Trump’s “reciprocal tariffs” would drive stake into heart of the world trade system

San José, CA – On Thursday, February 13, President Trump signed another executive order, this time to study implementing his plan for “reciprocal tariffs.” While many businesses and financial investors breathed a sigh of relief that these would not go into effect until April, the Trump administration will use this time to try to define many policies of other countries as tariffs – even when they are not.

The United States does have an overall low tariff rate, of 1.5%. This rate was calculated by the World Bank using the actual amount of trade. But the fact is, many countries have equal or lower tariffs than the United States, such as major trading partners such as the European Union (1.3%), and Canada (1.3%). Japan does have slightly higher tariffs (1.6%) and even China’s rate of 3.1%, while double the United States, is still an overall low rate.

So, what the Trump administration will try to do is label non-tariff policies like the VAT, or Value Added Tax, as tariffs. All of the major trading partners with the United States have a form of VATS, including Canada, China, the European Union, Japan and Mexico.

A Value Added Tax, or VAT, is a type of consumption tax somewhat like a sales tax. In the United States neither the state nor the federal government uses a VAT. Instead, states use sales taxes, where the U.S. businesses are exempt from sales taxes on their purchases, and the government is just paid once when the final sale is made to the consumer. Most countries use a VAT instead, where businesses pay a percentage based on their “value added” or difference between their business sales and cost of goods bought for production. But since imported goods don’t pay a VAT to the government, a VAT charge is added to them to level the playing field between domestic and foreign producers.

Another difference between a tariff and a VAT is who pays. With a tariff, the import business pays the tax to their own government. With VAT, the exporting business pays tax to the foreign government. However, it is true that in the end, most of this is passed on to the consumer.

If carried out, this would undermine the worldwide trade system, which is based on the “most favored nation” or MFN concept. MFN means that any agreement to lower tariffs with one country would be shared with all countries agreeing to MFN. This MFN was embodied in the principles of the General Agreement on Tariff and Trade or GATT in 1947 and later the World Trade Organization or WTO in 1995. This process has lowered U.S. tariffs from a high of 20% in 1932 down to the current 1.5% rate.

Many will wonder why Trump is trying to tear apart the very system based around the GATT and the WTO that the U.S. designed. This is Trump’s reaction to the fact that U.S. trade power has declined from its 1950 peak. After World War II, all the other major capitalist economies were devastated, and China was the poorest big country in the world, after 100 years of foreign invasion and civil war. By 1990, the United States was still the main trading partner for the most countries, Europe was second, and China was a distant third, with only ten smaller countries as its main trade partner.

But the relative decline of the United States economically meant that by 2020 China had taken over as the main trading partner of most countries, with Europe, in particular Germany, coming in ahead of the third-place United States. Trump hopes that tearing up the world trading system, in which Europe and China are doing better, will give the United States an advantage. More likely Trump’s policies will end up strengthening the economic competitors of the United States, as more and more developing nations turn to China – and there is even talk of Canada joining the European Union!

Trump and other MAGA leaders try to paint the United States as the victim, implying that other countries are causing the U.S.’s large trade deficit. But in fact, U.S. corporations seeking to maximize their profits have outsourced many consumer goods such as clothing, shoes, cell phones, computers, consumer electronics, appliances and furniture to other countries. In other industries, the U.S. has or is falling behind. In automobiles, Japan took the car crown from the U.S. and now China has become the world’s largest exporter of cars. In commercial airlines, Boeing has stumbled and now European Airbus leads, and China is rolling out their first commercial passenger jet. Intel has lost its lead in producing computer chips to Taiwan SMC and Samsung in Korea. In the green energy industries, China has taken the lead in solar panels, batteries and electric vehicles.

If we look at China’s rise, first they laid the foundation with education, infrastructure and expanding opportunities for women. But the Trump administration is doing the exact opposite, aiming to dismantle the Department of Education, not even paying lip service to our crumbling infrastructure, and trying to restrict opportunities for women. In fact, the Trump administration will not “Make America Great (or Affordable) Again,” it is doing the exact opposite, further diminishing the United States and raising prices to boot.

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