Comment on “Discriminatory Tariffs, Trade Diversion, and the Economic Impacts of Recent U.S. Trade Policy”

Kumagai (2026) provides a quantitative assessment of the economic consequences of US reciprocal tariffs using the Institute of Developing Economies' Geographical Simulation Model (IDE-GSM), a spatial computable general equilibrium (CGE) model with a rich geographical structure. Kumagai shows that the reciprocal tariffs generate negative-sum outcomes and that those losses are transmitted through different mechanisms across countries and sectors. Kumagai’s arguments can be organized around three main points. First, Kumagai highlights the discriminatory structure of the reciprocal tariffs and the resulting trade diversions as the main source of heterogeneous outcomes across countries other than the US and China. Second, Kumagai explains why the US itself emerges as the largest loser through the interaction of higher consumer prices, rising intermediate input sourcing costs, and uneven sectoral effects. Third, he shows that deeper regional integration mitigates part of those losses. The first point constitutes the analytical core of Kumagai (2026). Trade diversion is not, by itself, unique to the US reciprocal tariff episode. Similar effects arise in an earlier US-China trade conflict. What distinguishes the reciprocal tariff regime examined here is that it is partner-specific and therefore discriminatory. Countries experience a direct negative effect when their exports to the US become less competitive because of higher tariffs imposed by the US, but they may also benefit indirectly if the US tariffs on China, for example, are even higher and trade is diverted in their favor. Under such a discriminatory regime, what matters is not simply the US tariff level each country faces in absolute terms, but its tariff position relative to competing exporters, especially China. Differences in outcomes across third countries are therefore shaped primarily by relative US tariff differentials vis-à-vis China rather than by absolute tariff levels alone. Recent empirical evidence, such as Hayakawa's (2026) analysis of the trade effects of the US tariffs under Trump 2.0, provides complementary empirical support for the proposition that relative tariff differentials vis-à-vis China matter for third-country outcomes. This logic also has important policy implications for the world trading system. US reciprocal tariffs not only reduce welfare, even though part of their effect may be offset through trade diversion, but also make relative tariff positions increasingly important in shaping the incentives facing third countries. Some countries have incentives to negotiate individually with the US to obtain less disadvantageous tariff rates, while others are adversely affected by the redistribution of tariff burdens brought about by those same bilateral adjustments. The discriminatory tariff structure therefore creates a coordination failure of its own. Even though a worldwide optimal response may be to avoid a hasty reconfiguration and to internationally coordinate on a wait-and-see stance, the incentives to seek country-specific exemptions or concessions intensify in ways that undermine the basis for a collective response. In this sense, the situation can be understood as a prisoner's dilemma problem. A related analytical issue concerns how to interpret the cost of partner-specific discrimination itself. A useful conceptual benchmark is a uniform-rate scenario in which the US applies a revenue-equivalent tariff across trading partners. Such a benchmark would not simply capture the welfare cost of higher tariffs as such; it would help isolate the additional inefficiency generated by discrimination, which departs from the non-discrimination principle at the core of the WTO system. Kumagai et al. (2021) provide a useful point of reference by estimating the global impact of a uniform US-versus-world tariff increase. Further analysis along these lines would be of considerable interest, although incorporating it into the present framework would extend Kumagai (2026) beyond its current scope. The second point concerns why the US itself emerges as the largest loser. Kumagai explains this result through three interconnected channels. First, US reciprocal tariffs raise prices paid by US consumers. Second, they increase the cost of sourcing intermediate inputs from abroad used by US producers, thereby compressing corporate profitability and constraining production. Third, they induce a shift in demand toward domestic products as imported products become more expensive. Kumagai's (2026) central claim is that, for the US, the negative effects operating through the first two channels outweigh the positive effects associated with the third. The sectoral analysis further shows that these channels operate unevenly across sectors. In some sectors, such as textiles, tariff protection appears to work broadly in the direction intended by the import-substitution policy. In other sectors, most notably the automotive sector, however, the paper shows a substantial negative impact. Kumagai (2026) relates this contrasting result to the different price responses of automotive final goods and the intermediate inputs used in automotive production. Because imported vehicles account for a relatively limited share of the US automotive market once the United States-Mexico-Canada Agreement (USMCA) covered trade is excluded, the rise in final-goods prices in the automotive sector is modest. By contrast, industries supplying intermediate inputs to the automotive sector are more dependent on imported intermediates and therefore experience larger price increases. As a result, final-goods prices remain relatively stable while intermediate input costs rise, compressing profits and weakening production incentives. The reciprocal tariff regime does not merely impose costs on the US; it also fails to function coherently as an intended import-substitution policy in automotive and other sectors. The effectiveness of tariff protection depends on the import dependence of intermediate inputs, the substitutability between imported and domestic goods, and the relative movement of input and final-goods prices. The third point concerns regional integration. Kumagai shows that deeper integration through the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) mitigates part of the welfare losses caused by US reciprocal tariffs. The mechanism suggested in the paper is that deeper regional integration helps offset those losses through trade diversion effects and enhanced connectivity. At the same time, Kumagai indicates that reducing excessive dependence on the US market requires export diversification through regional integration efforts together with other policy measures. Kumagai further suggests that deeper regional integration may be particularly valuable for small and medium-sized countries in a weak bargaining position vis-à-vis the US, insofar as the gains from deeper integration may outweigh the losses from the US tariffs for such countries. This, in turn, raises a further analytical question. If deeper integration improves the outside options of such countries, it may also affect their incentives for bilateral bargaining with the US. However, the precise relationship between these effects is not fully specified. In particular, the analysis does not explicitly examine whether deeper integration weakens incentives for bilateral bargaining with the US by altering countries' relative tariff positions. Analysis along these lines would contribute to policy discussions on the growing importance of regional frameworks in sustaining international coordination under prolonged dysfunction of the World Trade Organization (WTO) and elevated trade policy uncertainty.