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International Trade

Trump Considers a Reciprocal Tax on U.S. Trade Partners

Karla Sanchez  

Karla Sanchez  

President Trump continues to keep the Global Trade community on alert with his changing trade policies. Within the last year he has withdrawn the U.S. from the Transpacific Partnership Agreement (TPP), initiated renegotiations of the North American Free Trade Agreement (NAFTA), taken steps to review the U.S. Korea Free Trade Agreement (KORUS) and most recently, imposed Section 201 Safeguard Tariffs on imported large residential washing machines and solar cells and modules. Next on Trump’s “America First” agenda, is possibly imposing reciprocal taxes on U.S. trade partners that levy tariffs on American goods. During Trump’s infrastructure plan announcement on February 12th, he made it clear that “We cannot continue to let people come into our country and rob us blind and charge us tremendous tariffs and taxes and we charge them nothing.” Since President Trump’s announcement, no specific details — such as how this tax initiative would be structured or what goods and trade partners this would apply to — have been released.

What is a reciprocal tax on trade?

“A reciprocal tax is charged on an import from another country that charges the U.S. a similar amount to export an American product into its market. It acts essentially as a tariff.” During his announcement, Trump called out China, Japan, and South Korea among others that he believed had been taking advantage of the U.S. for years. In addition, President Trump cited Harley-Davidson as a case in point where we experience unfair trade.

The specifics relevant to this example Trump called out are tied to Harley-Davidson’s announced plans last year to build a factory in Thailand. In part this decision was made to avoid Thailand’s up to 60 percent tariff rates on imported motorcycles from the U.S. In direct comparison, a fully assembled motorcycle importing from Thailand to the U.S. can expect much lower duty rates from duty free up to 2.4% (depending on engine size). The obvious delta in duty implications is a clear argument President Trump can support his “America First” vision.

What has the reaction been among our trade partners?

Korea was one of the countries singled out by President Trump during his announcement, and the reaction from Korean lawmakers and trade experts has been chilly. According to them this is another “non-existing” concept the U.S. is taking towards trade protectionism and may even violate international trade norms. According to Korean industry watchers, they feel that this “reciprocal tax” along with Trump’s building a wall along the Mexican border, are all nonsense and are causing U.S. trade partners to lose trust. The Korean government did not make an official statement regarding this reciprocal tax, other than this is a new concept for them and they plan on taking necessary actions once more specifics are provided from the U.S. These necessary actions may include filing complaints, along with China and Japan, to the World Trade Organization.

China was another country singled out by President Trump during his announcement, with his sights set on imposing heavier tariffs on China imports of steel and aluminum. China is one of the largest trading partners for the U.S. and is currently in active discussions with the U.S. on avoiding a possible trade war. It has been reported that China’s President Xi Jinping is sending his top economic advisors to the U.S. to further discuss trade tensions between the two countries.

Trump built his political brand by assuring voters that he would address the imbalance of trade for the U.S. and confront China to secure a better deal for American workers. In the meantime, the U.S. trade deficit with China has ballooned during Trump’s watch, hitting its highest level since 2008. The Commerce Department said on February 6, 2018 that the U.S.-China trade deficit increased 8.1 percent to a record $375.2 billion in 2017.

Progress of Trump’s Past Protectionist Measures

Trans-Pacific Partnership Agreement (TPP):

Soon after taking office in 2016, President Trump removed the U.S. from TPP, stating that this would be a “Great thing for the American worker.” As recently as this past February, U.S. Treasury Secretary Steven Mnuchin said that “he had begun to have very high-level conversations” on TPP and that rejoining the trade pact was an option for President Trump if the terms were improved.

North American Free Trade Agreement (NAFTA) Negotiations:

President Trump formally initiated the renegotiation process of NAFTA on May 18, 2017 and as of late February 2018, the three countries have embarked on round seven of seven. Tension continues to build between Mexico and the U.S. over Trump’s instance that Mexico pay for Trump’s border wall. Adding to the complexities of renegotiations is the upcoming Mexican Presidential Elections in July. Round seven of renegotiations is scheduled to run until March 5th in Mexico City.

Section 201 Safeguard Tariffs:

On January 22, 2018, Trump approved recommendations to impose Section 201 safeguard tariffs on imported large residential washing machines and solar cells and modules. In response, both Samsung and LG (both South Korean multinational corporations) announced they would be opening manufacturing plants in the U.S. to meet consumer demands. South Korea is the second largest trading partner for the U.S.

Looking Ahead

Although President Trump has yet to announce the full details and structure of his reciprocal tax initiative, he has already announced his plans to impose stiff tariffs on steel and aluminum imports. During a listening session with representatives from the steel and aluminum industry on March 1, President Trump agreed and confirmed that he would be imposing tariff rates of 25% for steel and 10% for aluminum. Trump’s announcement caused an immediate shock to the stock market and unsettled many of our European and Asian trading partners.

More details are expected to become available later this week when it has been reported that President Trump will be formally signing off on these tariff policies.

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