Trump's reciprocal tariff: a threat to global multilateral trading system

US President Donald Trump on April 2, 2025, announced a new 'Reciprocal Tariff' policy designed to revitalise the American industrial base, reduce trade imbalances, and protect domestic jobs. The policy introduced a two-tiered tariff structure: a universal 10 per cent tariff on all imports, effective April 5, 2025 and higher, country-specific 'reciprocal tariffs' targeting nations with substantial trade surpluses with the U.S., scheduled to take effect on April 9, 2025. However, the implementation of these reciprocal tariffs was later postponed for 90 days-except for those imposed on China, which remained in force.

A SHOCK TO THE GLOBAL ECONOMIC ORDER: President Trump's "America First" trade policy shook the global economy and marked a significant turning point in the multilateral trading system. It fueled widespread uncertainty surrounding the global economic and trade order. The move posed serious threats to international supply chains, cross-border investment flows, and overall economic stability. Businesses and investors were left navigating an increasingly volatile and unpredictable trade environment, leading to heightened market turbulence and growing fears of an economic downturn or global shock.

Many nations viewed the U.S. tariffs as unjustified and harmful, citing significant economic repercussions and warning that such unilateral actions could destabilise the delicate balance of international cooperation. This policy serves as a stark reminder of the interconnectedness of global systems and the potential consequences of prioritising short-term national interests over long-term multilateral stability.

This raised concerns about a potential global trade war, with far-reaching implications for supply chains, investment flows, and economic stability and fueled widespread uncertainty of the world economic and trading system.

Different countries have responded to this challenge differently. Some countries opted for diplomatic engagement and negotiations, while others retaliated with counter-measures to protect their economies. In retaliation to US escalated tariff, China has imposed retaliatory tariffs of up to 125 per cent on U.S. goods. US further raised tariffs on Chinese imports to a staggering 245 per cent, citing China's retaliatory actions as the reason. The European Union targeted iconic American exports like bourbon and motorcycles with tariffs worth billions of dollars. Similarly, Canada and Mexico introduced tariffs on U.S. steel, aluminum, and agricultural products. These actions have escalated trade tensions and disrupted global supply chains.

ESTABLISHING MULTILATERAL TRADING SYSTEM: The United States had realised the value of free trade, economic integration, and international cooperation as a result of the devastating effects of World War II and the severe economic downturn brought on by the Smoot-Hawley Tariff Act of 1930, which raised tariff significantly and fueled the Great Depression. This motivated the United States to trade liberalisation and it took lead in establishing multilateral trading system to establish a legal framework for rule-based international trade.

The U.S. was instrumental in establishing the General Agreement on Tariffs and Trade (GATT) in 1947, laying the foundation for the modern multilateral trading system, and later championed the creation of the World Trade Organisation (WTO) in 1995 to expand trade rules for services, intellectual property, and dispute resolution. These institutions promote free trade by reducing barriers and ensuring fair and predictable trade practices.

After World War II, the U.S. consistently advocated trade liberalisation, globalisation, free movement of goods, services and capital. President Truman was pivotal in establishing GATT, while President Kennedy advanced significant tariff reductions through the Kennedy Round. Ronald Reagan supported the Uruguay Round, leading to the WTO's creation, and signed the U.S.-Canada Free Trade Agreement, a precursor to NAFTA. Bill Clinton drove the establishment of NAFTA and the WTO, promoting globalisation. George W. Bush further expanded free trade agreements with countries like Chile, Singapore, and Australia while supporting the Doha Round of WTO negotiations. Inspired by the U.S., many of its allies in Europe, North America, and Asia embraced trade liberalisation and globalisation, significantly contributing to the growth of international trade, economic prosperity, and poverty reduction worldwide.

MFN AS A CORNERSTONE OF THE WTO: One of the most fundamental principles of the multilateral trading system is non-discrimination, which is embodied in the Most Favored Nation (MFN) rule. Under the MFN rule, WTO member countries are required to treat all trading partners equally. This means that if a country reduces tariffs or grants trade concessions to one trading partner, it must extend the same terms to all other WTO members. The origins of the MFN concept can be traced back to centuries, but it was formalised in modern trade agreements to promote fairness, predictability, and openness in global commerce.

The MFN principle became a foundational element of the GATT and later of the WTO, serving as a cornerstone of the global trading framework. The global rule-based multilateral trading system is a framework designed to facilitate international trade through agreed-upon rules and principles under its successor WTO. This principle fosters a level playing field, prevents discriminatory practices, and ensures that no country receives preferential treatment over others. It plays a critical role in maintaining trust and stability in international economic relations.

