Trump’s Reciprocal Tariffs: A Policy Built on False Fairness

Playground Politics, Global Consequences

Retaliatory tariffs based on "fairness" sound more like playground justice than sound economic policy. Yet, on February 13th, Trump announced his intention to introduce them, instructing federal agencies to review "non-reciprocal trade arrangements"—including value-added taxes (VAT) and non-tariff barriers—and report on potential remedies by April 1st. This directive effectively tasks American officials with determining which trade partners are the most unfair, an unenviable challenge akin to refereeing an international economic dispute.

The Complexity of Equalizing Tariffs

One seemingly straightforward approach is tariff equalization—matching the tariffs that other countries impose on American goods. However, this is anything but simple. The United States already levies duties on a vast array of imports. Its harmonized tariff schedule consists of 13,000 categories, covering everything from artificial flowers to swords and bayonets. Applying a "tit-for-tat" tariff structure across all 180 U.S. trade partners could lead to an astonishing 2.3 million individual tariffs. More problematically, it would effectively delegate U.S. trade policy to foreign nations with vastly different economic structures and priorities.

The absurdities quickly multiply. Consider Colombia, which imposes a 70% tariff on coffee to protect domestic producers. The U.S., however, grows minimal amounts of coffee. Matching Colombia’s 70% tariff would neither boost American production nor force Colombia to lower its own levies. Instead, it would simply make coffee more expensive for U.S. consumers.

The Challenge of Averages

Trump could alternatively focus on balancing the overall tariff levels applied to U.S. exports. Colombia, for instance, imposes an average tariff of 5.2% on American goods, whereas the U.S. charges just 0.3% on Colombian imports. However, calculating "fair" averages introduces another layer of complexity. A simple average—summing all tariffs and dividing by the number of goods—may overemphasize high but insignificant tariffs, such as Colombia’s duty on coffee. A more precise method, the trade-weighted average, adjusts for the volume of imports subject to tariffs, avoiding distortions. But even this approach risks missing particularly egregious tariffs that stifle trade entirely.

VAT Confusion

Another wrinkle is the VAT, which the U.S. does not impose. Trump claims that foreign VAT regimes function as tariffs, but this is misleading. Unlike tariffs, VAT applies equally to domestic and foreign goods. Moreover, VAT refunds on exports—often a target of trade hawks—merely ensure that European goods entering the U.S. face the same tax burden as locally produced goods. There is no inherent disadvantage for American companies.

Despite this, Trump’s trade adviser, Peter Navarro, has singled out the EU as a prime offender. Within the bloc, VAT rates vary by country but must be at least 15%, with certain goods eligible for lower rates or exemptions. If the U.S. were to replicate these rates for each country, product, and business, it would drown importers in red tape. Alternatively, the U.S. could impose a flat tariff mirroring each country’s standard VAT rate, disproportionately affecting high-VAT countries like Hungary (27%). By contrast, Canada’s goods-and-services tax is just 5%, while Australia, Japan, and South Korea apply a flat 10% rate.

The Murky World of Non-Tariff Barriers

Non-tariff barriers, such as food safety regulations and quotas, further complicate matters. The White House has highlighted the EU’s ban on shellfish imports from 48 American states as an example of unfair restrictions. The World Bank estimates that 94% of European imports face non-tariff barriers, compared to just 62% of U.S. imports. However, many of these restrictions apply equally to domestic and foreign producers, making them less about trade discrimination and more about regulatory differences. Under Trump’s previous administration, the U.S. Trade Representative even classified data protection laws and antitrust enforcement as non-tariff barriers, suggesting that "fairness" could be defined as whatever suits U.S. interests at a given moment.

The Mar-a-Lago Trade Gambit

Countries targeted by Trump’s tariffs will not sit idle. He claims he will lower tariffs if other nations do so first, pledging that U.S. duties will be "no more, no less!" than those imposed on American goods. However, the World Trade Organization (WTO) requires a "most-favored nation" approach, meaning tariffs must be applied equally to all trade partners unless a formal deal exists. While the U.S. has largely sidelined the WTO, other nations still adhere to its rules, potentially forcing them to devise workarounds. Alternatively, they could yield to Trump’s pressure and slash tariffs across the board, leading to an unprecedented wave of trade liberalization. But that remains highly unlikely.

A Strategy of Uncertainty

Trump thrives on unpredictability, and reciprocal tariffs provide another weapon in his negotiation arsenal. By dangling the threat of trade restrictions, he can pressure foreign governments into concessions. His meeting with Indian Prime Minister Narendra Modi on February 13th, for example, concluded with India committing to purchase more American oil and gas. However, this strategy has limits. Financial markets have barely reacted to the tariff threats, suggesting that investors suspect Trump is bluffing.

The real question is whether America’s trading partners will call that bluff. The U.S. is more open to trade than many of its partners, which ultimately benefits American consumers. If Trump follows through on his reciprocal tariffs, it will be U.S. buyers who suffer the most from higher prices. Other countries may eventually decide that the best way to respond is not to give in but to stand firm—echoing another playground maxim: "The only way to deal with bullies is to stand up to them."