Thoughts about Reciprocal tariffs - Part 1

 How should one think about President Trump’s reciprocal tariff? 

India too, like many other countries, is at the receiving end. While Trump’s approach may sound like a new, hard-edged tactic, history tells a different—and surprisingly nuanced—story. This is not the first time that US is talking about a reciprocal tariff measure. I will discuss some instances where US has done it before - from 1890s onwards to Uruguay round times - and provide my thoughts about ways to think about reciprocal measures being discussed. 

Below table summarizes the instances when USA decided to impose reciprocal tariffs on others. I am ignoring all those tariff meaures where reciprocal arrangements were not included, e.g. measures imposed solely for revenue generation or domestic protection without any negotiated concessions. Thus, the Fordney–McCumber Tariff of 1922 and the painful Smoot–Hawley Tariff of 1930 that were imposed unilaterally to protect domestic industries and raise revenue, without any reciprocal negotiations with trading partners, are not shown in the table below but discussed in context. 

1890, McKinley Tariff Act

• What was done: The McKinley Tariff Act raised average duties from around 41% to nearly 50%, offering duty-free status for certain imports from countries granting reciprocal concessions.

• What was the economic impact: While some U.S. industries saw short-term boosts, consumers faced higher prices, fueling inflation concerns and strong political backlash.

• What was the impact on trading partners: Many nations saw their exports to the U.S. decline unless they agreed to reciprocal deals, leading to tense negotiations and reduced access to American markets.

• Was it a win for the US: No. The tariff inflated consumer costs, stirred widespread opposition, and was ultimately repealed in 1894.

1897, Dingley Tariff Act

• What was done: Raised average tariffs to around 52%—one of the highest in U.S. history—while authorizing the President to negotiate lower rates for countries that granted reciprocal concessions.

• What was the economic impact: Consumer prices climbed, squeezing household budgets; domestic producers saw short-term gains, but overall growth was dampened by higher import costs.

• What was the impact on trading partners: Many countries faced sharply reduced access to the U.S. market unless they cut their own tariffs, leading to tense bilateral negotiations and retaliatory sentiments.

• Was it a win for the US: No. Despite benefitting some industries, it drove up consumer costs and was gradually lowered through subsequent trade agreements.

In short, the experiments of the 1890s were not successful. Given President Trump’s professed love for President William McKinley, the results of the policies of McKinley should inform him better. 

Cut to the interim World War times, the passage of the Smoot-Hawley Tariff Act in 1930 marked the peak of protectionist policies in the U.S., sharply raising tariffs on thousands of imports. While aimed at shielding domestic industries, this policy backfired by provoking retaliatory tariffs from trading partners, which deepened the global economic downturn. As international trade shrank, the U.S. economy continued to suffer, prompting a reevaluation of isolationist trade practices. In response, the Reciprocal Trade Agreements Act (RTAA) of 1934 shifted focus to a more cooperative approach, paving the way for tariff reductions and expanding global commerce, by empowering the President to negotiate tariff reductions and open overseas markets for U.S. goods. So technically, this was positive reciprocal where the I-decrease-how-much-you-decrease-the-tariff kind of negotiations started. 

1934, Reciprocal Trade Agreements Act (RTAA)

• What was done: Empowered the President to negotiate bilateral tariff reductions, shifting authority from Congress to streamline trade liberalization.

• What was the economic impact: Lowering tariffs helped revive export markets and stimulate U.S. industries during the recovery from the Great Depression.

• What was the impact on trading partners: Trading partners gained enhanced access to the U.S. market, prompting many to reciprocate by lowering their own tariffs.

• Was it a win for the US: Yes.

It appears that RTAA experience taught a good lesson to the US which avoided getting into tariff wars thereafter for a very long time. At-least till the Japanese exports started threatening US in a serious way. Japan was not opening up its semiconductor market to the US producers, while enjoying full access to the US market, which led to friction in the 80s. 

1986, USA vs. Japan

• What was done: The U.S. levied 100% tariffs on roughly $300 million worth of Japanese imports—computers, televisions, and power tools—to pressure Japan into opening its semiconductor market.

• What was the economic impact: Domestic electronics manufacturers welcomed the move, but higher prices for consumers and retaliatory risks introduced significant friction in a vital bilateral relationship.

• What was the impact on trading partner: Japanese firms in affected sectors lost valuable access to the U.S. market, and the dispute heightened tensions over technology transfer and trade imbalances.

• Was it a win for the US: Mixed. The action partially opened Japan’s semiconductor market, but it also raised prices at home and strained a key trade partnership until the tariffs were fully removed in 1991.

The last two rows in the table are not strictly reciprocal tariff threats, but I have retained them to show how the threat of retaliatory tariffs can be an effective negotiating tool. In these cases—referred to in the media as the “Pasta War”—rather than escalating into a full-scale tariff war, the U.S. leveraged the potential imposition of tariffs under Section 301 to pressure trading partners into making concessions. This strategy allowed the U.S. to signal its readiness to defend its economic interests without permanently disrupting trade flows, illustrating how even the mere threat of tariffs can shift negotiations in its favor.

This was something that Trump did during his first stint too. His administration invoked Section 301 of the Trade Act to impose substantial tariffs on a wide range of Chinese imports—targeting specific product categories with high ad valorem rates—to pressure China into addressing longstanding issues such as intellectual property infringement, forced technology transfer, and market access barriers. Chinese outplayed Trump on this one, by paying lip service while doing next to nothing on ground. Technically though, these measures involved recalibrating tariff schedules to create significant cost differentials, thereby disrupting established supply chains and increasing the effective price of Chinese goods. The origin of China+1 model can be attirbuted to this move by Trump. Biden continued the pressure on China, in a less bombastic but more effective manner, by bringing in CHIPS Act and the Inflation Reduction Act. Export controls during Biden administration were more effective and targeted - restricting access to critical semiconductor and other high-tech technologies with greater precision. (despite Deekseek, Chinese firms face significant hurdles in acquiring bleeding edge GPU compute today)

This brings us to the current times when Trump has been re-elected and is threatening retaliatory tariff hikes. 

Going by historical records shown above, retaliatory tariffs only work when they induce reciprocal concessions—not when they trigger an endless cycle of tariff hikes and adverse retaliation that ultimately hurt the U.S. Every instance of indiscriminate tariff increase has imposed significant costs on American consumers and industries, and were ultimately rolled back. 

This brings me to “The Teakettle Principle” joke - the idea that the easiest way to solve a problem is to reduce it to a problem that you've already solved - something that Trump’s attempt reminds me of. Raise the tariffs - then solve it by using reciprocity. It worked in 1934. He just needs to create the 1930s now. 

Part 2 to follow…to deal with the bureaucratic nightmare of administering reciprocal arrangements, the re-shaping of the supply chains, and the impact on global trade in general.

Further reading: Clashing over Commerce - A history of US Trade Policy - Douglas A Irwin.