‘The big one’: Trump’s latest threat would lead to chaos

Donald Trump says his latest tariff idea is “the big one”. He’s not kidding. His reciprocal tariffs would cause global trade and supply chain chaos and be a logistical nightmare for the US and the countries on which the tariffs would be imposed.

The concept of reciprocal tariffs isn’t complicated. The US would essentially match the tariff rates of the countries with which it trades.

Donald Trump’s plan for reciprocal tariffs will be a nightmare to implement. Credit: AP

“It’s time to be reciprocal,” Trump said last week. “You’ll be hearing that word a lot. Reciprocal. If they charge us, we charge them.”

That sounds simple, but in practice, it would be anything but straightforward. The US trades with about 200 countries, and most do not have a single tariff rate but hundreds, if not thousands, of individual rates for individual products or product categories.

Last month, Trump announced the removal of an exemption from duties on duty-free shipments of low-value (less than $US800, or $1260) parcels from China, Mexico and Canada.

Within 24 hours of the tariffs on those parcels coming into effect, the US Postal Service and the US Customs and Border Protection agency had to pause them because they didn’t have the systems to inspect and calculate the duties on the billions of small parcels that enter the US each year.

Applying reciprocal tariffs to all imports entering the US would involve vastly more complexity and cost than the challenge of applying those duties to small parcels.

It could entail making billions of decisions on all individual imported items, with different calculations depending on where they were shipped from, what tariff applied to that product within the exporting country and how it compares with America’s own tariffs.

It might also involve determining whether the actual duty rate the exporting country applies to imports of the product differs from the rate declared to the World Trade Organisation, an organisation that would be rendered defunct under any version of Trump’s “America First” trade regime.

Trump’s tariffs on low-cost goods were paused days after they were announced.Credit: AP

That complexity may be why Trump’s trade adviser and long-time advocate for tariffs, Peter Navarro, said the US would look at all America’s trading partners but would start with the ones with which the US ran the largest trade deficits rather than trying to apply the new regime to all US imports from the outset.

If that were not enough, Trump’s concept of reciprocity is broader than equalised tariffs.

In announcing its new tariff plan, the White House said the new regime would consider foreign government subsidies, exchange rate policies and the impact on their exports of value-added taxes.

Trump has also referred to, in the context of the proposed tariffs, the digital taxes Europe and others apply to the sales of big tech companies, which are mainly American, as well as to Europe’s antitrust actions against the big US tech companies and the massive fines that have been imposed.

Trump has a particular bee in his bonnet about Europe’s VAT system, a goods and services tax on each stage of a good’s production and distribution. About 175 countries, including Australia (the GST), have a value-added tax. They broadly range from Australia’s 10 per cent to the European average of about 22 per cent. The US doesn’t have VAT but does have state sales taxes that average about 6.6 per cent.

Having already said he will impose a specific 25 per cent tariff on imports of steel and aluminium, in discussing his reciprocal tariffs, Trump also said he would impose new import duties on cars, semiconductors and pharmaceuticals “over and above” the reciprocal tariffs.

Thus, there would have to be a comparison of tariff rates between the US and the countries that export to the US, as well as the identification and application of particular tariffs beyond the core reciprocal tariffs plan. There would also have to be an assessment of a raft of non-tariff issues and some form of calculation as to their monetary value if Trump’s new tariff plan were to be effected.

Trump adviser Peter Navarro is a big fan of tariffs.Credit: AP

Complicating the whole concept even further is that the global tariff regime is unlikely to be static.

Some countries might respond to Trump’s threats by lowering some tariffs, which, if they were lower than those in the US, would presumably force the US to follow suit.

Indeed, there are many products that the US exports – particularly dairy, sugar and textiles – where US tariffs are significantly higher than in most other countries. Those countries could raise their tariffs to the US levels in the name of reciprocity without the US having any legitimate cause to complain or respond.

It is even more likely that countries will retaliate to an increase in tariffs on their exports to the US with targeted tariff increases of their own, as the European Union has said it will do. Some might raise their tariffs on goods where they import little, and the US imports a lot.

The complexity and fluidity of the new trade regime would be a nightmare for companies – including America’s – and their ability to manage their supply chains. Indeed, rapidly evolving tariff rates worldwide and their uncertain costs would create significant challenges for the functioning of global supply chains.

In Trump’s mind, trade wars are good and easy to win. His new favourite version, his reciprocal tariffs, might appear easy to implement but would be anything but.

It is unlikely that US Customs has, or could have in the near term, the infrastructure – the systems and personnel – to administer what could be billions of sets of continually evolving tariff relationships for individual product lines, let alone calculate a rate for the non-tariff factors. The same challenge could apply, on a smaller scale, to US and other companies.

Trump’s original tariff plan – the one he took to last year’s election – was far more straightforward and would have been simpler to administer. He promised a baseline, universal tariff on all imports of either 10 or 20 per cent and a 60 per cent rate on imports from China. That would have been somewhat easier to apply and, if there was retaliation, adjust.

Trump might, of course, just use the threat of his tariffs to bludgeon countries with trade surpluses with America into trade deals on his terms.

Already, some countries, such as the European Union and India, are canvassing what concessions they might make. This masthead has reported that the Albanese government has decided to pause its plan to penalise digital platforms if they refuse to pay local media outlets for news articles.

Deals that improve the terms of trade for US companies by lowering trade barriers in their major markets won’t, however, deliver the ancillary benefit Trump wants from his trade war on the rest of the world. He wants revenue, and lots of it, to help pay for $US4.6 trillion of tax cuts for companies and wealthy households.

If, rather than negotiate new trade deals, the US were to raise its tariff rates to match those of the countries with which it has a trade deficit, it would be US consumers, especially lower- and middle-income households, that would largely pay the price for funding those tax cuts in the form of higher product prices and higher inflation rates.

In Trump’s mind, trade wars are good and easy to win. His new favourite version, his reciprocal tariffs, might appear easy to implement but would be anything but.

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