US Tariffs Could Rise to Counter Tariffs, Non-Tariff Barriers, VAT, Wage Suppression and More

The memo said non-tariff barriers include "import policies, sanitary and phytosanitary measures, technical barriers to trade, government procurement, export subsidies, lack of intellectual property protection, digital trade barriers, and government-tolerated anticompetitive conduct of state-owned or private firms."

The Commerce Department and the Office of the U.S. Trade Representative will lead the efforts to quantify the harm to American exporters from this myriad of issues, though the treasury secretary and the director of the National Economic Council also will have input, particularly on exchange rates. Peter Navarro, senior counselor for trade and manufacturing, will put forward his views, and the DHS secretary will advise on how the tariffs could be collected.

The memo says: "For many years, the United States has been treated unfairly by trading partners, both friend and foe," and that's one reason the U.S. has a "large and persistent annual trade deficit in goods." It says this action is designed to reduce that deficit.

Many questions are unanswered by the memo. Will only goods that the U.S. exports (or exports in any quantity) be targeted, so that goods like mangoes or coffee will be spared? Will the U.S. hike tariffs on goods the countries export to the U.S. in the highest quantities, not all products, so as to affect the bilateral trade deficit most directly? Will only countries with goods trade deficits be targeted, and countries that buy more goods from the U.S. than they export to the U.S., like Colombia and Australia, be spared?

A senior White House official, speaking on background, said that the Cabinet members that handle trade will "examine those countries first that have the highest trade deficits with us and or the most egregious issues," and move quickly on those.

A fact sheet that justified the approach pointed to Brazil's ethanol tariff, India's food and motorcycle tariffs, a ban in the EU on U.S. shellfish exports from 48 states, and the EU car tax of 10%.

While Trump said appreciatively that the EU had lowered its car tariff to 2.5% -- that has been suggested as a possibility by EU politicians, but is not a certainty -- he also brushed aside a question from a reporter on whether negotiations with trading partners to lower tariffs would mean the tariffs would never be collected. He said he expects most trading partners' tariffs to remain the same, and said that the tariff revenue will help the U.S. pay down its debt. He didn't confirm the $1 trillion annual number that senators were told in a private lunch, however, saying instead, "I think it'll be a staggering amount" of money collected in tariffs each year.

Both Trump and a top trade hawk in his administration pointed to the EU as a target.

"They have a 20% VAT tax, which we're considering to be similar or the same as a tariff," Trump said, about the EU. "They sued Apple, they sued Google, they sued Facebook. The court system over there is not very good to our companies." He said airlines have complained to him about fees they have to pay when they land at European airports. "The European Union has been absolutely brutal on trade," Trump said.

Navarro, on the call with reporters, also put a bulls'-eye on the EU. "America runs its more than a trillion dollar pernicious trade deficits because the major exporting nations of the world attack our markets with punishing tariffs and even more punishing non-tariff barriers," he said. "A poster child is the EU's value-added tax, which almost triples the EU's tariff rate on American exports, even as it heavily subsidizes the EU's exports.

"No wonder Germany sells eight times as many cars to us as we do to them, and President Trump is no longer going to tolerate that," Navarro said.

The non-partisan Tax Foundation wrote that the VAT is no more trade distorting than state sales taxes. "Despite the appearance of subsidizing exports and punishing imports ... a border-adjusted VAT is trade neutral. A border adjusted tax 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," the group explained.

The foundation did say that VATs are better for domestic producers because they make sure not to double-tax both a business buying inputs and the customer for that business when it buys the finished product.

"More than 40 percent of US sales tax revenue comes from intermediate transactions, which impose costs on US producers. This design flaw is not present in VATs, which do not double-tax intermediate transactions. Consequently, the sales tax imposes a penalty on domestic production that a VAT (or a better designed sales tax) would not. European VATs aren’t subsidizing anything -- US states are just shooting themselves in the foot," the group wrote.

Although South Korea, Mexico and Canada don't charge tariffs on most U.S. exports because of their free trade agreements, Trump and his staff made clear that would not be enough to spare them from the reciprocal trade action.

The anonymous White House official said, "The President also is focusing like a laser beam on what he calls non-monetary barriers or non-tariff barriers, and across the international environment, any given country is like fingerprints. They all have a different mix of how they take advantage of the U.S. For example, Japan has relatively low tariffs but high structural barriers, whereas India has the tariffs. It has some of the highest tariffs in the world.

"It doesn't matter whether it's strategic competitors like Communist China or allies like the European Union or Japan or Korea, every one of those countries is taking advantage of us in different ways, and the President characterizes this as a lack of reciprocal trade."

Trump, during the signing of the memo, complained to reporters about Canada. "Canada's been very bad to us on trade, but now Canada's going to have to start paying up," he said. He said again "we just don't need their products," and said that Canada would "have to become a state" because the country cannot afford to invest in its military enough to be a full participant in NATO.

Trump talked about reciprocal trade just ahead of a meeting with Indian Prime Minister Narendra Modi. "India traditionally is just about the highest tariff country. They charge more tariffs than any other country. We'll be talking about that," he said.

But, again, when asked if his goal was to lower Indian tariffs to U.S. levels, he suggested that it wasn't. "Whatever they charge us, we're charging them, so it works out very well. It's a beautiful, simple system."

Commerce Secretary nominee Howard Lutnick, who was in the Oval Office during the press conference, struck a different tone, telling a reporter asking about higher prices for consumers: "Remember, if they drop their tariffs, prices for Americans are coming down."

The memo said that the Commerce Department and USTR would "initiate, pursuant to their respective legal authorities, all necessary actions to investigate the harm to the United States from any non-reciprocal trade arrangements adopted by any trading partners. Upon completion of such necessary actions, they shall submit to me a report detailing proposed remedies in pursuit of reciprocal trade relations with each trading partner."

A reporter asked the White House if it would be using Section 232, Section 301, Section 338 to impose tariffs.

The official said Section 301 will likely be "relied on quite heavily," that Section 232 could be used, and so could the International Emergency Economic Powers Act, or IEEPA. "I think as this unfolds, you'll see that we will rely on all of the various statutes that provide the president broad authority," he said.

There are already Section 301 investigations completed for a number of EU countries, the United Kingdom, India and Turkey over digital services taxes, in addition to the investigations on Chinese practices.

A reporter asked the White House if each product would receive its own reciprocal tariffs -- a different one for keys vs. cars. He didn't directly answer. He said, "The advantage of the reciprocal approach is that, rather than one-size-fits-all, it can customize the equivalent tariff to each of the major trading partners based on the kinds of actions they're taking.

"And by doing it at a country-specific level, it opens the door for each country to basically correct the unfair trade practices that they're engaging in. One country might have higher tariffs, another country has higher non-tariff barriers."

Trump also talked about future tariff actions, in addition to the reciprocal tariffs, saying he'd impose tariffs on pharmaceuticals, semiconductor chips and cars to drive more domestic manufacturing in all those sectors. On chips, he said, "Taiwan took our chip business away, and we want that business back. And if they don't bring it back, we're not going to be happy."

"It's not going to be a big shock to the system," he said of the tariffs on drugs, which are currently tariff-free.

"This is something that should have been done many years ago. And ultimately, prices will stay the same, or go down. Our manufacturers are going to be helped. There could be some short-term disturbance, but long term, it's going to make our country a fortune," he said.

"I don't expect exceptions or waivers," he said, after acknowledging that he chose not to impose tariffs on consumer electronics when Apple lobbied him, saying they'd lose market share to Samsung if he did so. "This applies to everybody across the board. This is a much simpler way of doing it, much better," he said.