Donald Trump has directed his team to develop plans to implement reciprocal tariffs, or import taxes, on goods entering the US from other countries. The exact form of these tariffs is yet to be determined, but it is likely to involve setting levies on imports to the US at a rate similar to the levies imposed by other countries on US goods. Trump’s rationale for this is that many countries have higher tariffs on imports from the US compared to US tariffs on their imports, which he views as unfair to US exporting companies. He argues that his reciprocal tariffs will create a level playing field. BBC Verify has investigated whether Trump’s argument holds merit.
How do countries set tariffs on imports?
In the realm of global trade, countries are allowed to impose tariffs on imports under the World Trade Organization (WTO) rules. These tariffs can vary depending on the type of goods being imported. However, under WTO regulations, countries are prohibited from discriminating among nations when deciding on the tariffs for specific imported goods. This principle, known as the «Most Favoured Nation» (MFN) principle, mandates that all countries face the same tariff rates set by the country imposing the tariffs. Exceptions to this rule exist in the form of free trade agreements between two nations that cover most of their trade, allowing them to charge no tariffs on goods traded between them while maintaining tariffs for goods from other countries.
What tariffs do countries currently have?
Most countries report an average external tariff to the WTO, which represents the overall average tariff rate applied to all imports. In 2023, the US had an average external tariff of 3.3%, slightly lower than the UK’s 3.8%, the European Union’s 5%, and China’s 7.5%. While the US had lower average tariffs compared to some of its trading partners like India (17%) and South Korea (13.4%), trade agreements with countries like Mexico, Canada, and South Korea exempt American exports from tariffs. Trump’s argument about higher average tariffs in some countries affecting American exports holds some legitimacy.
However, the impact of tariffs on the US economy is not straightforward. Most economists believe that the costs of import tariffs are eventually borne by households in the imposing country, as they lead to higher prices for imported goods.
How might a reciprocal tariff work?
Trump has proposed imposing the same average external tariff on imports from each individual country as those countries impose on US goods. This approach, while seemingly fair, could violate WTO rules that require uniform tariffs on specific goods, regardless of their origin. If the US can demonstrate that a targeted country is already breaching WTO rules, it may be able to justify specific retaliatory tariffs against that country. Simply implementing reciprocal tariffs as a general policy would likely breach WTO regulations.
Another approach could involve matching tariffs on individual items imposed by different countries. For instance, the US could decide to impose a 10% tariff on cars from the EU to level the playing field, given the EU’s 10% tariff on imported cars. However, this approach would be complex and lengthy due to the variety of goods involved in global trade and the diverse tariff regimes of WTO member countries.
Could US tariffs actually come down?
If the US were to match individual tariffs from other nations, it might need to lower some tariffs instead of raising them. For example, the US has higher tariffs on certain agricultural products, such as milk imports, compared to countries like New Zealand, which have 0% tariffs on dairy imports. Lowering tariffs on goods like milk could face political resistance from US dairy farmers who benefit from the protectionist tariffs. Similarly, a reciprocal tariff regime on individual goods could pose challenges for industries like automotive, where the US imposes a 25% tariff on imported trucks while the EU’s tariff on imported trucks is only 10%. Trump’s additional tariffs on steel and aluminum indicate that true reciprocity may not be the primary objective of his trade policy.
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