Two and a Half Cheers for Trump’s New Trade Approach

There is so much to like about President Donald Trump’s reciprocal tariff blueprint, it’s hard to know where to begin. At the same time, it does raise some knotty issues that the new administration should address adequately before too long.

The president’s February 13 memorandum doesn’t actually put sweeping new tariffs into effect. Nor does it provide a timeline for imposing levies. In fact, the steps it does describe make clear that few if any duties will go into effect before April. Rather, Trump has directed the government to identify situations in which U.S.-based producers receive inequitable treatment by foreign governments. Yet few doubts have been voiced by any observers that major trade restrictions will result sooner rather than later—and unless and until American trade partners take up Trump’s offer to avoid new tariffs by cutting or eliminating their own trade barriers.

Even so, there was plenty in the memorandum for trade-policy realists to cheer. First, Washington is now finally committed to going after non-tariff trade barriers in a serious way. Until now, in order to address foreign subsidies and dumping, discriminatory government procurement, intellectual property theft, Mickey-Mouse foreign health and product safety regulations, and the like, U.S. leaders have relied on a system of national trade laws.

Unfortunately, this strategy was not remotely serious. The trade law system has always been too slow-moving, was too reactive, and worked in far too piecemeal a way. Moreover, the foreign bureaucracies that tain them are often so secretive that these practices can be difficult even to identify, let alone prosecute. And such failings really count, since these non-tariff barriers have been much more important obstacles to trade than tariffs (which of course are easy to identify). On paper, high enough American tariffs should be able to offset the major damage inflicted on U.S.-based producers by this foreign gimmickry.

Second, Trump has resolved to act against the harm done to American businesses by discriminatory foreign value-added tax (VAT) systems. VATs are tained by virtually every other economy on earth, and shaft the domestic businesses and workers in two ways. First, they’re charged on American goods and services exports (in addition to the tariffs and non-tariff barriers they face). No American counterpart exists. And second, they’re rebated for companies seeking to sell abroad—including to the United States. (No U.S. counterpart exists for such subsidies, either.)

If the United States had been taining its own VAT system, critics of the Trump proposals might be right in claiming that even with the export subsidies, VAT systems in general don’t affect global trade flows—because as with other countries, America’s own combination of import taxes and export subsidies would strengthen the dollar, and neutralize the VAT system’s measures to restore the price advantage of U.S. goods and services in the American market and the world over.

But of course, the United States is the huge global outlier both in terms of using a VAT system and for running trade deficits. Do you think that has had no impact on international trade? Few efforts have been made to quantify the impact of the disparity, but about ten years ago, economists and attorneys at the U.S. trade law firm Stewart and Stewart estimated that it “distorted” American trade flows (that is, added to the deficit) to the tune of $440 billion annually. That sum equaled about the entire U.S. goods and services trade gap at that time. There’s no reason to believe that foreign VATs aren’t supercharging the trade deficit comparably now.

Further, as the global average tariff rates have fallen over the decades (thanks largely to various rounds of global trade talks), the numbers of countries adopting a VAT system has soared. According to the Macrotrends.net website, the global average tariff dropped from 4.79 percent in 1988 to 2.59 percent in 2017. But a 2019 article by global tax specialist Lachlan Wolfers of the corporate consulting firm KMPG notes that the number of VAT countries soared from 25 in 1977 (just before a round of world trade talks achieved “substantial reductions in customs duties”) to 168 in 2019. That’s pretty compelling evidence that most foreign economies have been using VAT systems to compensate themselves for tariff cuts—and that they believe that these policies affect their trade flows for the better.

And thankfully, Trump’s memorandum signaled that the United States is walking away from the tariff grand strategy it has followed since practically the end of the Second World War. Based on a principle known as Most Favored Nation, it prohibited countries from charging different tariff rates for any reason to different countries or different groups of countries. The goal was to prevent what was seen as a disastrous pre-war period of trade-bloc building that was part and parcel of the rising protectionism that deepened and prolonged the Great Depression and helped lead to that global conflagration. The means chosen to create and keep global trade peace and bolster peace, period, was requiring all signatories to treat their trade partners in exactly the same way tariff-wise regardless of how these partners treated them. In other words, it was the opposite of the Trump-ian focus on reciprocity—doing unto others in trade policy as they have done to you.

