Reciprocal tariffs are just what the US needs to fix its manufacturing decline

Reciprocal tariffs are coming soon. Many economists and trade experts are concerned that they may backfire on President Donald Trump. But if you take the politics out of the issue, reciprocal tariffs could be an important first step toward fixing longstanding U.S. problems with trade and manufacturing.

Reciprocal tariffs could initiate a transformative shift toward a fairer, universal tariff system, one that is capable of revitalizing domestic manufacturing.

Trump plans to start the new tariffs on April 2, though exactly how they will work is still under discussion. U.S. tariffs are among the lowest in the world. The new plan is expected to roughly equalize U.S. tariffs with the tariffs other countries impose on us. Trump and his advisors see them as an important part of their effort to negotiate to bring manufacturing back to the U.S., reduce trade deficits, and protect national security.

To be sure, Trump’s fluctuating tariff announcements, postponements, and reversals have caused confusion and nervousness among businesses, consumers, and investors. The stock market’s volatility this month reflects concerns about potentially worse inflation, stagnant economic growth, and supply chain disruptions. But the current U.S. trade and tariff system has real problems.

The U.S. trade deficit with China decreased after Trump launched a trade war in 2018, but has since risen. The goods deficit reached a record Brazil, for example, has an 18% tariff on U.S. ethanol, compared with the 2.5% the U.S. charges Brazilian ethanol imports, Similarly, the European Union has a 10% car tariff versus the U.S.’s 2.5%.

Reciprocal tariffs would need to address those differences without overwhelming the U.S. tariff system. Current trade law identifies approximately 13,000 individual categories for goods under the HTS, short for Harmonized Tariff Schedule. If tariff rates were set individually for all of those line items across nearly 200 countries, it would create an unmanageable mess of 2.6 million individual tariff rates.

This problem may drive tariff innovation. The Trump administration is considering ways to simplify the reciprocal tariffs. It may classify nations into low, middle, and high tariff tiers, The Wall Street Journal reported on Tuesday.

This tiered approach addresses the outdated HTS, created in 1989 for simpler supply chains. The HTS is based on country of origin and product category, and is ill-suited for today’s complex global supply chains.

Determining the country of origin is complex and vulnerable to manipulation. For example, Chinese exporters can evade U.S. tariffs on China by finishing goods in Mexico or Vietnam, exploiting the U.S.-Mexico-Canada Agreement or the lower tariffs the U.S. imposes on Vietnam.

The HTS encourages tariff avoidance through supply chain manipulation. As long as tariff differentials exist, firms will prioritize cost-saving shifts across other countries over reshoring to the U.S.

Shifting to a value-chain tariff system instead of the HTS-based bilateral tariff rates would help close loopholes and incentivize reshoring.

The value-chain system would complement the Trump administration’s development of new tiered tariff rates. Tariffs would be based on the value added by supply chain operations in each country. For instance, if semifinished goods from China represent 90% of the product’s value and assembly in Mexico adds 10%, then 90% of the value would be subject to China’s new tariff rate, and 10% to Mexico’s.

A consistent, higher universal tariff rate for all countries would eliminate the ability of firms to exploit differing bilateral rates. This would provide a stronger financial incentive for firms to reshore operations. A value-chain tariff system is also fairer, as it accurately reflects the value added along global supply chains, rather than solely relying on the declared country of origin.

The difficulty in implementing value-chain tariffs is a lack of visibility into companies’ supply chains. Companies themselves often don’t have the full picture of their products’ origins. Currently, only 2% of companies possess visibility beyond their second-tier suppliers, those providing materials and parts to their direct suppliers. The U.S. government will need to demand supply-chain visibility and transparency from manufacturers.

The government should also mandate that firms declare their investments, job creation, and value creation in the U.S. This information would empower American consumers to make informed purchasing decisions and counter investor pressure favoring asset-light business models.

Under these models, companies own brands and intellectual property but rely on other companies to physically produce their products, often using manufacturing facilities overseas. Asset-light business models can be highly profitable, but they have contributed to the decline of U.S. manufacturing over the last four decades.

Balancing these factors would incentivize U.S. companies to invest in domestic fixed assets and human capital instead.

Firms will need to map their global supply chains, a significant undertaking. But they are already under pressure by regulators to do so, to disclose carbon emissions by their suppliers and ensure the absence of forced labor. Firms are increasingly willing to invest in supply chain mapping. AI tools can facilitate this process by compiling and synthesizing data. The AI start-up Altana, for instance, employs generative AI to create dynamic maps of global supply chains for businesses.

Finding workers for a new generation of U.S. advanced manufacturing may be a challenge. Many executives are worried about labor shortages. The U.S. government and the private sector can mitigate that concern by investing in training and upskilling workers. This includes collaborations with educational institutions, apprenticeships, and vocational training programs. Advanced robotics and automation can also augment the workforce, enhance productivity, and maintain competitiveness.

It isn’t partisan to point out that U.S. manufacturing is in decline. The path forward requires implementing value-chain tariffs and fostering a robust domestic manufacturing ecosystem so that the U.S. can drive economic growth, bolster national security, and ensure fairness in global trade. Reciprocal tariffs are an important first step.

About the author: Christopher Tang is a distinguished professor at the UCLA Anderson School of Management.