US President Trump has been strikingly consistent in his trade stance. He argues that, abetted by US leaders, foreign countries have taken advantage of the United States in trade.He wants to end this practice.  

He is struggling to find a way.  His campaign rhetoric about imposing a large tariff on imports from China was quickly cast aside. It was replaced by some passing interest in a “border adjustment tax”, which, as envisioned, would have taxed all imports into the US, while making exports tax free. This was initially to be part of the tax reform, but was dropped ostensibly due to the complexity, but it also a near-certain challenge at the World Trade Organization.  

The US President has not given up. This week take of “reciprocal tax” has been resurrected. The idea here is that the US should match other countries’ tariff on US goods. Commerce Secretary Ross has already suggested how it would work. The EU puts a 10% tariff on auto imports from the US. The US puts a 2.5% tariff on auto imports from the EU.Ergo: the US should raise its tariff to 10%.  

Although the US President’s intent is clear, the reciprocal tax idea is a non-starter for the same reason as the border adjustment tax, and speaks directly to our belief in the resilience of the global liberal trade regime. The US helped erect a multilateral rule-based system. The rules were designed to prevent defections and apply to the US as well as other members. The US tariff schedule, especially for goods, is not hardwired into the WTO and to change it would require negotiations with all the WTO members, and they may have little incentive to acquiesce.  

Trade is considerably more complicated than many economic textbooks suggest. Trade is not primarily finished goods crossing national frontiers, but intermediate goods, frequently part of global supply chains, that can cross borders many times, and often moving within the same company (intrafirm trade).