Trump’s Reciprocity Gambit Threatens to Upend Global Trading System

Jamieson Greer, President Trump’s nominee to lead the Office of the US Trade Representative was sailing through his confirmation hearing before the Senate Finance Committee. Poised and articulate, Mr. Greer, a seasoned trade professional was a reassuring presence as he deftly fielded questions on everything from tariffs on Mexican and Canadian goods to forced labour to carbon border adjustment taxes.

But right at the start he said something which should have sent tremors through US trading partners, “I am convinced,” he said in his opening statement, “that we have a relatively short window of time to restructure the international trading system to better serve U.S. interests.”[1]

He did not say “reform”, he said “restructure.” He did not say “global” interests, he said “US” interests. If he was imprecise in what he wanted it didn’t take long to learn that what Mr. Grier intends is the repudiation of the global trading system.

President Donald Trump’s “Fair and Reciprocal Plan” outlines a system of reciprocal tariffs whereby USTR will confront trading partners and offer them two choices – bring down tariffs and other trade barriers or face much elevated US tariffs on their exports. It’s not only tariffs. Washington would also take aim at all non-tariff barriers (NTBs), subsidies extended to businesses by foreign governments, taxes levied behind the border and regulations on US tech companies.

In a 13 February inter-agency memorandum, President Trump charged the USTR and the Commerce Department, in conjunction with other Federal agencies, with assessing the extent of trade barriers imposed by other countries and submit to the White House a report by early April outlining how Washington should respond.[2]

The drawbacks to this idea are legion. Such a system would create an unpredictable and uncertain environment for trade and for investment. It would be virtually impossible to administer and would open the door for widespread fraud as companies gamed their sourcing and rules of origin requirements in search of the most favourable tariff treatment.

Commercial relations between countries and companies would be strained to an extent unmatched in 80 years. Global supply chains would fray and rupture and the network of commercial and political alliances forged with blood and sweat will begin to unravel.

Administering such a system would be highly complex and imprecise. Reading tariff schedules requires a degree of expertise possessed by few. The 412-page tariff schedule written up to classify the trade relationship with a handful of Central American countries is illustrative.[3]

Under the World Custom Organization’s Harmonized Commodity Description and Coding System (HS) every country or territory groups products by using the same numerical codes to indicate product type. Generally speaking, 6-or 8-digit codes are used to identify products by subheading while the United States, and other countries also use 10-digit codes to more precisely identify particular products. In 2024, US Customs and Border protection listed 11,414 tariff lines with 8-digit codes and 19,552 tariff line using 10-digit codes.[4]

Because the United States has trade agreements which grant preferential tariff status to certain trade partners those tariffs may vary from country to country. The WCO has 200 member countries and territories which means that if the Trump administration wants to haggle over every tariff line from every country, they would be assessing between roughly 2.3 million and 3.9 million tariff lines depending how granular the assessors choose to go.[5]

Quantifying the monetary value of non-tariff barriers, measuring industrial subsidies and analysing the tax codes of 200 countries would be even more arduous.

Presumably, before confronting foreign governments to press for reciprocal treatment, Trump administration officials would first need to determine the levels of domestic tariffs and non-tariff barriers.  This would entail USTR or the Commerce Department determining the level of protection for US producers protected by quotas as well as tariffs. Imports of many agriculture products, notably dairy and sugar are subject to quotas. Would the US baseline be the in-quota tariff or the (vastly higher) out of quota tariff?[6]

What if a country has lower tariffs than the United States, in general or for a particular product? The disparity with India, for instance, is evident. India’s an average bound tariff for all products is 50% and its applied rate of 17%. But Hong Kong has a bound rate of zero. New Zealand’s applied rate on average is 1.9%.

The United States has an average bound tariff rate of 3.4% for all products, the applied rate at 3.4% is virtually identical. But averages can mask many anomalies. Average US tariffs ceilings on dairy products for instance are 16.1%, with some products shielded by tariffs as high as 188%. Sugar, another heavily protected sector, enjoys tariff protection to the tune of 11.2%, beverages and tobacco 15%, domestic clothing producers are cosseted by an average tariff of 11.6%, and so on.

What will USTR say when negotiators from New Zealand say “fine, we’ll cut our duties on imports of cars, but we want you to take our butter duty free.” Brazil might say the same thing regarding sugar and Italy with respect to clothing.

What would sugar beet growers in Michigan or Idaho, or refiners in Louisiana say about this? Would dairy producers in Wisconsin welcome trading their tariff and quota protection for the sake of selling more US-made cars in Europe?[7]

All of this assumes that the Trump administration will actually undergo a rigorous analysis. More likely the administration will simply arrive at very large numbers and expect trading partners to buckle or face punishingly high tariffs.

Farewell to MFN

The reciprocity plan would snuff out the decades old practice of non-discriminatory application of tariffs through the Most Favoured Nation principle. This principle of non-discrimination is the corner stone of the multilateral trade system and has been since it was first introduced in 1947 at the Havana conference, which created the General Agreement on Tariffs and Trade and its successor, the WTO.

The reciprocity plan would also kick to the curb another essential WTO principle – transparency. Trading partners, importers and exporters and the general public can check tariff levels applied on thousands of products by the 166 WTO members. A system of bilateral deal making, by contrast, would make obtaining information on tariffs far more complicated.

Transparency and non-discrimination were not principles plucked from thin air. Economic historians will tell you that discrimination among trading partners between 1919-1939 contributed to the economic tensions and nationalism that gave rise to the Second World War. Beyond the geopolitical disquiet the plan would unleash are the mundane and practical commercial concerns.

