Are Export Taxes the Missing Deterrent in Today’s Trade Wars?

Trump II follows a new political economy & that requires a new type of retaliation.

Richard Baldwin, 30 January 2026. Factful Friday.

Introduction.

Here’s an idea that sounds radical but might not be. Hear me out.

Imagine a foreign country could credibly commit to matching any US tariff with export taxes of the same size on selected goods. Call it the Fair Retaliation Export Tax (FRET). The aim would not be revenge. It would be deterrence: raising the domestic political cost of US tariffs so they are not imposed in the first place.

The proposal raises two questions immediately: 1) why would export taxes be more effective in deterring US tariffs than, say, standard retaliatory tariffs on US goods? 2) To which goods should the export taxes be applied?

Why would export taxes be a better deterrent?

One of the many strange things about Trumpian trade policy is the types of special interest groups he pays the most attention to. For most US presidents, exporters matter politically. That is why foreign threats to put tariffs on US exports often deterred US tariffs. For President Trump, exporters are surprisingly far down his list. What matters instead is whether tariffs raise prices for US consumers or disrupt US production.

Trump II seems to really care about the price-rising impact on US consumers (Affordability Crisis), and US industry that relies on imported inputs (supply chain pressure). Here is a for-instance.

On Saturday 1 February 2025, President Trump put 25% tariffs on imports from Canada, but Monday he removed them. Why? White House Press Secretary Leavitt explained “At the request of the companies associated with USMCA, the President is giving them an exemption for one month so they are not at an economic disadvantage.” No mention at all of avoiding Canadian retaliatory tariffs.

The New York Times said that the President’s reversal came after he talked with the heads of the three big US automakers. The executives told the president that putting tariffs on cars and parts from Canada and Mexico would effectively erase all of their companies’ profits and undermine jobs in US factories. This is the new political-economy reality of the Trump II Administration.

The lesson is simple: Trump backed down not because of fear of retaliation, but because US producers convinced him the tariffs would damage production inside the US. China found this out with their export controls that forced slowdowns of US auto production in the Spring of 2025. This led to a massive climbdown by the US Administration as I explained in last week’s Factful Friday.

With a FRET regime in place, the February 2025 choice facing President Trump would have been 25% border tax on everything or nothing. US tariff exemptions would have been filled in by partner export taxes. Maybe he would have done it anyway, but the domestic cost would have been much higher.

Which goods should be targeted by the FRET?

The answer to this second question is dictated by the answer to the first. What actually went into effect was a 25% tariff with exemptions – where the exemptions were chosen by the US President to reduce the damage of his own tariffs on his own political base.

The exemptions he chose are a guide to where export taxes would create the greatest leverage. In February 2025, and repeatedly since, the US administration has exempted certain US imports since the hit on US industry or consumers would be too great. Those are exactly the exports that could be targeted by the FRET.

Of course, the FRET would hurt the foreign nation as well, but there are no costless weapons in a trade war. There will always be domestic blowback.

Incentive to put up US tariffs with and without the FRET.

Without FRET, the US imposes tariffs but then exempts the most politically sensitive inputs, shielding its own producers. With FRET, exemptions merely shift where the price increase occurs from the US side of the border to the foreign side of the border. Either way, US producers face higher costs.

For example, the tariff on auto parts was largely suspended since otherwise US-made cars would be less competitive with cars imported from Korea, the EU, and Japan. With the FRET, the US would not unilaterally choose which imports would see price hikes. Let’s hark back to the 1 February tariffs that were rowed back on 3 February. Specifically, the tariff was removed on the things US industry really needed. With the FRET, the 3 February situation would be transformed back into the 1 February situation. The price-rising border tax would be applied to all US imports from Canada. For some goods, the tax would be imposed on the US side of the border, for the rest it would be applied on the Canadian side of the border.

And then what? What would the President say when the CEO of the three big car companies called the President to say that his policy was destroying their profits and putting them at an “economic disadvantage”? Obviously, the Fair Retaliation Export Tax would alter the US’s cost-benefit analysis when putting on tariffs.

Sounds risky, no? But what’s the alternative?

I can see how this strategy could be seen as destabilizing and risky. Maybe it’s better to surrender to President Trump’s threats? The only rebuttal I have is that the only countries that managed to get aggressive tariffs removed were those willing to raise the cost to the US itself of keeping its own tariffs. Given how little POTUS seems to care about US export sales, that suggests that targeting the US supply chain would be more effective.

FRET is not for everyone: you need supply-chain leverage.

When it comes to the FRET, most countries have no leverage since they are not important in the US international supply chain. But, Canada, Mexico, the EU, and China are incredibly important suppliers of critical industrial inputs. India is important on the import supply side as well in some segments of pharmaceutical. You can tell since POTUS exempted those from his 50% tariff (India supplies nearly 50% of the generic medication).

If you want to see a more systematic analysis, please turn to the 2023 Brookings Paper, “Hidden Exposure: Measuring US Supply Chain Exposure,” I wrote with Rebecca Freeman and Angelos Theodorakopoulos.

Summary and Concluding Remarks.

The key point of this Factful Friday turns on a simple fact. US tariffs have been withdrawn only when they directly or indirectly threatened US producers with slowdowns, shutdowns, or severe loss of competitiveness. Unlike previous administrations, the pain experienced by US exporters has been relatively unimportant. The exception that proves the rule is US commodity exports. And even then, the administration’s reaction was not to remove the tariffs that provoked the retaliation, but rather to provide subsidies.

FRET involves risks. If fully deployed and met with US obstinacy, the FRET could cause serious disruption in tightly integrated supply chains, such as autos in North America. But then again that is precisely why it could deter. The key question, then, is not whether FRET would be painful. All effective deterrents are. The real question is whether the current US administration would knowingly persist with tariffs once they clearly trigger factory shutdowns, layoffs, and sharp price rises inside the US itself. Based on everything we have seen in the second Trump term so far, the answer appears to be no.

There are some WTO compliance issues with the FRET. WTO rules say they should be MFN. But I guess a sufficiently narrow definition of products would mean that almost all the effect would fall on exports to the US rather than other nations given the tight integration of the North American supply chain.

Now I’m sure many readers are shrugging their shoulders and muttering about the uselessness of armchair strategizers. But mine are not new thoughts.

Si vis pacem, para bellum: If you want peace, prepare for war.

This wisdom has been used by leaders ranging from Caesar to George Washington. It captures a bit of the seemingly contradictory logic of making opponents believe you’ll fight back even if fighting will be worse for you, materially, than surrendering.

Think of it this way. Most nations don’t build an army to fight a war. They build an army to avoid having to fight a war. Likewise, the Fair Retaliation Export Tax regime would be built to keep the peace.

References

Baldwin, R. E. (1991). Optimal tariff retaliation rules. In The political economy of international trade: Essays in honor of Robert B. Baldwin (pp. 108–121). Cambridge, MA; Oxford: B. Blackwell.

Johnson, H. G. (1953–1954). Optimum tariffs and retaliation. The Review of Economic Studies, 21(2), 142–153. https://doi.org/10.2307/2296006 https://www.jstor.org/stable/2296006