Reciprocal tariffs really mean chaos for global trade – The Economist – 19.02.25
- Michael Julien
- Feb 22
- 3 min read
America has tried reciprocity before, and discovered its flaws.
What happens when you ditch the principles that underpinned global trade for three-quarters of a century? Donald Trump hopes to find out. He wants to levy “reciprocal” tariffs, which match the duties American exports face abroad, plus charges to offset any policy he deems unfair. A stable multilateral trade system which has, for all its flaws, fostered miraculous rises in global prosperity would give way to arbitrary judgments made in the Oval Office.
After the second world war America built a system of global commerce that sought to treat countries equally. The operating principle was the “most-favoured nation” (MFN) clause, which means that members of the World Trade Organisation must levy the same charge on a given good, no matter where it comes from (except within deep free-trade agreements, such as that between America, Canada and Mexico).
As a consequence, in any given market, American firms trade on the same terms as most other foreigners. This acts as a brake against lurches towards protectionism or lobbying for special favours, because changing tariffs for one trading partner would mean changing them for everyone.
Chart: The Economist
MFN has led to asymmetries. Countries can protect powerful producers, so long as the external tariff is uniform. It also permits imbalances in average tariffs, because countries differ in their willingness to liberalise. America levied a simple average tariff of just 3.3% in 2023, lower than 5% in the EU and 3.8% in Britain. Poor countries tend to have higher levies.
That does not mean America is a victim. Its consumers benefit from cheap imports and its companies from cheap parts. In the 20th century free trade increased global stability. Still, perhaps reciprocity could nudge others to lower trade barriers, in order to increase their own access to America’s market.
The problem, however, is that Mr Trump’s policy would be fiddly, arbitrary and more likely to ratchet up instead of down. The administrative effort needed to implement it would range from gruelling to gargantuan, depending on how reciprocity was defined. At the very least, for each good a single tariff would be replaced by hundreds of possible bilateral levies and things would get fiendishly complex for products with supply chains spanning many countries. In the late 19th and early 20th centuries America pursued reciprocity only to conclude that constant bargaining was cumbersome and unpredictable, leading Congress to adopt unconditional MFN in 1922.
The unpredictability would be aggravated by Mr Trump’s desire to be the judge of whether a country’s trading practices are unfair. His order cited value-added taxes (VATs), which are levied in most rich countries, as one such discrimination; America has no VAT, only state and local sales taxes. Yet VATs are fair, because they apply equally to imports and local goods.
Including VATs in reciprocity would lead to hefty increases in tariffs. Goldman Sachs, a bank, says that if America adopted only mirror-image tariffs without retaliation, its levies would rise by an average of two percentage points. Many European VAT rates exceed 20%.
But there probably will be retaliation, so tariffs are likely to spiral upwards. The mere possibility of that will deter businesses from relying on trade. Because Mr Trump’s reasoning on vat is nonsense, who knows what grievance he will dream up next? And reciprocity is only one component of his plans. If he also whacks duties of 25% on some goods, as he continually threatens to, you have a recipe for retaliation and a full-scale trade war. That might suit Mr Trump, but it would be a blow to the American and world economies alike. ■
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