barriers (which can sometimes be as subjective as a phytosanitary health check that the exporting country deems unnecessary), policies, subsidies, and unidentified "burdensome regulatory requirements" on American businesses operating abroad;
• Foreign policies and practices that influence exchange rates "to the detriment of Americans" or suppress American wages; and
• Any other practices the US Trade Representative’s office deems unfair or a "structural impediment."

The concept of reciprocal tariffs has injected maximum uncertainty into trade with the United States. There is simply no way to know, in advance, the final tariff any product from any trade partner might face at the border.

It may be that individual countries, sectors, or firms never have a reciprocal tariff applied. Trump said on Thursday he does not expect trading partners to change their tariff rates in response to the US imposition of reciprocal tariff rates. He said there wouldn’t be exemptions, but has almost immediately accepted high-level talks with Japan, Australia, and South Korea on new US steel and aluminium tariffs. Deft negotiations could stave off new charges. Or nothing works and potentially high tariffs are applied. Tariffs could be coming for partners even where their existing MFN tariff is below what the US applies, once all the other US criteria are included.

For the moment, markets are holding relatively firm. Analysts view the postponement of immediate executive action as a somewhat reassuring signal that this may be part of a massive Trump negotiating exercise. But the sweeping nature of the reciprocal tariffs combined with a US president who is wedded to weaponizing tariffs as a solution to all US policy problems suggests that the administration is intent on managing tariffs in a substantially different way in very short order. The relief expressed across equity and bond markets last Thursday may be the proverbial calm before what is to come.  

A shorter version of this article was published on CNA Snap Insights.

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