Reciprocity done wrong

Yahoo

26-04-2025

Core to President Donald Trump's view of global trade is the notion of 'reciprocity' — that the United States should do to other countries' exports what they do to ours. The idea, which Trump has embraced for decades, has a certain seductive simplicity: Isn't it only fair that 'we' charge 'them' what 'they' charge 'us,' and that if 'they' want relatively free access to 'our' market, then 'we' should have the same in 'theirs'?
Alas, reciprocity is not that simple — at least not how the current administration implements it. Indeed, the concept of reciprocity has been central to the modern global trading system, starting with the Reciprocal Trade Agreements Act of 1934 and the creation of the General Agreements on Tariffs and Trade in 1947 and continuing today in bilateral and regional free trade agreements, including Trump's own U.S.-Mexico-Canada Agreement. Yet, his personal version of reciprocity is something very different, and it's a catastrophically bad idea for practical, economic and geopolitical reasons — some of which the Trump administration itself has now admitted.
In response to the president's April 2 'Liberation Day' proposal of tariffs as high as 49%, global markets fluctuated wildly. Less than a week later, Trump announced a 90-day suspension on tariffs exceeding 10%. He says he's willing to negotiate new trade deals during this pause, but their details — and final U.S. tariff rates — are unclear. In reality, however, the best outcome for the U.S. economy would be restoring much of the status quo of existing reciprocal trade pacts — a status quo that both Trump and former President Joe Biden wrongly abandoned. Here's why.
Trump's reciprocal tariff system suffers from an unavoidable tension between accuracy and speed. Reciprocity as Trump describes it would apply a different tariff rate for every imported product from every country, based on both that country's restrictions on the U.S. version of these goods and the United States' own tariff and nontariff measures already in place. For example, the United States would apply a 'reciprocal' tariff on pickup trucks from Germany that accounted for not only German restrictions on American truck imports (including the European Union's 10% tariff) but also the United States' existing restrictions on German trucks (including our 25% tariff).
Enacting such a system, however, would be exceedingly difficult. For starters, there are more than 13,000 different products in the current U.S. tariff schedule, so applying a reciprocal tariff to all 186 member countries in the World Customs Organization would require more than 2.5 million different tariffs — an exponential increase over the current system and one that would demand vast government resources to create and administer. One trade lawyer recently told The New York Times that managing these new tariff lists would alone be 'a herculean task' for U.S. Customs and Border Patrol, especially as countries change their policies, supply chains shift in response to the new reciprocal tariff regime or bad actors work to evade it.
The government would also need to give the private sector time to adapt to and comply with the new system before it's activated. Currently, companies and customs brokers only pay close attention to where imported products are made for a small handful of products that get special duty rates, such as those falling under U.S. trade agreements or subject to various restrictions. All other shipments require no such efforts, as the tariff rate will be the same regardless. Under a new reciprocal system, on the other hand, these and other customs rules and procedures — some taking months to document — would matter not for a few products and countries but for every single thing entering the United States, no matter its origin or complexity. That's trillions of dollars-worth of goods each year imported by tens of thousands of U.S. companies. It would take them, their agents and their foreign suppliers months, if not longer, to ensure they're following the new rules and paying the proper tariff rates.
Calculating the appropriate U.S. reciprocal tariff would be a similarly herculean task. First, the government would need to define and quantify all the foreign barriers supposedly blocking U.S. exports and then convert them all into a single 'tariff equivalent' for the country and product at issue. This includes relatively simple policies like tariffs and quotas, but also many domestic government policies with highly uncertain and indirect trade effects. Government subsidies, regulations, intellectual property rules, Europe's value-added taxes and other domestic policies can have indirect trade effects. Even the metric system could be a nontariff barrier where foreign regulations require its use (e.g., on speedometers). It would take years for U.S. government economists and lawyers to distill all these effects into a final tariff number for every country.
The same issues would apply to U.S. trade barriers, which an accurate reciprocal system must consider. The United States has low average tariffs but many high ones on politically sensitive products like sugar, dairy products, textiles and apparel, footwear, and pickup trucks. Washington also employs many nontariff measures to impede foreign competition, including subsidies, quotas, 'Buy American' restrictions, domestic shipping restrictions and regulatory protectionism like the FDA's near-blockade on baby formula. The United States is also one of the world's biggest users of 'trade remedy' measures, such as antidumping duties and today applies more than 700 of these restrictions on mainly manufactured goods like steel and chemicals. According to the independent Global Trade Alert, which monitors nations' trade liberalization and protectionist policies, the United States has implemented the most 'harmful' trade interventions — tariffs, nontariff barriers, subsidies, etc. — of any nation since late 2008.