The problem was that this framework (known, oddly, as Most Favored Nation) locked countries like the United States that were and have continued to be relatively open to trade into whoppingly lopsided commercial patterns with countries that were and have continued to be relatively closed. So the open countries like the United States were obligated to keep their markets open to all comers, whatever those trade partners’ behavior. And closed countries—like Japan and China and Germany—were simply obligated to keep their markets equally closed to all comers.

But about those major issues still to be addressed: Despite the considerable common sense and ethical appeal of reciprocity, following this maxim too strictly could curb the United States’ ability to use trade policy for purposes not strictly related to trade, but crucial nonetheless. Some examples: The Trump administration’s success in using “punitive” tariffs (which it distinguishes from more purely economic tariffs) to win concessions from Mexico and Canada on border security issues, and from Panama on restricting China’s presence near the Canal. Beijing, moreover, has been tariffed for its role in the fentanyl trade.

Yet many other opportunities will emerge for using these tariffs to gain geopolitical advantage—either threatening to raise them as sticks, or offering to lower them as carrots even if the target country’s tariff practices don’t change a whit. In a world where economics and national security inevitably overlap, enough of these policy tensions are bound to appear that it is reasonable to expect their resolution to dilute the benefits of tariffs for domestic businesses and workers far too often. Indeed, that’s what tended to happen during the Cold War, when globalist administrations used access to the vast American market to win or keep allies, and keep neutrals out of the Soviet or Chinese camps, no matter the cost to the domestic economy.

In those cases, what will the president’s priorities be and how does he propose to balance competing economic and geopolitical interests? These uncertainties indicate that the universal tariff that Trump had been contemplating would be the better trade policy lodestar. As I have written previously, this tariff approach could easily accommodate higher duties on especially bad actors like China and its enablers, and lower or no duties on various items that the United States either doesn’t produce at all or lacks in sufficient quantities. Key examples include the Canadian oil and gas needed to keep the U.S. economy awash in energy until domestic production ramps up, and the cutting edge semiconductors that America will continue to need from Taiwan for the years until domestic chip production regains its mojo.

As a result, the universal tariff would reduce the kind of continuing ad-hocery that reciprocity could too easily foster. The consequent greater predictability would also certainly be appreciated by domestic businesses—both exporters and those unable for the time being to avoid much overseas sourcing.

The reciprocity emphasis also seems to jeopardize any hopes for creating the kind of genuine hemispheric trade bloc that could both keep hostile foreign interests out and damp down immigration flows from Mexico and Central America by encouraging economic development. Nor does supporting the latter objective mean a simple repeat of the Biden administration’s cynical contention that such migration could be stemmed ly by attacking its “root causes.”

After all, the problem with this notion was never with the idea of fostering progress in the sending countries. The problem was that neither Biden nor his border czar Kamala Harris seemed to understand, or want to understand, that until this inevitably gradual process bore major fruit, some serious border security was required. Like most of their pre-Trump predecessors, they seemed equally clueless about measures (like discriminatory tariffs) to make sure that the benefits of trade deals like those negotiated with Mexico and Central America actually reached those countries. Instead, the Biden-ites seemed happy to see vital opportunities in labor-intensive manufactures like garments keep flowing to China and other cut-rate Asian competitors.

None of these challenges and unanswered questions reveal fundamental problems with Trump’s long-time insistence that U.S. trade policy has needed radical restructuring, and that the key to success is basing new measures on America’s matchless leverage in the global economy. But they do indicate that there are more and less effective ways to use this leverage, and that further study of trade strategies—rather than representing a simple delaying tactic—is just what American interests need now.