What would the Trump Tariffs mean for World Trade?

Donald Trump, who likes to call himself "Tariff Man", may well be the next President of the United States. In this contribution, we examine a tariff measures he might propose, how the rest of the world might react and what this could mean for the future of world trade.  

The Trump Proposals

Tariff Man has made a number of varied statements on his intended trade policies. Those that are highlighted in the media include a blanket tariff increase on all imports (and even higher tariffs on Chinese goods), 100% tariffs on countries that move away from dollar-denominated trade and 100 or 200% tariffs on US companies that move production to third countries. It is to be hoped that none of these broad and simple measures could ever be passed in such terms by the US Congress even with Republican majorities in both houses. 

A more intelligent proposal, and the one that we examine below, is the proposed "Trump Reciprocal Tariff Act" that would allow the US President to increase the tariff on any imported good from a third country to equal that imposed by the third country in question on the same good when imported from the United States. An eye for an eye, a tariff for a tariff as Trump says. The real attraction of such a policy is that the increased tariff would cease to apply if the third country were to reduce its tariff on US goods. The proposed Act would allow the President to negotiate these reciprocal tariff changes.

This proposal harks back to the Reciprocal Trade Agreements Act of 1934 under which the US Congress empowered the US President to increase or decrease tariffs on third countries in exchange for, or to extract, tariff and trade concessions from other countries. This led to numerous agreements being concluded. The negotiating methods and lessons learned from this episode were carried over into what became the GATT in 1947.

WTO Implications

The GATT/WTO system of tariff commitments is founded on the principle that countries have different economic conditions and interests and therefore different tariff needs. The United States may never have industrialised in the 19th century if imports of industrial products from Europe had been available duty free. Similarly, Europe would have very little agriculture today if imports of agricultural products from the rest of world were duty free. 

The GATT introduced a system of tariff negotiations that was a response to the mistakes of the past. In particular, all tariff concessions were to be applied equally to all GATT contracting parties in accordance with the Most Favoured Nation ("MFN") obligation. This put an end in particular to the UK's empire preference that the United States so much resented.

Under the GATT/WTO system, countries negotiate tariff reductions between themselves and then apply those reduced tariffs equally to all other members. Thus, for example, recently in 2020 the EU reduced tariffs on a group of products such as frozen lobsters at the request of the US while the US reduced its tariffs on a group of products of equivalent value and of interest to the EU, for example, glassware and ceramics. All of these reductions were applied to all WTO Members as required by the fundamental MFN obligation. 

Reciprocity is the opposite of MFN. The Trump Reciprocal Tariff Act would not only violate GATT/WTO rules, it would destroy the very foundation of the GATT/WTO system. 

The planned Trump Reciprocal Tariff Act assumes, first, that the US can ignore its WTO tariff bindings and, second, that it can apply different tariffs to different countries, violating the most fundamental GATT/WTO principles. No-one in the United States seems to be pointing this out. More seriously, no-one in the United States seems to care about blatantly violating fundamental GATT/WTO principles (as illustrated, for example, by the 100% tariffs imposed on Chinese electric vehicles).   

Possible Reactions by WTO Members

Other WTO Members can of course resort to WTO dispute settlement and would be guaranteed to succeed in their complaints. The United States will presumably be indifferent to WTO complaints but may be more concerned about retaliation.

The EU has already stated that its reaction to Trump's planned tariffs would be "immediate and severe" and that it has prepared a list of products for retaliatory tariffs that would be painful for the US and bring the US to the negotiating table.

It is striking that both sides are seeking to force the other to negotiate. 

Negotiating away trade problems is of course what the WTO is for. However, these future negotiations may not be of the kind envisaged by the WTO. 

The WTO has a system for authorising measured and proportionate retaliation for established and unremedied breaches of its rules. In that way, for example, the US was authorised to retaliate against the EU's failure to bring its regime for bananas into conformity with WTO rules and the EU was authorised to retaliate against the US for its Foreign Sales Corporation tax regime – and in both cases this led eventually to compliance.

The immediate and severe measures envisaged following application of the Trump Reciprocal Trade Act would be of a different nature. Both sides would appear to consider themselves unconstrained by rules and also to have right on their side. Retaliation could be met by counter-retaliation and so ad infintum – or at least until there is nothing left to retaliate with. In addition, there could be a large number of sides in the ensuing trade war.

The New World Trade Order

The products produced by countries around the world and the products various countries need to import vary greatly; that is the whole point of trade. So also does the negotiating leverage each country enjoys vary; mitigating that circumstance is one of the points of the WTO. 

Developing countries in particular, have much higher tariffs on industrial goods than do industrialised countries. The interest of the US in negotiating with them is often much lower (unless they happen to be able to exploit an advantage, such as the ability to cut off supplies of critical minerals). 

Consequently, while the US and EU may be able to constructively negotiate with each other so that, for example the EU tariff on cars is reduced and the US reduces its tariff on trucks, there is much less prospect of constructive negotiations with smaller, less prosperous countries.

More importantly, the logic of the planned Trump Reciprocal Trade Act is that different tariffs are imposed on different countries and therefore any tariff agreements reached with a powerful negotiating partner will not apply to less powerful partners.

What then will the new World Trade Order look like? 

One can only speculate but arguably the WTO could become irrelevant and be reduced (like the League of Nations) to administering the pensions of its staff.

The reciprocal trade agreements that result from this trade war would most likely be bilateral rather than multilateral and vary greatly as a result of diverse trade interests and negotiating leverage. That could open up many avenues for triangular trade navigating amongst the tariffs. Overall, however trade would be much reduced as would be growth and prosperity, as the IMF and other international institutions are starting to warn.  

The biggest losers would surely be developing countries that have much less negotiating leverage and benefit the most from the current system of historically negotiated tariffs.

One of the important concessions that developing countries made to their more developed negotiating partners in return for the right to maintain higher tariffs when being admitted to the WTO was to agree to liberalisation of trade in services (the GATS) and to respect intellectual property rights (the TRIPs Agreement). The one area where developing countries may be able to retaliate effectively could be on services an intellectual property protection.

Conclusion

The GATT and the WTO systems were developed after great much reflection and taking into account a long experience of trade disputes. They have greatly improved trading conditions compared to previous periods, contributing to increased prosperity for all.  Of course, they can usefully be reformed to take account of changes in the world economy and it has admittedly been difficult to achieve agreement on reforms due to the wide-ranging membership. 

Will the planned Trump Reciprocal Trade Act be the trigger that will lead to a constructive reform of the WTO or will it herald a return to the wild west of tariffs and trade agreements that prevailed before the GATT was created and which the post-war United States was so keen to reform?

The outcome will depend on the wisdom of our future leaders.