At an Oval Office press conference Thursday, President Trump confirmed that he’s going ahead with his reciprocal tariff plan. The U.S., he said, will impose the same tariffs on other countries as they impose on the U.S.: “No more, no less.” That sounds fair—we treat them the way they treat us—but it’s actually a terrible idea.
It amounts to outsourcing U.S. tariff policy to other countries. They would dictate what our tariffs would be. If other countries put high tariffs on American goods, then we would impose high tariffs on their goods. So much for American sovereignty. So much for deciding what’s in our own national interest. The British economist Joan Robinson once said that a country shouldn’t throw rocks into its own harbors just because other countries have rocky coasts. The same principle applies here: The U.S. shouldn’t have stupid tariff policies just because other countries have stupid tariff policies.
A reciprocal policy would enormously complicate the U.S. tariff system. The Harmonized Tariff Schedule of the U.S., which details individual rates on particular commodities, has about 13,000 line items. The U.S. trades with roughly 200 countries. Is Washington ready to impose and manage 2.6 million individual tariff rates? The lobbying pressures for exemptions and exceptions on the U.S. side would be enormous. This would fill the swamp, not drain it. Foreign exporters would go to great lengths either to get their products under a lower tariff classification or to transship them to another country to reduce the duty they would face.
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The Trump administration thinks it’s using tariffs to beat up other countries. In reality, U.S. businesses and consumers will take the hit. Even Mr. Trump’s hero William McKinley said, “Commercial wars are unprofitable.” Sadly, it’s advice that the administration seems likely to ignore.
All of this explains why markets breathed a sigh of relief after Mr. Trump delayed the pain Thursday by directing his Commerce Secretary and U.S. Trade Representative to study how tariff rates could be adjusted to match foreign trade barriers. Commerce Secretary Howard Lutnick said he planned to complete the report by April 1. Lobbyists, ready, set, go.
Mr. Trump has expressed special pique at European tariffs on U.S. autos and India’s on Harley-Davidson motorcycles. But his willy-nilly tariff threats—on one day, off the next—create business uncertainty that will hurt U.S. investment and hiring.
The specifics of Trump’s reciprocal tariffs plan remain sparse. The executive order Trump signed Thursday instructed the Department of Commerce and the U.S. Trade Representative to develop new proposed tariff levels that take into account the tariffs charged by other countries to import American goods, as well as industrial subsidies, value-added taxes, and other economic policies that Trump views as unfair. It will take weeks (and perhaps longer) for the new tariffs to be calculated and rolled out, and the changes may be implemented on a country-by-country basis, according to Megan Cassella, a reporter for CNBC.
Regardless of how it shakes out, it seems like Americans will be facing a massive tax increase. “White House officials claim that the new policy could yield up to roughly $1 trillion in new annual revenue,” the Washington Examiner reported.
That number seems a bit absurd. America imported about $3.3 trillion of goods last year, so achieving $1 trillion in new tariff revenue would require tariffs to be set so high that they would severely reduce imports—thus reducing the revenue from tariffs. Think of it as a reverse Laffer curve. That’s one reason why tariffs are a poor way to generate revenue.
Still, if that’s the figure the White House is going with, let’s call it what it is: The largest tax increase since World War II, as a share of America’s gross domestic product (GDP). Total American GDP was about $29 trillion last year, so a $1 trillion tax increase would consume about 3.4 percent of the economy, making it the largest tax increase since the Revenue Act of 1942.
Claude Barfield describes Trump’s proposed tariffs on semiconductors as “foolhardy.” Two slices:
The Biden administration, and now the incoming Trump administration, seem determined to support and subsidize the US semiconductor industry for competitiveness and security imperatives. A central vehicle for this semiconductor industrial policy initiative is the CHIPS and Science Act of 2022. In addition to providing substantial sums for R&D, the act provided some $39 billion to advanced semiconductor manufacturing in the US.
Despite this support, Intel’s struggles have continued, and indeed become graver. In 2022, in an attempt to regain technological prowess, the company brought back former CEO Pat Gelsinger, who had led the company before its downward spiral. Gelsinger embarked on a highly ambitious campaign not only to restore Intel’s lead in advanced chip design, but also to compete in the capital-intensive market for manufacturing chips. Over the past three years, while there has been some progress on the design side, Intel has failed to significantly beak into chip manufacturing—even as huge capital costs sapped the company’s resources and undercut investor confidence. Last December, only weeks after the Biden administration signed an agreement to supply some $7.5 billion in manufacturing subsidies for Intel for new “fab” construction, the Intel board fired Gelsinger, leaving the company with interim leadership.
That brings us to the Trump administration. Despite his jabs at the CHIPS Act, President Trump has stated his commitment to reshoring US manufacturing, particularly in strategic technologies like semiconductors (export controls will not hold China back forever).
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Foolishly and dangerously, President Trump has vowed to put tariffs on semiconductors. TSMC manufactures 90 percent of the world’s most advanced chips and while it is investing in the United States, it will be many years before the US can cease importing these chips from the company.
We already know that tariffs are in fact a terrible idea, just as we know that things like rent control or price controls are bad ideas. Both in theory and practice, these policies fail. Yet are superficially appealing to those with no appreciation for the reality of trade-offs.
Trump is such a person. While he has declared the word tariff “the most beautiful word in the dictionary,” he’s at the same time indicated he doesn’t really know how tariffs work. “It’s not going to be a cost to you. It’s going to be a cost to another country,” he said at a rally in September.
In case it needs to be spelled out: tariffs are taxes on imported goods, with the importers paying the taxes and passing along the higher costs to you, the consumer.
GMU Econ alum Dominic Pino explains that Value-Added Taxes (VATs) are not tariffs. A slice:
As you can see, the VAT does not give Swiss chocolate an advantage over American chocolate from the Swiss consumer’s perspective. He is paying the same VAT either way. It’s not a tariff when an American pays sales tax on a good imported from Europe, and it’s not a tariff when a European pays VAT on a good imported from America.
A VAT is a consumption tax, not a tariff. It applies equally to all goods sold in a country – domestically produced or imported. If a country has a 20 percent VAT, both a domestically made car and an imported car sold within that country pay the same VAT. There is no built-in preference for local producers; in that sense, it is not discriminatory.
