World trade at risk: Trump's drive for reciprocity will undermine trade

United States (US) President Donald Trump had made no secret on his campaign trail of his intent to reshape trade policy by sharply raising tariff walls. Concern that the US has received a raw deal when it comes to the traditional trade architecture has in fact been a long-standing belief with Mr Trump and he is once again in a position to impose his views on the world. In his last term, he was satisfied with hamstringing the World Trade Organization’s dispute-settlement structure and renegotiating the North American Free Trade Agreement (Nafta) while also taking the US out of the Trans-Pacific Partnership (TPP). These damaged the global trading system considerably, but his plans for this term are significantly more worrying. Mr Trump declared last week that he intended to charge a “reciprocal tariff” on goods imported into the US. It is unclear what this might mean, but at the very least it threatens to undermine the current system of world trade and leave countries like India struggling to respond.

 

The President’s notion of “reciprocal” tariffs is unclear, and it is up to his trade bureaucracy to try and interpret it. His chosen commerce secretary — who has not yet been confirmed by the US Senate, as is required by law — has said studies of major US trading partners would be completed by April 1. This is in response to a memo from the President that orders them to come up with a schedule of tariffs that matches those levied by other countries on US goods, and to include both value-added taxes in destination countries and non-tariff barriers to that calculation. The latter two complications are bad enough, given that they should not typically be addressed directly through tariff competition. The first is difficult enough to produce on a short schedule. Clearly, it cannot be a matrix which calculates how much each country charges for each line of merchandise from the US. More likely, it will be a rough-and-ready calculation of each trading partner’s average tariff on US goods, adjusted with some shadow price meant to account for non-tariff barriers.

 

Even if such an incomplete and irrational estimate is derived, the question then is of what happens if the US chooses to apply it. In effect, the danger is that Mr Trump’s directives will end up violating the most favoured nation (MFN) principle, which is what underlies all global trade today. Under the MFN principle, countries cannot discriminate against trading partners. Within the WTO system, which inherited this principle from the General Agreement on Tariffs and Trade, reciprocally negotiated bilateral privileges are automatically extended to all other trading partners. It allows smaller trading nations or those with limited capacity to negotiate to manage world trade and tariffs effectively, and it reduces the complexity in the system, allowing for greater volumes of trade to flow.

 

Without the MFN principle, investigation into rules of origin might have to be applied to every single shipment. Dumping the MFN principle, as Mr Trump’s focus on reciprocity suggests, would fundamentally alter world trade — and not for the better. India’s approach to Mr Trump, which has focused on adjusting tariffs for specific imports, might not suffice in this new world. Trade officials will have to seriously think of ways to preserve the multilateral system, and to apply joint pressure on the US. Perhaps joining trading blocs like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership is one answer.