Trump’s reciprocal tariffs and the art of the bad deal

President Trump claims to be both Tariff Man and Disrupter in Chief. 

His tariff plans combine these two titles, and they will accelerate into high gear if he unleashes his new “reciprocal tariff” plan. It is designed to extend and raise tariffs across the board while maximizing Trump’s ability to play favorites with his trade policy. The U.S. economy will pay dearly for it.

Trump began his second term threatening punitive tariffs against our largest three U.S. trading partners — China in February (10 percent), and Canada and Mexico in March (25 percent). Global 25 percent tariffs on steel and aluminum were to follow, potentially extending to 25 percent on all automobile imports by April.

He also gleefully announced the subsequent full-blown chaos of universal “reciprocal” tariffs against the entire world, in which each U.S. trading partner would presumably face mirror-image U.S. tariffs equal to their own respective tariffs imposed on every U.S. export item.

U.S. tariffs tend to be lower than those of most (not all) other countries, and the new tariffs would presumably be set to match each foreign country’s own (presumably higher) tariffs faced by U.S. exporters on that product. 

Yet higher tariffs are not a symptom of cheating by foreign trade partners. They usually serve as either a source of domestic tax revenue for less-developed countries or as a means of protecting vulnerable domestic industries. In trade negotiations, all countries bargain over each other’s tariff schedules until a complete set of tariff schedules is agreed upon by consensus.

U.S. trade negotiators play this game just as everyone else does, reserving higher tariffs to protect politically sensitive industries. Together, all countries in the negotiations get market access for their exporters in exchange for allowing import market access by their trading partners.

The system is simple, as each country’s tariff schedule, with few exceptions, must apply equally to all trading partners in the World Trade Organization. Since 1947 this arrangement resulted in a stable, predictable global trading environment, ensuring predictable market access and encouraging investment in trade activities.

Yet Trump’s reciprocal tariff plan is basically a framework for him to destabilize global trade by increasing U.S. tariffs against any trading partner to any tariff rate he chooses, for any reason, including non-trade issues. Trump has no intention to rely on U.S. reciprocal tariffs if foreign tariffs are low.  

For example, he triumphantly signed a trade agreement with Canada and Mexico in 2019 that set most tariffs at zero for all three partners. Now Trump has bizarrely concluded that, despite his brilliant agreement, Canada and Mexico are still cheating on trade (or something), hence his new 25 percent tariffs against them in 2025.

For Canada and Mexico, the latest excuse for tariff punishment is their immigration cooperation and fentanyl interdiction policies, which Trump deems to be insufficient. He will take the same approach to all other countries, blithely slapping tariffs unilaterally on any country he holds a grievance against. Those complying with his demands can expect to see him come back with new tariff threats on issues of his choosing.

Trump’s love of tariffs seems to come from a basic misunderstanding that U.S. tariffs “will make us rich” by forcing foreign governments to pay them, essentially allowing the U.S. to tax foreign countries. It is regrettable that President Trump continues to indulge in this fantasy and present it as a sign of his brilliant dealmaking.  

His economic advisers appear to be afraid (or unable) to present him with the simple truth: U.S. tariffs are taxes on U.S. citizens.

A second major error by Trump is to claim that trade deficits are the result of foreign cheating.  This assumption is also false. U.S. trade deficits are the result of the U.S. consuming more than it produces, which reflects greater net U.S. national investment than savings. 

It does not depend on the countries’ tariff levels. In fact, trying to correct a trade deficit with massive tariffs is counterproductive, since they drive up the value of the dollar by reducing the demand for foreign currency. The typical result will be a further increase in the U.S. trade deficit.

The balance sheet on U.S. tariffs is, therefore, grim for the home country. They raise prices at home and waste domestic resources through production inefficiency. They cause foreign retaliation and an increase in the value of the dollar, reducing U.S. export sales and U.S. employment in those industries.  

To these damaging effects, we can now add a Trumpian tariff cost: the chaos of his unpredictable trade policy. In Trump’s first term, his violation of World Trade Organization rules is estimated to have reduced aggregate U.S. private investment by 1 percent, or approximately $40 billion, based on 2018 numbers. His new reciprocal tariff plan expands tariff coverage to all $4.1 trillion in U.S. imports, implying even more damage to trade-related investment and U.S. GDP.  

Finally, the planned reciprocal tariffs would allow Trump to increase control over U.S. import markets and play favorites in granting tariff exemptions. This took place on a smaller scale in his first term, particularly regarding access to Chinese industrial imports. The planned universal tariffs could open hundreds of new critical import items for bureaucratic favoritism, creating a massive new “trade swamp.”  

Overall, reciprocal tariffs represent the Art of the Bad Deal.

Kent Jones is a professor emeritus at Babson College.