Trump’s old study didn't justify reciprocal tariffs, so now he wants a new one

Last week, President Trump issued a memorandum calling for a study on how to implement a “Fair and Reciprocal Plan” for tariffs. It’s due within 180 days but Trump already knows idea what it will say.  

That’s because he commissioned a similar study in 2019, which purported to show that he could lower the trade deficit by matching foreign countries’ higher tariffs. This conclusion was pure fiction.

The 2019 study had several problems. One of the most glaring of these was that it didn’t consider the prospect of eliminating tariffs in new trade deals with foreign countries.

It dropped members of U.S. free trade agreements from its analysis and turned a blind eye to the benefits of future ones. This cleared the way for the 2019 study to focus on its main complaint: namely, that the World Trade Organization’s unconditional most-favored-nation framework is unfair to the U.S.

By this, the 2019 study meant that in its review of nearly 700,000 most-favored-nation tariffs, it found that foreign countries had higher rates than the U.S. on 67 percent of these, lower rates on 20 percent and equal rates on 13 percent. In some cases, the differences were sizable. On autos, for example, the U.S.'s most-favored-nation tariff stands at 2.5 percent, versus 10 percent for the European Union, 15 percent for China and 35 percent for Brazil. 

This led to the question Trump wants answered in the new study: Would the U.S. trade deficit drop by more if foreign countries matched U.S. tariffs, or if the U.S. matched theirs? Using simulations, the 2019 study said the second scenario cut the trade deficit by 10.2 percent, versus the first scenario’s 9.4 percent. This is the result Trump wants the new study to endorse. 

But the 2019 study’s results can’t be taken at face value.  

First, trade deficits mostly reflect fiscal and monetary policies, not trade policy. The 2019 study hinted at this concern in passing but didn’t model any macroeconomic variables. 

Second, there are temporary tariffs, like anti-dumping and countervailing duties, which can be petitioned for by U.S. firms to deal with foreign goods that are sold below “normal value,” or are subsidized, respectively. Neither of these “trade remedies” is limited by most-favored-nation tariffs, yet they’re also not included in the 2019 study. 

Third, by construction, the 2019 study’s simulations isolated each market and industry, and thus can’t speak to the harm that tariffs cause other industries, let alone their effects on employment, for example. This “partial equilibrium” view may make sense for an anti-dumping duty investigation, but Trump’s question called for a “general equilibrium” approach. 

Fourth, the 2019 study didn’t model the effects of foreign retaliation. This is shocking since it sets up the scenario of reciprocating foreign countries’ higher tariffs by assuming that “our trading partners refuse to lower” theirs. Wouldn’t they also be likely to retaliate? 

Finally, even if we were to take the 2019 study at face value, it failed to consider an obvious third scenario: namely, one in which the U.S. and foreign countries zero out their tariffs in new trade deals.  

To see why, consider the 2019 study’s list of countries running trade surpluses with the U.S. Most of the main ones would have eliminated their tariffs as part of two trade deals the U.S. thought long and hard about joining but didn’t. 

The first is the rebranded Trans-Pacific Partnership, now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. This would give the U.S. duty-free market access to Japan, Malaysia, the United Kingdom and Vietnam. India has flirted with joining for years and might be more inclined to sign up if the U.S. did as well. Trump withdrew from TPP in 2017. 

The second is with the EU, modeled on the Transatlantic Trade and Investment Partnership from the mid-2010s. The 2019 study notes that the EU as a bloc, as well as several individual member states like France, Germany and Ireland, have trade surpluses with the U.S. It should have asked about the benefits of a similar trade deal. 

Congress didn’t show much appetite for the Transpacific Partnership or the Transatlantic Trade and Investment Partnership. No one is saying it would be politically straightforward to negotiate these trade deals now. But as Trump’s tariff tsunami makes clear, the mere threat of a trade war is alienating America’s allies and emboldening its enemies. Surely this is a wake-up call for the “trade skeptics” in the House and Senate.

Lastly, the Trump administration shouldn’t dismiss the WTO as a negotiating forum to slash tariffs.  

In 2002, the U.S. proposed that all WTO members eliminate all non-agricultural import duties by 2015, but there was pushback. This time around, the U.S. could put forward something modeled on the WTO’s zero-for-zero agreement on pharmaceutical tariffs to eliminate select tariffs among a “coalition of the willing” based on conditional most-favored-nation tariff, a concept that Trump's 2019 study very much liked. 

Trump’s reciprocal tariff plan is bad economics. It’s also bad politics. Trump vows to implement it by executive order to get around Congress, but by matching foreign countries’ higher rates, he’s delegating the authority to set U.S. tariffs to their legislatures. 

Marc L. Busch is the Karl F. Landegger professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University.