Reciprocal Trade Tariffs' Mechanism, Justification Debated at WITA

That was implied when President Donald Trump said recently that there would be a 25% tariff on EU products (see 2502260032).

Georgetown Law School Professor Jennifer Hillman, a former general counsel at the Office of the U.S. Trade Representative and a former commissioner on the International Trade Commission, responded, "That is obviously clearly more feasible than what sounded like what was the original proposal." She said that, with about 13,000 Harmonized Tariff Schedule codes, if you had a different tariff rate to match each country's rate, you could "end up with 2.6 million different tariff lines, which obviously is completely impossible to administer."

She noted that the White House had to walk back the carve-out for Chinese goods from de minimis "because you ended up with mountains of packages waiting to be cleared."

Ross was the moderator of a panel convened by the Washington International Trade Association Feb. 27.

Mark DiPlacido, policy adviser to American Compass and former deputy assistant USTR for public affairs under Robert Lighthizer, defended the idea of hiking tariffs on trading partners in order to either force them to buy more American exports or to divert trade from imports to domestic production, or a combination of those effects.

He said that imposing tariffs on China reduced the trade deficit with that country, but the trade deficits with Canada and Mexico climbed. He said that the overall trade deficit last year was $900 billion; it was $1.2 trillion when only considering goods.

That's dangerous, as important industries went overseas, he argued, and the dissatisfaction among voters with the industrial job losses led to Trump's victories.

John Veroneau, senior counsel at Covington, and a former general counsel at USTR, said that Trump is not wrong when he says other countries use tariffs and non-tariff barriers to keep U.S. exports out, but he said "it is not as severe as he suggests," and it's not a huge problem with the EU, Canada, Mexico or other FTA partners.

He said he's concerned that the reciprocal trade initiative is not really an effort to get trading partners to lower their barriers we identify, but rather "to justify a Fortress America approach where we’re going to increase tariffs."

Veroneau argued: "A more reliable way to reduce the trade deficit is to reduce the budget deficit, but we’re going in the opposite direction."

That's because trade deficits are a reflection of the need for foreign investment to underwrite domestic consumption (or even investments) that the country's production cannot fully support. In the case of the U.S. government, it has, for a generation, spent more than it collects in taxes, and some of that budget deficit is supported by foreign buyers of Treasury bonds.

When other panelists said that trade deficits are a result of macroeconomic choices, DiPlacido said he agrees that spending is a problem, but that a lot of the trade deficit is a result of other countries' policies, whether those are VATs, non-tariff barriers, or policies that promote manufacturing over consumption.

That's why the memo was written so broadly, and goes beyond matching others' tariff rates. "It’s not meant to bring [most-favored nation (MFN)] rates down to zero for everybody," he said. Rather, as Lighthizer has written, he thinks a trade policy that's most viable is "a new trading bloc that is based on the idea of balance rather than free trade for free trade’s sake."

Veroneau said: "I think the concern in the business community is that this is a cataloging exercise, and looking at everything that might be a barrier to trade in a very expansive way is really just a front for justifying increasing U.S. tariffs and is not really a good-faith effort to reduce efforts bilaterally and globally."

Hillman said that although the Trump administration is trying to tackle trade barriers other than tariffs, they're planning to hike U.S. tariffs in response. She said low- and middle-income Americans spend 38% of their income on goods, while the wealthy spend 11% of theirs on goods.

"If we’re trying to help low- and middle-income people, the worst thing we can do is to raise tariffs," she said.

Panelist Simon Evenett, a professor at IMD business school in Switzerland, said foreign officials don't know how to assess the risk their exports face, since the memo authorizes action to counter any measures the U.S. determines are unfair, written or unwritten.

But they are planning for retaliation, and some of those ideas will not be retaliatory tariffs. In addition, he said, they are talking about bans of outbound investment to the U.S., to prevent local manufacturers from opening up factories in the U.S. to avoid the tariffs. They are talking about revoking intellectual property rights for American firms. Will they collect taxes from their exporters?

He also said that U.S. officials are seriously overestimating how valuable the U.S. market is to other countries' producers, and therefore, its leverage. He said that while the U.S. has almost unlimited leverage over Mexico and Canada, even if China couldn't export a single screw to the U.S., it could replace all its lost sales there with other markets in three years. There are 70 countries that could replace their exports to the U.S. in less than 12 months, he said.

The panelists didn't come to a conclusion on how the government would choose to impose tariffs on trading partners -- would it be through the International Emergency Economic Powers Act, which has no public deliberative process, or through Section 301 investigations, which do establish a fact pattern, and take many months to complete? Hillman said she hopes the latter. DiPlacido said he has had no conversations with the decision makers, but that he thinks "there's a real chance" that Section 301 is the primary instrument.