Trump’s risible ‘reciprocal’ tariffs

“Reciprocity”: yeah, right. Do me a favour. Don’t believe a word of it. He’s having a laugh. Sorry, where was I? Ah yes. Welcome to Trade Secrets. If you’re one of my new readers, you’ve chosen an exciting time to join.

We start week five of the Trump administration with the president having threatened five sets of wildly destructive tariffs (Colombia, China, Canada and Mexico, steel and aluminium and so-called “reciprocal”) and deferred all but one to some time in the next couple of months. The last of these, unveiled last week, is undoubtedly the wackiest yet. In today’s newsletter I explain why it’s best seen as Trump discarding even a token attempt at rules-bound consistency and simply making it up as he goes along. Meanwhile, a much bigger threat to globalisation (as I’ve written about before) escalated last week with Trump’s alignment with Russia over the Ukraine invasion, increasing the likelihood of indefinite chaos on Europe’s eastern flank and weakening the EU. The Charted Waters section, which looks at the data behind world trade, is on the dollar.

US trade policy is turning a bit Chinese

A shout-out to my colleagues on the reporting side (who are performing utter heroics, it looks like a lot of work) for putting the R word in quote marks in the headlines of our news coverage and analysis, and I’ll follow their lead. This plan isn’t “reciprocity”. It’s mercantilism laced with narcissism and caprice.

As I’ve written before, the Trump campaign platform contained a plan for a somewhat logical — if prohibitively complicated and destructive — policy where the US matches the tariffs its trading partners impose on US goods with equivalent tariffs of its own. The idea has some historical symmetry: it somewhat resembles Franklin D Roosevelt’s Reciprocal Trade Agreements Act of 1934, which was designed to reverse out of the high-tariff Smoot-Hawley era and ended up paving the way for the postwar multilateral trading system. Of course, by destroying the most-favoured nation basis of said system, Trump’s plan would be going the other way.

I said it was either politically impossible — because it would mean cutting US tariffs for highly protected American producers, such as sugarcane growers — or it would be partially and hypocritically implemented. SURPRISE! It’s the latter. In fact, it’s worse than the latter.

The plan, bearing the heavy imprint of White House trade warrior Peter Navarro, allows the US to punish a trading partner not just for tariffs higher than the US equivalent, but also for using a value added tax (a long-standing obsession of some trade folk in Washington) or other taxes Trump doesn’t like, maintaining inconvenient regulations, being mean to the US tech industry, having a misaligned currency, looking at the US in a funny way, wearing white after Labor Day and so on and on. It’s the toxic stew from a cauldron of trade grievances which has been bubbling away for years.

Here’s the way I think about it. “Reciprocity” is simply what Trump and Navarro say it is. The US is giving itself multiple tools to impose whatever tariffs it likes for whatever reason it can make up on a highly flexible, legal basis, with a series of arbitrary and eminently mutable deadlines. On top of the tariffs it already has on China, the US now has 25 per cent fentanyl-and-immigration tariffs supposedly now due on Canada and Mexico on March 4; across-the-board steel and aluminium tariffs on March 12; and this “reciprocal” nonsense, which is to be discussed in the light of various reports Trump has commissioned for April 1 and imposed God knows when after that. The ad hoc assembly of such tariff weaponry appears largely designed to create negotiating leverage for concessions or bribes, and if carried through, marks the end of the US domestic rules-based system.

Being slightly fanciful, in some ways the US is turning a bit Chinese. It’s got an increasingly centralised, crony-ish presidency running export-oriented mercantilism, while dishing out support through trade restrictions and sometimes subsidies to favoured industries. It’s also willing to use tariffs and blocks on imports as a coercive tool of foreign policy — in President Xi Jinping’s case, Australia and Lithuania; in Trump’s case, Colombia, Mexico, Canada and now apparently everyone else.

There’s one somewhat obvious difference. China has been honing the ability of its bureaucracy literally for centuries, having held its first competitive civil service written exams in the sixth century CE. Trump is allowing Elon Musk and his vandals to rampage through the US federal civil service, wantonly destroying its administrative capacity. I sense this will not end well for the US.

How do you solve a problem like Navarro?

OK, so enough of the horror story. What are multinationals and trading partner governments to do?

First of all, let’s remember that all of this might come to nothing, or to not very much. Of the five sets of tariffs Trump has so far threatened, he’s only implemented one of them (China). It remains notable — far from definitive, since investors can be completely wrong, but at least notable — that financial markets clearly don’t believe there will be some massive, dislocating change.

Second, it’s surely going to be a bad idea to play the “reciprocal” game. Cutting tariffs to match the US equivalent will destroy the most-favoured nation basis of the multilateral trading system. If the rest of the world is going to try to trade more among themselves, that system, very imperfect though it is, will be the bedrock of it. And what’s the guarantee the US would keep its side of the bargain anyway? This is Trump we’re talking about. It seems even less wise for governments to do anything as drastic as dismantling their VAT systems in the hope of getting an easier ride.

Third, it’s not going to be very practical to co-ordinate retaliation between different trading partners, given their different capacities and trading patterns. The idea of everyone tariffing Elon Musk’s Teslas is a nice one, though tricky for the EU and China, which both have Tesla factories. But governments could at least (as did Canada and Mexico, as I wrote the other week) have a plan for what they’re likely to do and have it ready to go into action as soon as possible.

Something that hits Trump hard without doing immediate damage to the retaliator’s economy is obviously ideal: the EU can do something on tech regulation, for example. Imagine if Trump and Navarro announce a start date for the “reciprocal” tariffs and are immediately met with a global array of retaliation threats bristling with trade, investment and regulatory weaponry. Even they might balk at starting a generalised trade war with the rest of the world.

Fourth, if the US signals clearly enough that it’s about to hit their exports, foreign companies (perhaps with support from their government) can plan to do exactly what the Chinese did last time — find their way round through a connector country. If I were an Indian manufacturer dependent on US consumers, I’d be planning contingencies for how I could route my exports or even invest in stop-off countries. We could end up with a truly global game of whack-a-mole. And although there will be a lot of disruption in the short run, in the medium term I’d bet on the world’s supply chain superheroes to outfox Navarro.

Overall, the thing is this. To haul out the old saying attributed to one or other French wits of the 18th and 19th centuries, for the US to start a generalised global trade war against the rest of the world is more than a crime — it’s a blunder. If the US genuinely tries to close its overall deficit with big tariffs all round, it will cause a crunching recession. If Trump discriminates between trading partners, the heavily tariffed ones can nip through the side door of those who escaped more lightly.

Charted waters

There’s not much sign yet of the weak dollar on which Trump is intermittently keen, nor much clear direction from the administration. His Treasury secretary Scott Bessent last week quixotically decided to try to wrestle a tautology into submission by making the splendidly meaningless claim that the US having a strong dollar policy didn’t mean other countries could have a weak currency policy. I know, right? Me neither.

Trade links

• The FT explains how Trump’s savaging of USAID is affecting development assistance worldwide.

• The think-tank MERICS looks at how well China is positioned for a trade war with the US.

• The EU is considering banning more imports of food products not made to EU regulatory standards, particularly as regards the use of pesticides.

• Hosuk Lee-Makiyama for the ECIPE think-tank looks at the trade and security situation in the far north Atlantic.

• I was a guest last week on the FT’s peerless Unhedged markets and finance podcast to talk about tariffs, steel and the uselessness of the giant panda.

Trade Secrets is edited by Harvey Nriapia