Reciprocal tariffs would be Trump’s undoing

OPINION:

President Trump’s job approval ratings are slipping. His radical shifts in foreign and international economic policies will leave America isolated and ignite the kind of inflation that undermined the credibility of the Biden-Harris administration.

A February executive order directs the secretary of commerce and the U.S. trade representative, consulting with other departments, to propose country-specific, product-line tariffs that reflect corresponding nations’ tariffs on imports of U.S. goods and subsidies, regulatory barriers, undervalued currencies, value-added taxes and whatever else the kitchen sink may provide that harm U.S. exports.

Such calculations are complex and difficult, but the most important stuff is readily accessible. For example, foreign tariff schedules — the United States charges 2.5% on cars and SUVs, the European Union 10% — and individual country value-added taxes.

The World Bank estimates Purchasing Power Parity exchange rates. The yuan-dollar exchange rate that would approximately equate to costs for goods in China and America is about 3.81, not the current 7.25 market rate. This implies that the average tariff-equivalent barrier on U.S. exports to China is not the average ad valorem duty of 3.1% but at least 93.4%.

Taking China’s product-by-product tariff schedule and adding 90.3% would give us the base point of what the United States should charge on imports from China. We could add the generous subsidies Beijing lavishes on manufacturers to boost competitiveness.

Critics, such as former U.S. trade representative general counsel Jennifer Hillman, say calculating comprehensive schedules would be too daunting. However, we can quickly adjust to the tariffs trading partners charge and scale those for undervalued currencies and many subsidies without too much difficulty.

U.S. customs already designates countries of origin and product classifications to apply appropriate tariffs — for most goods, free from free trade agreement countries, most favored nation rates for World Trade Organization members, or a general schedule dating to Smoot-Hawley.

Such reciprocal tariffs would abruptly repudiate U.S. trade policy since the Reciprocal Trade Agreement Act of 1934.

The 1930 Smoot-Hawley Act raised the average U.S. tariff to 45%, attracted wide foreign retaliation and worsened the Great Depression. Subsequently, the Franklin D. Roosevelt administration sought to negotiate lower tariffs and in recent decades, the United States has maintained some of the lowest tariffs.

U.S. tariffs on dutiable imports average 5% on agricultural products. For India, it’s 39%.

If we look at tariffs, Japan applies an average rate of 1.64%, but the PPP exchange rate for the yen is 95.1 per dollar, not the current market rate of 149.3. Consequently, Japan’s individual product tariffs should be scaled up 57 percentage points to form a baseline for the tariffs the United States should apply on Japanese products.

In all this, three realities are paramount.

First, reciprocal tariffs won’t solve the trade deficit.

The U.S. savings shortfall determines the size of the U.S. trade imbalance. We sell Treasurys and other securities abroad to consume more than we produce because the sum of U.S. household and corporate savings is insufficient to fund U.S. government borrowing and business investment.

We can borrow so much because we print the world’s reserve currency.

Second, Peter Navarro, the influential White House trade adviser, tells us these tariffs should not be terribly inflationary. In his first term, Mr. Trump boosted tariffs on Chinese goods from 3.1% to 19.3%, but conditions are different now.

Before COVID-19, inflation was tame. Now, the nation is struggling with it. It peaked at 9% in June 2022 and lingers at about 3%. Radically higher reciprocal tariffs would apply to imports from most countries.

If the average tariff is increased by 20 percentage points, we could count on inflation closer to 4% than 2%.

Consider the price of a Japanese car with an import tariff exceeding 60%.

Mr. Navarro wants us to believe foreign automakers view the U.S. market as so critical that they would eat these tariffs. Auto manufacturers and parts suppliers currently have profit margins of only 6% or 7%.

Mr. Trump campaigned to bring prices down, but he won’t stay popular long if tariffs raise car prices by one-third.

Third, U.S. manufacturers are as dependent on imports as Amazon and Target.

They can’t survive without imported semiconductors, computers and the like. It’s simply too expensive to make all the components of a modern automobile, iPhone or anything else solely with U.S. parts.

Manufacturers would likely bring some component production back home and switch among foreign sources to find the lowest applied U.S. tariffs, but only at additional costs that American consumers could bear.

The McKinley tariffs and subsequent revisions were similar in scale and were followed by a terrible depression from 1893 to 1896.

If imposed, the chaos of Trump’s reciprocal tariffs could become worse.

• Peter Morici is an economist, emeritus business professor at the University of Maryland and a national columnist.