Introduction

'Fair and Reciprocal Plan' was introduced by US under the Donald Trump administration. This policy aimed to counter non-reciprocal trading arrangements with the trading partners. This policy wanted to determine and impose equivalent reciprocal tariffs in order to address perceived disparities in trade relations. The non-reciprocal trading relationship is assessed based on various factors, including tariffs, discriminatory taxes, non-tariff barriers such as subsidies and restrictive regulations, exchange rate manipulations and any other practice deemed to limit U.S. market access or impede American firms from competing effectively.

Assessing Non-Reciprocal Trade Relationships

The U.S. evaluates non-reciprocal trading relationships by examining the various factors that create an uneven playing field for American businesses. These factors are --

Imposition of tariffs by trading partners on U.S. exports
Discriminatory taxes that favor domestic firms over American businesses
Non-tariff barriers such as subsidies and restrictive trade regulations
Manipultion of exchange rate that undervalue foreign currencies to make their exports cheaper
Any other policy that limits U.S. market access or restricts fair competition

U.S. Share in Global Merchandise Exports

US is one of the world's largest trading nations but still its share of global merchandise exports has remained relatively stable over the years. In 2010, countries across the world sent 12% of their total merchandise exports to the U.S. By 2019, this figure had increased only marginally to 13%, just one year before the pandemic. The latest available data for 2022 show that the U.S. accounted for 13.4% of global exports. This indicates that around 87% of global merchandise exports currently take place between countries that do not include the United States.

There are, however, significant variations among different countries in their export reliance on the U.S. For example, Cayman Islands and Bermuda in the Caribbean send nearly 85% of their goods to the U.S. Similarly, the U.S. accounts for over 75% of Canadian and Mexican merchandise exports. On the other hand, 81 out of 160 countries, for which data were available from UN Comtrade for 2022, exported less than 5% of their total goods to the U.S. Among these, 26 countries (many from Africa) sent less than 1% of their total exports to the U.S. The average U.S. share across the 160 countries stood at 11.4%, while the median was much lower at 4.7%. In the case of major economies like India, China and the European Union (EU) the proportion of merchandise exports going to the U.S. was 18%, 16% and 19%, respectively, in 2022.

Comparison of Tariff Structures

A major element of the 'Fair and Reciprocal Plan' is the comparison of U.S. tariffs on imports from trading partners with tariffs imposed by trading partners on the U.S. exports. The most recent tariff data which was sourced from UNCTAD TRAINS, covers 157 trading partners of the U.S. for the year 2022. And the European Union is treated like a single entity due to its common external tariff.

An analysis of this data reveals the following key findings:

In 27 trading partner countries, the average import-weighted tariffs on U.S. exports are actually lower than the tariffs imposed by the U.S. on imports from those countries. This means that, technically, these nations cannot be classified under the 'Fair and Reciprocal Plan' since reciprocal tariffs would put the U.S. at a further disadvantage.
The list of 27 countries includes some of the largest U.S. trading partners, such as Canada, the European Union, Japan and the United Kingdom. Together, these countries accounted for half of all U.S. merchandise exports in 2022.
Of the remaining 130 countries, where the U.S. perceives a tariff disadvantage, the disparity in tariffs is relatively minor in many cases. In 57 countries, including China and India, the difference in import-weighted tariffs is less than 5%.
Among these 57 countries the required increase in U.S. tariffs to achieve parity is less than 1% in 15 countries.
However, in 73 countries worldwide, the tariff differential is more than 5%, making them the most significant targets for the 'Fair and Reciprocal Plan'.

Potential Consequences of Reciprocal Tariffs

Impact on U.S. Trade Interests

If reciprocal tariffs are imposed it could have several negative consequences for U.S. economic interests. Higher import tariffs would lead to increased costs for American consumers and businesses. This will reduce their purchasing power and profitability. Major trading partners might respond with counter-tariffs which could hurt U.S. exporters and make American goods less competitive abroad. Additionally global supply chains could be disrupted causing inefficiencies and higher production costs. Trade flows may also be diverted, as affected nations seek alternative partners, ultimately reducing their reliance on the U.S. market and weakening its economic influence.

Correlation Between Tariff Hikes and U.S. Export Shares

Interestingly data analysis indicates a positive correlation between the size of the tariff increase and the share of U.S. exports in the partner country’s total trade. In simple terms imposing reciprocal tariffs on trading partners where a large tariff differential exists will disproportionately affect countries that rely heavily on the U.S. market. This could lead to unintended negative effects where countries that divert their exports to other destinations would face increased tariffs from the end of U.S.

Policy Alternatives: Removing Trade Barriers

Regulatory Reforms and Trade Liberalization

Instead of pursuing retaliatory tariffs, policymakers need to focus on removing barriers to trade and investment. And the effective strategies are as follows:

Reducing domestic trade barriers to improve ease of doing business.
Enhancing regulatory cooperation with global trade partners.
Promoting digital services trade, which has been growing at a faster pace than goods trade.
Negotiating comprehensive preferential trade agreements that address behind-the-border regulatory issues.

Growth of Digital Trade

Reports from the World Bank and the World Trade Organization (WTO) indicate that digitally delivered services exports have outpaced all other categories of international trade in the last decade. Empirical research also suggests that preferential trade agreements that include provisions on regulatory and non-tariff barriers have the most positive impact on digital services trade. This highlights that there is a need for governments to prioritize trade facilitation and regulatory reforms over retaliatory tariffs.

Conclusion

'Fair and Reciprocal Plan' and policy aims to create a level playing field for the U.S. trade. This will be done by addressing tariff imbalances (as perceived by US). However, a closer examination suggests that such a policy could result in economic inefficiencies, retaliation from key partners and increased costs for U.S. consumers and businesses.

So, a more sustainable and effective trade strategy is required which involves regulatory reforms, trade liberalization and fostering digital trade which would enhance the U.S. competitive advantage without disrupting global commerce.

PRACTICE QUESTION

Q.Evaluate the impact of the 'Fair and Reciprocal Plan' on global trade. Are retaliatory tariffs an effective tool for trade balance? (150 words)

1. What is the 'Fair and Reciprocal Plan' in U.S. trade policy?

A U.S. policy under Trump to counter unfair trade practices by imposing reciprocal tariffs on trading partners with higher tariffs, discriminatory taxes, or restrictive regulations.

2. How does the U.S. assess non-reciprocal trading relationships?

By analyzing tariffs, taxes, non-tariff barriers, exchange rate manipulation and market access restrictions that disadvantage U.S. businesses.

3. What is the impact of reciprocal tariffs on U.S. trade?

Higher consumer costs, counter-tariffs on U.S. exports, disrupted supply chains and reduced U.S. market influence.

4. How does tariff structure influence the 'Fair and Reciprocal Plan'?

Data shows 27 key partners already impose lower tariffs on U.S. exports, while 73 countries have over a 5% tariff gap, making them prime targets.

6. What are the alternatives to reciprocal tariffs?

Regulatory reforms, trade liberalization and digital trade growth through lowering trade barriers, better global cooperation and stronger trade agreements.

The Reciprocal Tariff Dilemma