CHOICES
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The approach to trade policy adopted by both the current and previous Trump administrations has been characterized as being “power-based” (Mattoo and Staiger, 2020; Sheldon, 2022). The approach essentially consists of the United States seeking to revise its previous trade commitments by unilaterally increasing the set of tariffs it applies to its trading partners, with a view to getting them to provide greater market access to US exporters. The underlying presumption of this approach is that the persistent bilateral trade deficits the United States has with a given trade partner are due to the latter applying tariffs and non-tariff barriers that prevent US trade balancing. This rationale is very clear when looking at how so-called “reciprocal” tariffs were actually calculated by the Office of the US Trade Representative (USTR). The published formula defines the rate of reciprocal tariffs applied to a trading partner as being equal to their bilateral trade surplus with the United States, weighted by their exports to the United States (USTR, 2025). Critically, the larger the bilateral trade deficit, the greater the level of reciprocal tariffs imposed on a specific trading partner.
To place the shift to power-based bargaining in context, it is key to see how a rules-based approach worked following the formation of the General Agreement on Tariffs and Trade (GATT) in 1947, and its successor, the World Trade Organization (WTO). Starting from a high average tariff equilibrium, successive rounds of trade liberalization moved the international trading system towards an equilibrium with lower average tariffs.
Fundamental to the process of tariff-cutting under GATT rules have been the principles of reciprocity andnondiscrimination, captured in GATT Articles II and XXVII and Article I, respectively, the latter referring to most-favored-nation (MFN) treatment (Baldwin, 2025). The GATT/WTO has consistently applied first-difference reciprocity, where trade negotiations focus on balancing concessions on tariff reduction, tariffs being cut overall by an agreed formula, taking account of domestic political constraints. Specifically, in any deal, there will be some set of politically sensitive sectors subject to differential tariffs across countries. Under MFN, the principle of nondiscrimination requires that agreed tariff cuts by any country(ies) should be extended to all members of GATT/WTO.
The lower average tariff equilibrium under GATT/WTO has also been supported by a credible enforcement mechanism embodied in the dispute settlement system. In theory, countries have an incentive to deviate from the low average tariff equilibrium, the punishment for such deviation being reversion to the high average tariff equilibrium (Sheldon, 2022). In practice, the rules of GATT/WTO have sought to maintain the balance of tariff concessions and avoid the use of punitive and therefore economically destructive actions.
If one country were to unilaterally raise its tariff(s), this would imply a loss of previously negotiated market access for another country. Under GATT/WTO rules, specifically GATT Article XXIII, subject to a ruling by the dispute settlement mechanism, the other country can withdraw an equivalent amount of market access, assuming the action is not “abusive.” However, if one country chooses to implement a significant violation of tariff commitments honored for some time, the affected country can revert to the high average tariff equilibrium. In other words, the objective of GATT/WTO rules has been to ensure agreed retaliation by one country against the unilateral action of another is proportionate, thereby minimizing the chances of a trade war.
The United States has targeted power-based bargaining in a discriminatory fashion at a wide range of countries, separated into two subgroups: first, developed countries involved in trade negotiations with the United States from 1947 onwards, whose average tariffs have been reduced to or close to those at the low tariff equilibrium, and, second, developing countries whose average tariffs are currently higher. However, under MFN, all countries in this second group face the lower average tariffs set by the first group. Clearly, there is a lack of symmetry between the average tariffs set by the United States and the countries in the second group, but there can also be asymmetry due to variation around the average for countries in the first group.
Countries in both groups are being targeted with reciprocal and discriminatory tariffs by the United States, based on the presumption that their asymmetric tariffs are the major cause of bilateral trade imbalances with the United States, and the administration is seeking full reciprocity in trade negotiations. For example, if the United States has been applying a 2.5% tariff on a specific good, while the European Union (EU) and China have been applying 10% and 25% tariffs, respectively, to that same good, this is considered discriminatory, and, therefore, both the EU and China should reduce their tariffs to the same level as the United States. It would appear that the current administration believes that reciprocal tariffs are the only way in which the United States can achieve a new tariff outcome where the range of tariffs applied by the United States is equal to the range of tariffs applied by each of its trading partners. Also, while unilateral application of tariffs has the benefit of being immediate, with the potential of securing bilateral trade deals, it also invites targeted retaliation by affected trading partners.
