A Tariff Issue on Which Free and Fair Traders Can Agree

May 31, 2019

Excerpt: Peter Navarro, "Whether you’re a pure free trader or a fair, reciprocal and balanced trader like the president, if you live in a relatively low-tariff country like the U.S., you should oppose an international trading system that helps institutionalize nonreciprocal tariffs."

Flawed WTO rules allow other countries to charge significantly higher duties than America does.

[Peter Navarro | May 28, 2019 | WSJ]

The source of the problem is the World Trade Organization’s “most favored nation” rule, which prohibits discrimination among trading partners. Under MFN, a WTO member state must apply the lowest tariffs it applies to the products of any one country to the products of every other country. WTO members may, however, charge higher tariffs if they apply those nonreciprocal tariffs to all countries.

This hurts countries with relatively low tariffs, like the U.S. The American MFN tariff rate on automobiles, for example, is 2.5%. The European Union’s tariff is four times as high—and the EU exports more than three times as many autos to America as America exports to the EU. India’s auto tariff is more than 10 times as high—and in 2017 the U.S. exported only 638 autos to India while the U.S. has become India’s third-largest auto export market.

To determine the extent of nonreciprocal tariffs faced by U.S. farmers, ranchers and manufacturers, the White House Office of Trade and Manufacturing Policy analyzed 132 countries with which the U.S. does not have free-trade agreements. They account for more than 60% of total U.S. trade.

Across more than 600,000 product lines, U.S. exporters face higher tariffs more than two-thirds of the time. India applies higher tariffs 90% of the time and China 85%, thereby helping to block many American exporters from selling goods at competitive prices to more than one-third of the world’s population.

To combat such nonreciprocity, President Trump urged Congress in his 2019 State of the Union address to pass the U.S. Reciprocal Trade Act. The USRTA would authorize the president to bring to the negotiating table any American trading partner that applies higher nonreciprocal tariffs or nontariff barriers. If such a trading partner refuses to lower its tariffs or other barriers, the president would have the power to impose reciprocal duties.

To estimate possible effects of the USRTA on America’s more than $500 billion annual trade deficit, the World Bank’s World Integrated Trade Solutions Smart tool was used to analyze two scenarios. Scenario One assumed that under presidential pressure, U.S. trading partners lower their tariff rates on specific products. Scenario Two assumed that, despite presidential pressure, trading partners refuse to lower their tariff rates, and the U.S. raises tariffs to reciprocal levels. Estimated trade-deficit reductions were roughly 10%—$54.3 billion in Scenario One and $63.6 billion in Scenario Two.

Across sectors, agriculture and autos would disproportionately benefit if tariffs were lowered to U.S. levels. American auto and auto-parts exports were estimated to rise $11.3 billion, or 9%, while agricultural exports would rise $10.9 billion, or 8.6%. Given that more than 20% of U.S. agricultural products are exported, this would translate to a nearly 2% overall boost to sales for America’s farmers.

For a ballpark estimate of the jobs impact from lowering the U.S. trade deficit through a reciprocal tariff policy, the Economic Policy Institute provides this yardstick: For every $1 billion deficit reduction, U.S. employment increases by approximately 6,000. This suggests a USRTA jobs boost ranging between 350,000 and 380,000.

That last claim may disconcert free-trade economists, who insist higher tariffs always result in slower growth and less employment. But because imports don’t contribute to gross domestic product, unfair trade reduces growth, and narrowing the trade deficit through higher exports and lower imports boosts growth. The recently reported annual GDP growth rate of 3.2% for the first quarter of 2019 supports this claim. A full percentage point of growth was due to a narrowing trade deficit, primarily with China.

Whether you’re a pure free trader or a fair, reciprocal and balanced trader like the president, if you live in a relatively low-tariff country like the U.S., you should oppose an international trading system that helps institutionalize nonreciprocal tariffs. As the latest study from the White House illustrates, passing the USTRA would turn this nonreciprocity around—and help America turn the corner on its large and persistent trade deficit.

Mr. Navarro is an assistant to the president and director of the Office of Trade and Manufacturing Policy.

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  • Bruce Bishop
    I would highly recommend that everyone read, or watch the YouTube video of “Death by China,” by Peter Navarro and Greg Autry. I went back to my 2011 copy to see if they had addressed the potential crisis in “rare earth” elements. They had. Thank God that Peter Navarro now has President Trump’s ear.

    What a pity that the mainstream media and the Democrats, as well as the globalist Republicans, will do everything they can to block Trump’s efforts to bring back American jobs.
  • Bruce Bishop
    Based on the estimate of 6,000 new manufacturing jobs for each $1 billion reduction in our trade deficit, that would mean 3 million new, high-paying blue-collar jobs, as well as many jobs for MBA’s, engineers, even some PhD’s. Also, the number of corollary jobs that result from each manufacturing job ranges from 2.9 to around 13 in Silicon Valley. This would give a huge boost to government tax receipts as well. I will gladly go back to paying nineties prices for apparel, toys, electronics, tools and appliances, to see that many Americans begin to realize the American Dream.