Any other approach to 'reciprocity' could move faster but would inevitably produce a system disconnected from economic reality, omitting certain products and countries or setting new U.S. tariff rates that exceed those needed to equalize trade treatment between two countries. This result not only would mean greater economic pain for the American consumers and companies forced to pay the tariffs and greater uneasiness from investors about the U.S. government's competence, but would also dissolve the tariffs' justification, i.e., that 'fairness' demands U.S. tariffs mirror foreign trade barriers. The latter flaw, in turn, would undermine the tariffs' supposed goal of negotiating lower barriers to U.S. exports abroad: high, 'spitballed' tariffs are sure to alienate foreign governments — prodding them to see 'reciprocity' as just a bad-faith excuse for protectionism — and make them less likely to engage in future talks.
In choosing between accuracy and speed, the Trump administration chose the latter. Unveiled on April 2, the Trump administration's reciprocal tariff regime included both a 10% global tariff and even higher tariffs based not on an actual assessment of a particular country's trade barriers or U.S. trade barriers but simply the nation's overall trade surplus with the United States. The U.S. trade representative admitted that it examined only overall balances because 'individually computing the trade deficit effects of tens of thousands of tariff, regulatory, tax and other policies in each country is complex, if not impossible.'
But few, if any, economists consider the shortcut calculation legitimate. Trade balances, economists explained, were a terrible proxy for unfair trade practices, and the tariff rates presented were unrealistic at best. Final 'reciprocal' rates were often far higher than any reasonable estimate of the foreign countries' barriers. Tariffs were carelessly slapped on uninhabited islands and U.S. military bases. Nations considered free trade exemplars and partners were given the same tariff rate as notorious trade scofflaws. Small, poor nations ended up with some of the highest tariffs for the trade-crime of simply being too small or poor to buy much American stuff. And U.S. trade barriers were ignored entirely.
Many economists further explained that the calculation used to assign the tariffs suffered from several basic errors, and that — even granting the administration's flawed approach — a proper calculation would generate tariffs four times smaller than what Trump's team got. The backlash even extended to the economists the Trump administration itself cited to justify its tariff calculations, with many of them openly disagreeing with both the process and results. As one put it, 'There's not a lot of trained economists I know of, including myself, who would argue that trade imbalances are an important metric for policymaking. Yet the people who are setting policy have decided it's a really important metric.'
Nevertheless, the practical problems with a reciprocal tariff system — even the administration's over-simplified one — go beyond its form. For starters, varying U.S. tariff rates on the same goods from different countries would encourage companies and governments to circumvent the highest levies, adding even more pressure on customs enforcement along the way. Companies could, for example, reroute their products' supply chains to locate final assembly in countries that now face lower U.S. tariffs. Or they could adjust a product's input sourcing, so that it legally originates in a lower-tariff place. Or they'll find other legal loopholes — and illegal ones too — to continue shipping goods to the United States at the lowest possible cost.
We saw exactly these moves in response to previous U.S. tariffs on steel, aluminum and certain Chinese goods. Once the measures were imposed, multinational corporations got to work finding ways around them. Thus, for example, U.S. tariffs on Chinese imports proved ineffective in blocking out Chinese content because companies found creative (mostly legal) ways to still get those goods in the country. Logistics professionals proved similarly nimble when the pandemic and other disasters hit, quickly rerouting goods and supply chains to keep trade flowing.
A system with widely varying tariff rates across dozens of countries is sure to do the same, turning U.S. trade policy and enforcement into a game of global whack-a-mole as private firms work to evade high tariffs and U.S. officials respond to said evasion with additional tariffs. Tariff evasion is as old as the republic itself, and — as we've learned quite well with our domestic tax system — smart lawyers, accountants and other professionals make a killing (for them and their clients) exploiting regulatory complexity. The reciprocal tariff system will be complexity on steroids.