While economic theory predicts that US trading partners would respond with their own tariff increases, virtually none have done so. There have been announcements of targeted retaliation by both Canada and the EU with respect to the tariffs affecting steel, aluminum, and automobile imports, but as yet there has been no across-the-board retaliation by either country; the EU paused its retaliation threat in early April 2025 (Bown, 2025a). In principle, the EU could have applied its 2023 Anti-Coercion Instrument (ACI), which provides the means to act in situations where a non-EU country, such as the United States, threatens the EU or its member states through measures affecting trade or investment (Sheldon and Chow, 2025). However, with the completion of a trade deal between the United States and the EU, the latter being faced with a 15% tariff on all exports, the threat of retaliation has clearly receded. Overall, multiple countries, including Japan, the UK, Vietnam, Indonesia, and the Philippines, appear to be willing to sign trade deals with the United States in order to avoid even higher tariffs being applied (Reklaitis, 2025).
So far, the exception to targeted retaliation is China, which first retaliated during the 2018–2019 trade war, its tariff increases moving the US-China tariff equilibrium to one with higher average tariffs. Under the current administration, the United States and China initially engaged in a tit-for-tat escalation of tariffs against each other, the implied equilibrium being considerably higher than that observed pre-GATT, and one that can be characterized as a two-sided trade embargo. Although both countries subsequently backed off and are seeking a trade deal, China has again shown its willingness to retaliate against the United States, even if the tariff choices would result in what would be close to a prohibitively costly autarky equilibrium.
Compared to the 2018–2019 trade war, the use of tariffs by the current administration has intensified. On April 2, 2025, across-the-board tariffs of 10% were applied to virtually all US trading partners, along with discriminatory tariffs ranging from 11% to 50% targeted at countries with whom the United States has a bilateral trade deficit (Bown, 2025a). The latter tariffs were suspended on April 9, 2025, for a period of 90 days, followed on July 7, 2025, by the announcement of a new set of reciprocal tariffs ranging from 10% to 41%, a range maintained on July 31, 2025 (Bown, 2025a). At the same time, the trade war with China has been reopened, average US tariffs on all Chinese exports initially being raised to 125%, average Chinese tariffs applied to all US exports being raised to 147%, albeit temporarily reduced by both sides to 51.8% and 32.6% respectively, on May 14, 2025 (Bown, 2025b). Based on the tariffs in place, it is estimated that the average effective tariff rate for the United States is 16.8%, the highest level since 1935 (Yale Budget Lab, November 17, 2025).
This increase in tariffs signals a return to restrictive trade policy not seen since the Smoot-Hawley Tariff Act of 1930. However, it is a mistake to argue that the current protectionism is similar to what occurred after World War I. While the Smoot-Hawley tariffs were driven by special interests and logrolling in Congress, the trade restrictions imposed by other countries after the gold standard collapsed had more of a mercantilist than a protectionist flavor. The focus of current US trade policy appears to be a return to mercantilism, but with a fundamental difference: Tariffs are not being used to affect gold flows due to a balance of payments crisis; instead, they are being used by the United States to target the trade deficit, with potential retaliation from trading partners (Chow and Sheldon, 2025).
During the 2018–2019 trade war, tariffs were applied under US trade law on the following grounds: injurious imports of washing machines and solar panels (Section 201 of the Trade Act of 1974), a national security threat from steel and aluminum imports (Section 232 of the Trade Expansion Act of 1962), and China conducting unfair trade practices (Section 301 of the Trade Act of 1974).
