Trade Cases

Does ‘Reciprocal Tax’ Give Trump Wiggle Room on 232?

February 13, 2018

Does President Trump’s call for a “reciprocal tax” on imports from countries that impose higher tariffs than the U.S. give him cover for the dilemma he faces over Section 232?

Speaking at a White House meeting with state officials and local executives on Monday to discuss his infrastructure plan, the president offered up some unexpected comments on trade. Pointing to the trade deficits with Mexico and Canada and the contentious negotiations over the North American Free Trade Agreement, Trump said, “They will either treat us right or we will have to do business differently. We cannot continue to be taken advantage of by other countries. We cannot let people continue to come into our country and rob us blind and charge us tremendous tariffs and taxes and we charge them nothing.” The solution he proposed, while offering no detail, is a “reciprocal tax,” which will be “a big part of what is happening over the next month.”

Back in April, during the tax reform debate, Reuters quoted Trump as appearing to favor an import tax that could be adjusted to reflect the country of origin’s tax rate for U.S. products. “There has to be a certain reciprocal nature to it,” the president said. “The other countries, if they’re charging you a 50 percent tax, you say: ‘OK, whatever you charge, we’re charging’.” How that could be done within the bounds of World Trade Organization rules is unclear.

Washington trade attorney Lewis Leibowitz said a reciprocal tariff would be a blatant violation by the United States of its WTO obligations. The U.S. is bound to charge the customs duties negotiated through the WTO with other member nations. “The U.S. cannot charge different tariffs for different countries. All WTO members are entitled to the “Normal Trade Relations” tariff rate,” Leibowitz said.

Last year, Republicans in the House proposed a “border adjustable tax,” but dropped the idea from the tax reform package after it was roundly criticized. “Maybe the president is suggesting a rebirth of that idea, which is not technically a tariff,” Leibowitz said. A value-added tax like a border tax is WTO-legal, “but the U.S. seems implacably hostile to a VAT, which would apply to domestic transactions as well as imports.”

Trump’s Section 232 dilemma is a dicey one. By definition, a dilemma is a choice between two or more imperfect options. In this case, if he places tariffs or quotas on steel imports, he will anger America’s many steel-consuming industries and artificially raise the prices of many consumer goods. If he does not approve the long-expected trade action, it will be a shocking letdown for the domestic steel industry, one of his strongest supporters, which has been hard hit by unfairly traded imports.

Trump has less than 60 days to act on Section 232 before the mid-April deadline and may be feeling the pressure. “Reciprocal” tariffs on steel may appease both groups of constituents and yet have relatively little effect on a market in which the United States already has tariffs on steel that are as high or higher than many other nations.