Assurance that companies from different countries receive the same trade treatment in the United States or in any country provides a degree of certainty. In the World Trade Organization – as in many other trade agreements – tariffs levels have legally binding ceilings, which means a country can lower tariffs below the ceiling but cannot exceed it. Singapore, for example, has an average bound rate for all products of 8.8.%. But at the border the actual applied rate is 0%.[8]

The fact that these tariffs and trading rules are legally binding and are known by exporters and importers worldwide generates a predictable and stable environment in which to trade. Companies can plan future investments knowing that access to the market in which they have invested will remain in place. Should access to that market be in doubt, investment will suffer.

How might other countries respond? Many will retaliate first and negotiate later. This is what China did earlier this month when Trump slapped 10% duties on Chinese imports. Mexico and Canada have drawn up lists of US products on which to retaliate if President Trump decides to follow through on his threats to apply 25% duties to their exports entering the United States. The European Union had been preparing its own retaliation list for months.

It’s extremely unlikely these countries would throw away the predictability and stability gained through decades of trade negotiations by pursuing reciprocity.  The cost of overseeing so chaotic a regimen would, in any event, be beyond the resources of many developing countries. More likely other countries will continue to trade with each other on either the WTO’s MFN terms or on the rate of tariff negotiated in the hundreds of free trade agreements that dot the global trading landscape.

These predictable and stable trading relationships would stand in stark contrast to trade with the United States. The result is likely to be that trade with the United States declines across the board as companies in the rest of the world seek new partners. Call it the Trump Premium.

What the Trump administration is asking the rest of the world to do is engage in a root and branch eradication of decades long trading relationships in favour of a system offering no obvious benefits to anyone, including US companies.

It’s fashionable to cast the WTO, the guardian of the global trading system, as the scapegoat for the economic hardships suffered by some Americans and for giving rise to Chinese power. The previous two administrations often spoke disparagingly about the WTO and the second Trump administration has wasted little time in following suit.

Before the Senate Finance Committee earlier this month, Mr. Greer told the Senators “The WTO, in its current state, is deeply flawed” and that the organization “presumed to exercise authority over our trade laws.”[9]

The coordinated efforts of WTO members to avoid scrutiny from the incoming Trump administration by accelerating the re-appointment of Director General Ngozi Okanjo-Iweala has also irritated many in the new administration. Former US ambassador to the WTO, Dennis Shea, who retains close ties with trade officials in the current administration, told the US Council on Foreign Relations that in pursuing such a course “the WTO did a real disservice to itself” and that the action represented “a very bad start to the Trump 2-WTO relationship.”[10]

Many in Geneva worry that the new administration might take concrete steps to further imperil the distraught organization. Former US Trade Representative Robert Lighthizer recently floated in The New York Times the notion that countries with “democratic governments and mostly free economies” should create a new trading system dedicated to ensuring balanced trading relations with no surpluses or deficits between trading partners. To bring about this balance, Mr. Lighthizer suggests the establishment of a two-tier tariff structure with the lower tariffs on offer to those members of this new club while higher tariffs would be applied to exports from “nondemocratic countries” and those which use “beggar-thy-neighbour, aggressive industrial policies to run large surpluses.”[11]

But Mr. Lighthizer is unlikely to find too many takers for his plan. Frustrated though many WTO members may be with the organization’s shortcomings they are unlikely to ditch it in favour of membership in an organization led by so unreliable a partner.

Nor is the United States likely to leave the WTO. To do so would cede leadership to China when it comes to setting the rules of global commerce. It would also strip from US patent holders the protections of the WTO’s Trade Related Intellectual Property agreement which Ms. Okonjo-Iweala claims underpin the $136 billion in royalty payments US companies receive every year.[12]

In any event, with its dispute settlement system neutered, thanks to the previous Trump administration sinking the appeals process, and its negotiating function paralysed, the WTO poses no threat to the Trump trade agenda.

Donald Trump’s motivation in embarking on his reciprocity Odessey is not entirely clear. It’s not even certain he will carry out this plan. What other countries should do to appease him is not evident either. If the president’s goal is autarky, revenue raising and score settling, they will be unable and unwilling to do so anyway. So, reluctantly they will retaliate, hope for the best and try to wait out the next four years.

[1] https://www.finance.senate.gov/imo/media/doc/02062025_greer_testimony.pdf

[2] https://www.whitehouse.gov/articles/2025/02/reciprocal-trade-and-tariffs/

[3] https://ustr.gov/sites/default/files/uploads/agreements/cafta/asset_upload_file425_3964.pdf

[4] https://www.usitc.gov/tariff_affairs/documents/2024_hts_item_count.pdf

[5]  https://www.usitc.gov/tariff_affairs/about_hts.htm

[6] https://ustr.gov/issue-areas/industry-manufacturing/industrial-tariffs/tariff-schedules

[7] https://www.wto.org/english/res_e/booksp_e/world_tariff_profiles24_e.pdf

[8] https://www.wto.org/english/res_e/booksp_e/world_tariff_profiles24_e.pdf

[9] https://www.finance.senate.gov/imo/media/doc/responses_to_questions_for_the_record_to_jamieson_greer.pdf

[10] https://www.cfr.org/event/transition-2025-series-tariffs-and-trade

[11] https://www.nytimes.com/2025/02/06/opinion/tariff-free-trade-new-system.html

[12] https://www.ft.com/content/9c99e5b1-a4e8-41b2-8a26-ec1409280f27