In contrast, application of across-the-board tariffs draws on the International Emergency Economic Powers Act (IEEPA) of 1977, which authorizes the president to regulate trade via embargoes and sanctions if a national emergency is declared in response to a significant threat to the United States, President Trump arguing the US trade deficit is evidence for such an emergency. The US Court of International Trade (CIT) has ruled that justification for the use of reciprocal tariffs does not meet the test of “unusual and extraordinary threats” (CIT, 2025, p. 25). Critically, the court argued that under Section 122 of the Trade Act of 1974, significant trade deficits do not “necessitate the use of emergency powers and justify only the President’s imposition of limited remedies” (CIT, 2025, p. 33). Therefore, the CIT ruled reciprocal tariffs be “vacated and their operation permanently enjoined” (CIT, 2025, p. 48). Following this ruling, a federal appeals court (USCA) issued a temporary administrative stay on the CIT decision (USCA, 2025a). Subsequently, the USCA has confirmed in a 7-4 ruling that they, “affirm the CIT’s holding that the… Reciprocal Tariffs imposed by the Challenged Executive Orders exceed the authority delegated to the President by IEEPA’s text” (USCA, 2025b, p. 44). Following the appeal of this decision by the administration, the US Supreme Court is now expected to make a final ruling on the reciprocal tariffs in early 2026 (Geib, 2025).
The United States is focusing on what it believes to be an imbalance in the trade concessions it made through successive rounds of the GATT/WTO. To address this, it is implementing tariffs across the board against its trading partners, but at the same time seeking bilateral deals with those countries. However, a procedure already exists by which a single country, such as the United States, is permitted to renegotiate its previous tariff concessions under GATT Article XXVIII (Pauwelyn, 2025). Under this provision, any WTO member can unilaterally modify or withdraw its bound tariff commitments, and any affected trading partner is allowed to respond in a reciprocal manner by modifying or withdrawing “substantially equivalent” tariff commitments of their own, subject to any rulings by the DSB on what constitutes substantial equivalence.
Essentially, this is what the current administration is doing, even though it has not chosen to trigger GATT Article XXVIII (i.e., it is seeking to alter its previous tariff commitments, substituting in a new set of concessions consisting of a base tariff and reciprocal tariffs that vary with bilateral trade balances). However, while the United States is not offering compensation to its affected trading partners, as required under GATT Article XXVIII, it has been argued that any bilateral trade deals it strikes with them could, in principle, be brought under WTO governance (Pauwelyn, 2025). The key point here is that rebalancing of US tariff bindings could occur within the structure of the WTO, especially if other countries, such as the EU, were to lead a broad coordination of such a renegotiation process (Pauwelyn, 2025). This approach is necessarily slower compared to unilateral action, but it does have the advantage of being predictable for both trading partners and other economic entities. However, the demonstrated antipathy of the United States to the WTO suggests it is unlikely it will seek to reframe its reciprocal tariffs in the context of GATT Article XXVIII (Baldwin, 2025).
The economic impact of US trade policy under the first Trump administration has been well-documented, a review of research indicating two main takeaways: US consumers bore the main burden of the tariffs, and aggregate real income fell in the United States (Fajgelbaum and Khandelwal, 2022). Current research is focusing on the expected effects of the tariffs introduced by the current administration. For example, one study projects that a 10% across-the-board tariff will result in a total cost amounting to 1% of GDP, while higher tariffs against and by China would increase costs by an additional 0.8% of GDP (Clausing and Lovely, 2024). Another study calculates that the overall loss to the US economy could be a 1% decline in real income by 2028 (Rodríguez-Clare et al., 2025). A very recent study indicates that higher tariffs could improve US terms of trade as well as reduce the trade deficit, provided there is no retaliation from its trading partners (Ignatenko et al., 2025).
As of July 31, 2025, the impact of reciprocal tariffs on US agricultural exports is yet to be fully seen, but it will depend very much on which countries eventually choose to retaliate and the extent of that retaliation. One study, utilizing a reciprocal tariff scenario, estimates the total agricultural export loss to be -2.2% (Kim, Steinbach, and Zurita, 2025). In a larger modeling exercise across different reciprocal tariff scenarios, Bouët (2025) reports a real reduction in US agricultural output of between -2.2% and -6.1% by 2040. In a similar exercise, McKibbin, Noland, and Shuetrim (2025) find that by 2035, and depending on the tariff scenario, US agricultural production falls by between -2.5% and -10.46%, while agricultural labor demand falls by between -1.6% and -7.3%.
