President Donald Trump has gone on a rampage implementing the administration’s trade agenda. In one month, the president has slapped 25% tariffs on all steel and aluminum imports. The White House has engaged in on-again, off-again levies on Canada and Mexico to ensure they enact their border proposals and curb drug trade flows. China has been slapped with 10% import taxes. The latest executive action, says Trump, could be one of the most consequential memorandums he has ever signed: reciprocal tariffs.
World Is Tarrified of the Trump Trade Agenda
Heading into the Presidents Day long weekend, Trump signed a memo enacting sweeping global reciprocal tariffs on all of America’s trading partners. “I have decided for purposes of fairness that I will charge a reciprocal tariff. Meaning whatever countries charge the United States of America we will charge them, no more, no less,” he told reporters at the Oval Office.
The logic behind reciprocal tariffs is to level the playing field and ensure that the United States is not charged more for its exports to foreign markets. What numbers are used remain to be seen, as various senior administration officials will conduct studies and present the president with their findings by April 1. What is known is that, for example, the European Union maintains a 10% tariff rate on US automobiles. Under the new scheme, Washington would raise its levy on European cars from the current 2.5% to match that of Europe.
Trump and his aides say that the United States needs to facilitate a fairer global trade environment. According to the US Trade Representative Office, the United States has a weighted average import tariff rate – a measure that considers the value of a country’s imports – of approximately 2% on goods entering the country. Places like Brazil and India have tariff rates of 7.4% and 11.5%, respectively.
“The United States is one of the most open economies in the world, yet our trading partners keep their markets closed to our exports,” the White House said in a fact sheet. “This lack of reciprocity is unfair and contributes to our large and persistent annual trade deficit.” The US trade deficit was just short of $1 trillion last year, an all-time high.
One of the core components behind the president’s latest move will be targeting value-added taxes, which administration officials assert are a “double whammy” because they almost triple the tariff rate. A VAT is a consumption tax applied to the value contributed to goods and services at every stage of production and distribution. A manufacturer producing an automobile will pay a VAT on the raw materials. Wholesalers and retailers will pay a VAT as the car traverses the supply chain. Consumers will ultimately pay the VAT as part of the vehicle’s purchase price. The average VAT rate in Europe is about 21%.
Writing on Truth Social, Trump called VATs “far more punitive than a tariff.” Stephen Miller, the White House deputy chief of staff, estimates that VATs lift the total tariff on US automobile exports to the European Union to about 30%. “No wonder Germany sells eight times as many cars to us as we do to them. President Trump is no longer going to tolerate that,” said White House trade adviser Peter Navarro.
So, what should the American people make of the administration’s recent development in the trade agenda? Will this raise prices? Will this create US jobs? Will this create a more reciprocal climate?
An Import-ant Update in the Trade Saga
Economists and policy analysts believe Trump’s reciprocal tariffs could be a massive game changer in international trade. One transformative outcome is possibly removing the World Trade Organization from the equation and participating in a bilateral reciprocal approach. Under the previous regime, global trade participants had been obliged to adhere to the most-favored-nation (MFN) status, the DEI version of worldwide commerce. It will also inevitably serve as a bargaining chip for the United States, demanding other countries lower their tariffs and remove other trade barriers or suffer the penalties.
Meanwhile, experts have listed pharmaceuticals, automobiles, medical supplies, home furnishings, and high-end consumer products as the most affected goods. The White House also listed some examples in its fact sheet, alluding to shellfish (Europe), ethanol (Brazil), and motorcycles (India).
Based on all the president’s men and women emphasizing VATs, Europe will likely be hit the hardest. Deutsche Bank analyzed how much tariffs could rise in the coming months, assessing VAT and non-VAT scenarios. The European trade bloc and other regional nations would witness enormous increases in US tariff rates. On the one hand, these governments could lower their tariff rates to appease the Trump administration. On the other hand, abolishing VATs would be next to impossible since they account for nearly a fifth of all EU tax revenues.
Of course, dozens of other countries would be put on notice, too, since they maintain a VAT system. Argentina, for instance, could experience a spike in tariff rates, which might explain why President Javier Milei has been adamant about establishing a new trade agreement with the United States.
“Globally, 175 countries have a VAT system, with the US being one of the few exceptions, using a sales tax system by state varying from 0% to 11.5%, instead,” said Inga Fechner, a senior economist of global trade at ING, in a research report. “Since VAT is typically applied as a destination-based tax, meaning it is charged based on where the goods or services are consumed rather than where they are produced, it aligns with WTO principles.”
Others contend that the White House misconstrues VATs and their impact on trade. Tax Foundation economists purport that VATs are trade-neutral and do not discriminate against US exports. “While it may seem like a compelling political argument to justify across-the-board tariffs on the EU, it instead reflects a complete misunderstanding of what a VAT is and how it works,” they said. But while Commerce Secretary Howard Lutnick suggests that VATs are export subsidies, the policy analysts note that since the VAT is border-adjusted, it “leads to currency appreciation for the imposing country, which would make it cheaper to import goods, more expensive to export goods, and thus would cancel out the apparent benefits of the tax on imports and the rebate on exports.”
A Big League Move
Economic observers have shrieked to the heavens at the potential inflationary effects of Trump’s tariffs. Some political pundits and politicians have attempted to take advantage of the latest inflation data, suggesting that the president’s policies have contributed to these numbers. And yet, besides Trump’s 10% levy on China, nothing else has changed on trade policy. In other words, even if these mechanisms are installed, the United States will not feel the effects, if any, for several months or a couple of years since tariffs, in the aggregate, operate with a lag effect.
April 1 will be a big day for Trump’s trade agenda. His administration will release its comprehensive investigations and reports on America’s trade policy. Will these details determine that America has been a fool all along? Mark it on the calendar.
