Retaliatory Tariffs

I have finally encountered a kind of tariff that I am not sure I am against. The idea is to impose the same tariff on another country’s exports that they impose on your exports. A tariff makes the country that imposes it worse off, a fact that neither Trump or most of the media appear to understand — Vance may — but it makes the country it is imposed against worse off as well. Imposing a tariff can be in the interest of the politicians who impose it for public choice reasons, as a way of buying support from a concentrated and well organized interest group such as the auto industry at the expense of a dispersed interest group such as their customers. That is one of the two reasons tariffs exist, the other being that the false theory of trade economics is simpler and easier to understand than the true theory.¹

But another country’s tariff barriers against your exports make both your country and its politicians worse off. So if imposing tariffs on their imports results in tariffs being imposed on their exports, it might be in the interest of the politicians as well as the country they rule to lower, even abolish, their tariffs — and free trade, zero tariffs, is my first best tariff policy.

Reciprocal reduction of tariffs is, of course, a routine objective of trade negotiations. What Trump appears to be proposing is to automate the process. That might have some advantages. It would reduce the amount of time and effort spent on trade negotiations. More important, it would make it harder for a government that wanted to keep its tariffs to pretend to its citizens that negotiations for mutual reductions had broken down over details.

It is not obvious what “reciprocal tariffs” means in practice, because tariffs, typically, are on particular goods. China imports oil and exports textiles. If they impose a tariff on American oil there would be no point to the US retaliating by imposing a tariff on Chinese oil — we don’t import Chinese oil.

Under the Plan, my Administration will work strenuously to counter non-reciprocal trading arrangements with trading partners by determining the equivalent of a reciprocal tariff with respect to each foreign trading partner. (Reciprocal Trade and Tariffs Memo)

It isn’t clear what “the equivalent” means. One possible approach would be to figure how much revenue a country collects from tariffs on American exports and set a uniform tariff on that country’s exports set to bring in the same amount of revenue. That would be simple and would reduce the political support for tariffs, since they could not be targeted to protect specific industries.

For which reason I don’t expect it to happen. The closest version that seems politically plausible is a nonuniform tariff schedule that brings in the equivalent revenue. Unfortunately that would let the administration protect favored industries with tariffs high enough to reduce imports, and revenue, to near zero.

Of course, the target country could, in a true system of reciprocal tariffs, solve the problem by reducing their tariffs to zero.

Unfortunately, it isn’t clear that what Trump is proposing is a true system of reciprocal tariffs. The memo starts with (a) tariffs imposed on United States products but goes on to:

(b) unfair, discriminatory, or extraterritorial taxes imposed by our trading partners on United States businesses, workers, and consumers, including a value-added tax;

(c) costs to United States businesses, workers, and consumers arising from nontariff barriers or measures and unfair or harmful acts, policies, or practices, including subsidies, and burdensome regulatory requirements on United States businesses operating in other countries;

(d) policies and practices that cause exchange rates to deviate from their market value, to the detriment of Americans; wage suppression; and other mercantilist policies that make United States businesses and workers less competitive; and

(e) any other practice that, in the judgment of the United States Trade Representative, in consultation with the Secretary of the Treasury, the Secretary of Commerce, and the Senior Counselor to the President for Trade and Manufacturing, imposes any unfair limitation on market access or any structural impediment to fair competition with the market economy of the United States.

If Trump wants to impose tariffs on countries that don’t impose them on us, he will have lots of excuses to do it.

To be fair to Trump or whomever wrote the memo, if the policy was limited to (a) above a country that wanted to protect its industries from competition could probably find a way of doing it that wasn’t a tariff, such as a regulation on the product designed to be hard for foreign producers to meet. For reciprocal tariffs to work the policy has to be interpreted by someone who wants it to work, wants to retaliate against tariff-equivalents but not to use (b) through (e) as excuses to impose tariffs whenever doing so is politically profitable.

---

My web page with the full text of multiple books and articles and much else

Past posts, sorted by topic

A search bar for past posts and much of my other writing

1. I discuss the relevant economics in Ptolemaic Trade Theory.