It is clear that the impact of reciprocal tariffs on the US agricultural sector will be very dependent on whether or not there is retaliation by affected trading partners, who retaliates, and whether or not specific agricultural commodities are targeted. As noted above, the trade war of 2018–2019 was largely driven by Chinese retaliation, with bulk commodities such as soybeans being affected more than differentiated products. Early analysis of what might happen with reciprocal tariffs reinforces such an expectation, soybean exports to China forecast to be most affected, the amount depending on the level of reciprocal tariffs and the degree of retaliation (Steinbach, Yildirim, and Zurita, 2024).
In addition, other factors could come into play. First, the extent to which US tariffs will be passed through into the price of farm inputs such as fertilizers and agricultural chemicals has implications for farm income—for example, the average effective tariff rate applied to imports of pesticides is now 20% or higher (Ward, 2025). Second, where the US dollar eventually settles in equilibrium also matters. The depreciation of the dollar after the announcement of reciprocal tariffs on April 2, 2025, appears to defy conventional economic wisdom, which predicts the dollar should have appreciated, thereby hurting exports (Clausing and Obstfeld, 2025). However, recent analysis suggests actual/expected retaliation can result in depreciation (Corsetti, Lloyd, and Ostry, 2025). Beyond the macroeconomic debate, this matters for the US agricultural sector: If the dollar eventually appreciates, this could have a negative impact on commodity exports, while continued depreciation could benefit commodity exports, but intensify the farm input cost pressures due to import tariffs. Third, the on-again, off-again nature of the announcement of tariffs by the administration has heightened uncertainty for farmers and other agents in the economy, the level of trade policy uncertainty being at its highest level since the 1960s, according to economists at the Federal Reserve Bank of St. Louis (Caldara et al., 2020).
The credibility of multilateral tariff bindings also depends on monitoring and enforcement by the WTO, and the expectation that if a country violates its commitments, the penalties for doing so will be costly enough that violations will either not occur or will be quickly ruled against under the WTO dispute resolution process. Clearly, the US adoption of power-based bargaining threatens the system of multilateral governance, reinforced by the fact that the WTO Dispute Settlement Understanding (DSU) has effectively been paralyzed by the United States’ refusal to accept new appointments to its Appellate Body (AB), the latter ceasing to function in December 2019 (Sheldon and Chow, 2025).
With appointments to the WTO’s AB being stymied by the United States, what does this mean for dispute resolution in a multilateral setting? A fundamental component of the DSU was the application of a regime, whereby panel decisions have no legal effect until adopted by the WTO’s Dispute Settlement Body (DSB), and the DSB cannot adopt a panel decision until any appeal has been completed (WTO, 1994).
Currently, a panel decision cannot be adopted by the DSB until an appeal is completed, but an appeal cannot be completed because the AB is unable to convene (i.e., a member country can express dissatisfaction with a panel decision through appeal), thereby freezing the entire dispute resolution process at the midpoint of the adjudication regime (Sheldon and Chow, 2025). The United States already followed such a strategy in 2020 after a panel ruled it had violated GATT Articles I and II in imposing tariffs on Chinese products under the first Trump administration (WTO, 2020). Likewise, any WTO panel ruling in favor of the United States with respect to China’s retaliatory tariffs would probably be “appealed into the void” by China, adding to existing agricultural export marketing risk.
A key characteristic of the current administration’s trade policy is across-the-board tariffs aimed at US trade partners with whom it has a bilateral trade deficit. This switch to power-based bargaining has important implications for both trade and governance of the multilateral trading system. During the 2018–2019 trade war, US agricultural exports were targeted for retaliation by several of its trading partners, notably China, and while the extent of retaliation since April 2025 has been somewhat muted, there is still significant potential for agricultural trade to be disrupted.
The governance of global trade is also being seriously affected by the United States’ application of tariffs violating the long-standing GATT principles of reciprocity and nondiscrimination and vetoing of new appointments to the WTO’s Appellate Body, undermining effective trade dispute settlement. In principle, the United States could seek to renegotiate its existing multilateral tariff commitments via an existing GATT/WTO mechanism, recognizing that affected trading partners would be able to withdraw equivalent tariff commitments. This would likely be a more orderly but lengthy process underwritten by a body of international trade law, but the current administration appears to have little regard for a rules-tariffs unilaterally against its trading partners, with the key exception of China, surprisingly, no countries have retaliated, as would be their right under the GATT/WTO rules.
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