Donald Trump has ordered his team to develop plans for imposing reciprocal tariffs on goods imported into the United States. While the exact details are still unclear, this move would likely involve setting import taxes on foreign goods at similar rates to those imposed by other countries on American exports.

Trump has justified this strategy by arguing that other nations often charge higher tariffs on US goods than the US charges on theirs. He believes this creates an unfair disadvantage for US companies that export goods.

How Are Tariffs on Imports Set?

Understanding global trade rules is crucial to the discussion on tariffs. Under the World Trade Organization (WTO) rules, countries are allowed to impose tariffs on imports. These tariffs can vary depending on the type of product. For example, a country could impose a 10% tariff on rice but a 25% tariff on cars.

However, the WTO requires countries to apply the same tariff rate on goods from any country. This is known as the “Most Favoured Nation” (MFN) principle. For example, Egypt cannot impose a 2% tariff on wheat from Russia but a 50% tariff on wheat from Ukraine. There is an exception for countries with free trade agreements, allowing them to charge no tariffs on each other’s goods but apply tariffs on imports from other nations.

What Are Current Tariff Rates?

Countries report their average external tariff rate to the WTO, which reflects the overall tariffs applied to all imported goods. In 2023, the US had an average external tariff of 3.3%, slightly lower than the UK’s 3.8%, the EU’s 5%, and China’s 7.5%. Some US trade partners, such as India (17%) and South Korea (13.4%), have much higher tariffs.

Trump’s point that some countries have higher average tariffs than the US is valid. These higher tariffs can raise the cost of American exports, which may disadvantage US exporters compared to foreign businesses selling in the US.

However, it’s not clear whether these tariffs harm the US economy directly. Many economists argue that tariffs are ultimately paid by consumers in the country imposing them, as imported goods become more expensive.

Will Reciprocal Tariffs Hurt US Consumers?

On February 10, Trump suggested that the US could impose tariffs equal to those imposed by other countries on their goods. For example, if another country charges a 25% tariff on US goods, the US could impose a 25% tariff on imports from that country. This approach could break WTO rules, as it would involve applying different tariffs to different countries, which contradicts the MFN principle.

If the US could prove that another country was violating WTO rules, it might justify retaliatory tariffs on that country. However, imposing reciprocal tariffs without such evidence would likely breach international trade agreements.

Could the US Match Tariffs on Specific Goods?

Another possibility is that the US could target tariffs on specific items rather than applying blanket rates to all imports from a particular country. For example, the EU imposes a 10% tariff on imported cars from the US, while the US imposes only a 2.5% tariff on European cars. In this case, the US could raise its car tariff to 10% to match the EU’s.

However, this would be a complicated process because global trade involves numerous goods with different tariff rates. Matching tariffs on individual items would take significant time and effort. Additionally, Trump’s plan might also include addressing non-tariff barriers, such as regulations and domestic subsidies, which could further complicate the process.

Could US Trade Tariffs Actually Decrease?

If the US adopted reciprocal tariffs, some US tariffs could even decrease. For example, the US has higher tariffs on dairy products, such as milk, compared to some countries like New Zealand, which imposes 0% tariffs. Lowering tariffs in these areas could face political challenges due to the impact on US industries.

Similarly, reciprocal tariffs on certain goods could lead to changes in US trade policy. The US imposes a 25% tariff on imported trucks, while the EU’s tariff is only 10%. If the US sought to match this, it might have to lower its own truck tariff.

Trump has also suggested that tariffs on steel and aluminum would be “over and above” any reciprocal tariffs, indicating that his primary goal may not be full reciprocity but rather protecting certain sectors of the US economy.