RECIPROCAL TARIFFS VIOLATE WTO RULES: The U.S. Reciprocal Tariff policy, which prioritises bilateral trade negotiations over multilateral cooperation and imposes differentiated tariffs on various countries, directly contradicts the rules and principles of the WTO and undermines its foundational values of non-discrimination and reciprocity. This policy violated the MFN principle, which obliges member countries to treat all trading partners equally by applying uniform tariff rates. By imposing country-specific tariffs based on perceived trade imbalances, the reciprocal tariff system created a discriminatory framework that fundamentally contravenes the MFN principle.

Moreover, WTO members are committed to binding their tariffs at agreed-upon levels to ensure predictability and stability in global trade. By unilaterally adjusting tariffs outside these commitments, reciprocal tariffs bypass the WTO's rule, weakening the authority of the multilateral system.

IGNORING WTO DISPUTE SETTLEMENT MECHANISMS: The United States has frequently criticised countries like China for implementing trade restrictions and non-tariff barriers, such as subsidies, import quotas, and regulatory hurdles, which can distort global trade. While these concerns may hold some validity, they do not justify unilateral measures like Trump's Reciprocal Tariff policy. Such disputes can and should be addressed through the WTO's Dispute Settlement Mechanism (DSM), a rules-based approach to resolving trade conflicts.

The WTO's DSM is specifically designed to handle trade disputes between member countries in a fair and transparent manner. It provides a platform for countries to challenge trade practices they believe violate WTO agreements through consultations, panel reviews, and, if necessary, appeals. This mechanism resolves disputes based on established international trade rules, offering a neutral and effective process to address issues such as non-tariff barriers without resorting to retaliatory measures.

PENALISING SMALL AND DEVELOPING ECONOMIES: In addition to destabilising the global trading system, Trump's reciprocal tariff also intensifies the economic challenges faced by developing countries. These countries are given some protections by multilateral frameworks like the WTO, including special provisions for Least Developed Countries (LDCs) and access to dispute resolution procedures. In bilateral settings, these safeguards are typically absent, leaving developing nations more vulnerable to exploitation and coercion.

Developing countries depend on stable trade relationships and access to global markets to export goods and attract foreign investment. However, Trump's reciprocal tariffs have introduced uncertainty and restricted market access for these nations. For example, Madagascar and Lesotho, two small and least-developed countries, faced tariffs as high as 47 per cent and 50 per cent, respectively, despite contributing less than 0.1 per cent to the U.S. trade deficit. Similarly, Bangladesh, which also contributes minimally to the U.S. trade deficit, is subject to disproportionately high tariffs of 37 per cent. This significantly undermines the competitiveness of its low-value, labour-intensive readymade garments in the U.S. market-a critical destination for its exports.

Developing countries are often at a severe disadvantage in bilateral negotiations due to their limited bargaining power, which has a negative effect on their terms of trade-the relative prices at which they exchange goods and services with other countries. These countries typically have smaller, less diversified economies that are heavily reliant on a few key exports-often raw materials, labor-intensive products, or agricultural products-and have limited bargaining power. In bilateral negotiations with larger and more developed economies like the U.S., they lack the economic leverage to demand favorable terms, which in turn adversely impacts their terms of trade. This asymmetry often forces developing countries to accept suboptimal trade agreements, such as reduced access to foreign markets or higher import tariffs on their goods.

Moreover, in bilateral negotiations, larger economies can impose policy-related conditions-such as stricter intellectual property laws, regulatory standards, or restrictions on subsidies. While stringent rules on labour or environmental standards are important in principle, they may significantly raise production costs, making their exports less competitive. The limited bargaining power of developing nations in bilateral negotiations erodes their ability to secure favorable trade terms, exacerbating economic inequalities and undermining their development prospects.

WEAKENING THE MULTILATERAL TRADING SYSTEM: Trump's reciprocal tariff policy marked a significant departure from the rule-based, multilateral trading system that has underpinned international economic relations since the end of World War II. By imposing blanket tariffs and adopting a country-specific approach based on perceived trade imbalances, the policy undermined established norms rooted in cooperation, non-discrimination, and adherence to WTO principles.

The multilateral trading system, founded on principles of fairness and collaboration, has long been a cornerstone of global economic stability. While the immediate concern centered on the risk of destabilising international trade, limiting globalisation, encouraging economic nationalism and protectionism, escalating a global trade war, and economic downturn, the broader and more alarming consequence is the gradual erosion of the multilateral trading framework. This weakening threatens the stability and predictability that the system provides to international trade.

Such a shift has implications far beyond trade. It even risks destabilising the global economic and political order. The erosion of trust in multilateral institutions like the WTO can spill over into other organisations, undermining the credibility, legitimacy, and effectiveness of entities such as the United Nations. The weakening of the multilateral trading system thus presents a deeper risk: the fragmentation of the multilateral world order itself, jeopardising the collective ability to tackle global challenges and maintain international cooperation.

Golam Rasul, PhD is Professor, Department of Economics, International University of Business Agriculture and Technology (IUBAT), Dhaka, Bangladesh. golam.grasul@gmail.com