Reciprocal tariffs really mean chaos for global trade

What happens when you ditch the principles that underpinned global trade for three-quarters of a century? Donald Trump hopes to find out. He wants to levy “reciprocal” tariffs, which match the duties American exports face abroad, plus charges to offset any policy he deems unfair. A stable multilateral trade system which has, for all its flaws, fostered miraculous rises in global prosperity would give way to arbitrary judgments made in the Oval Office.

After the second world war America built a system of global commerce that sought to treat countries equally. The operating principle was the “most-favoured nation” (MFN) clause, which means that members of the World Trade Organisation must levy the same charge on a given good, no matter where it comes from (except within deep free-trade agreements, such as that between America, Canada and Mexico). As a consequence, in any given market, American firms trade on the same terms as most other foreigners. This makes lurches towards protectionism or lobbying for special favours less likely, because changing tariffs for one trading partner means changing them for everyone.

MFN has led to asymmetries. Countries can protect powerful producers, so long as the external tariff is uniform. It also permits imbalances in average tariffs, because countries differ in their willingness to liberalise. America levied a simple average tariff of just 3.3% in 2023, lower than 5% in the eu and 3.8% in Britain. Poor countries tend to have higher levies.

That does not mean America is a victim. Its consumers benefit from cheap imports, its companies from cheap parts. In the 20th century free trade increased global stability. Still, you might think, perhaps reciprocity could nudge others to lower trade barriers to increase their access to America’s market.

The problem, however, is that Mr Trump’s policy would be fiddly, arbitrary and more likely to ratchet up instead of down. The administrative effort needed to implement it would range from gruelling to gargantuan, depending on how reciprocity was defined. At the very least, for each good a single tariff would be replaced by hundreds of possible bilateral levies and things would get fiendishly complex for products with supply chains spanning many countries. 

In the late 19th and early 20th centuries America pursued reciprocity only to conclude that constant bargaining was cumbersome and unpredictable, leading Congress to adopt unconditional MFN in 1922.

The unpredictability would be aggravated by Mr Trump’s desire to be the judge of whether a country’s trading practices are unfair. His order cited value-added taxes (VATs), which are levied in most rich countries, as one such discrimination; America has no VAT, only state and local sales taxes. Yet VATs are fair, because they apply equally to imports and local goods.

Including VATs in reciprocity would lead to hefty increases in tariffs. Goldman Sachs, a bank, says that if America only adopted mirror-image tariffs its levies would rise by an average of two percentage points, without retaliation. Many European vat rates exceed 20%.

But there probably will be retaliation, so tariffs are likely to spiral upwards. Even the risk of that will deter businesses from relying on trade. Because Mr Trump’s reasoning on vat is nonsense, who knows what grievance he will dream up next? And reciprocity is only one component of his plans. If he also whacks duties of 25% on some goods, as he threatens to every five minutes, you have a recipe for retaliation and a full-scale trade war. That might suit Mr Trump, but it would be a blow to the American and world economies alike.

© 2025, The Economist Newspaper Ltd. All rights reserved. From The Economist, published under licence. The original content can be found on www.economist.com