There are also more fundamental problems with Trump's reciprocal vision, regardless of its design. First, it requires the United States to apply high tariffs on products that we don't make for reasons that have nothing to do with trade or economic policy. Due to climate and geography, for example, the United States produces relatively little coffee, imports a vast quantities, and — to the delight of caffeine addicts everywhere — has applied a zero tariff on imports of green coffee beans from all countries in the world. Under Trump's proposed system, however, coffee from large exporters Vietnam and Indonesia would have faced 45% and 32% tariffs, respectively, solely because those nations ran large trade surpluses with the United States. Such tariffs would not encourage domestic coffee production or boost U.S. coffee exports, yet they would harm American coffee roasters and consumers. Plenty of other food and beverage products, along with specialty or name-brand manufactured goods, are made only by specific countries and companies and would suffer the same fate.
Furthermore, a reciprocal system that automatically matches U.S. tariffs to foreign trade barriers outsources U.S. trade policymaking to other governments. If officials in Tokyo, for example, put high restrictions on U.S. goods, reciprocity demands we do the same on Japanese goods, regardless of our tariffs' effects on American companies and consumers or their consistency with other U.S. government objectives. Indeed, given that around half of all U.S. imports are manufacturing inputs like steel, reciprocal tariffs could raise American manufacturers' costs and in turn reduce their output and export competitiveness — precisely the opposite of what the reciprocal system was allegedly supposed to do.
In general, the United States should remain free to improve its economy without the need to wait for other countries to do likewise. Regardless of whether you think the United States needs higher or lower tariffs, the decision should be based on what's best for most Americans and the economy as a whole, not what some random government official in some random country decides (often for political, not economic, reasons). That approach has worked well for the United States for centuries, and abandoning it is particularly nonsensical when urged by 'America First' proponents who decry — sometimes rightly — 'globalist' policies that cede U.S. policymaking and sovereignty to foreign powers and international organizations.
Finally, the Trump administration's reciprocal tariffs ignore that the traditional model of reciprocity has successfully eliminated foreign barriers to U.S. goods and services and increased U.S. exports — precisely what Trump says he's trying to achieve. Under this longstanding model, a government agrees to lower most of its trade barriers in exchange for another government doing the same, with both seeking an overall balance of concessions — not a line-by-line mirror image — to allow for different carveouts that reflect each nation's political sensitivities. Following extensive negotiations involving multiple domestic stakeholders (business, labor, legislatures, etc.), the governments lock in their new market access terms via a comprehensive agreement. The United States today has 14 of these bilateral and regional free trade agreements with 20 different countries, and each eliminates not only the vast majority of partner countries' tariffs (typically more than 98%) but also many nontariff barriers to U.S. goods, services and investment.
As a result of these deals, U.S. exports to partner countries have increased faster than U.S. exports to the rest of the world. By 2023, 47% of U.S. goods exports went to places committed to accepting exports from the United States duty-free. American companies and consumers, meanwhile, have gained from improved access to imports from these same places. And both American and foreign investors have gained from the certainty that — unlike the executive actions Trump has enacted — a trade agreement hardwired into law provides. Overall, studies have repeatedly shown that U.S. trade agreements have generated small but significant improvements in the American economy, boosting gross domestic product, manufacturing output, inflation-adjusted wages and total employment for both college-educated workers and those with only a high school degree.
And all these gains were achieved without new and costly tariffs and trade wars.
Indeed, the sad irony of our current reciprocal tariff experiment is that several of the most prominent targets of Trump's tariffs — Japan (24%), Vietnam (46%), Malaysia (24%), Taiwan (32%), and Indonesia (32%) — are currently members of or applicants to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, as is the U.K. (10%). Like all trade agreements, the CPTPP reduces the vast majority of member countries' barriers to other parties' exports. But Trump abandoned the deal on his first day in office in 2017. If he'd instead championed it, tariffs on almost all of the member countries' products would today be at zero. Given these facts and the partnership's goal of countering China's influence in the Asia Pacific, Trump's abandonment of the deal is in retrospect a colossal mistake.
Past U.S. free trade agreements and the reciprocity model on which they're based weren't perfect — they are, after all, political creatures and suffer from the kinds of practical, economic and legal flaws that government 'sausage-making' inevitably produces. Real weaknesses aside, old-school reciprocal trade deals successfully reduced foreign trade barriers and increased U.S. exports — and did so without the costly trade wars, heightened geopolitical tensions and vast market uncertainty we're seeing today.
Those harms, in fact, were just what the traditional reciprocal system sought to avoid — harms that resulted from decades of tit-for-tat tariff actions a century ago. Returning to that system may unfortunately require relearning those lessons the hard way today.
Scott Lincicome is the Cato Institute's vice president of general economics and its Herbert A. Stiefel Center for Trade Policy Studies.