U.S. President Donald Trump announces reciprocal tariffs on countries around the globe at the White House in Washington on April 2.Chip Somodevilla/Getty Images
When U.S. President Donald Trump announced a suite of reciprocal tariffs on Wednesday, he gave the impression that a thorough calculation was used to determine the levies for countries such as China, Vietnam and Taiwan.
“For nations that treat us badly, we will calculate the combined rate of all their tariffs, non-monetary barriers and other forms of cheating,” he said. Because he was feeling magnanimous, he continued, “We will charge them approximately half of what they are and have been charging us.”
Economists – even some whose work was cited in the Trump administration’s explanation for its math – say that is not what happened. Instead, the U.S. used a simplistic formula that does not have any direct relation to tariffs applied by other countries.
Financial author James Surowiecki was among the first to point out that the administration appeared to take the value of the U.S. trade deficit with each country and divided that number by the value of goods the U.S. imports, an approach that does not take tariffs or other protectionist measures into account.
He took Indonesia as an example. America has a US$17.9-billion trade deficit with Indonesia, which exports US$28-billion worth of goods to the U.S. Divide the first number by the second, and you get 64 per cent, which is what the White House claims Indonesia is charging the U.S. Cut it in half again, and presto, you get a reciprocal tariff amount the U.S. will apply to Indonesian goods in order to make things fair, by Mr. Trump’s logic.
“What extraordinary nonsense this is,” Mr. Surowiecki wrote on X.
White House spokesperson Kush Desai responded on X that Mr. Surowiecki was wrong. “No we literally calculated tariff and non tariff barriers,” he wrote. He posted a fancy looking mathematical formula complete with Greek letters to prove it and linked to a longer explanation from the Office of the United States Trade Representative.
It is true that the formula is slightly more complicated and includes a value for the pass-through rate – how much of the tariff gets added to the prices of goods – and another for elasticity, which measures how price changes affect demand. The formula multiplies these two numbers together.
However, the values for these figures are set at 0.25 and 4 respectively. While the formula might look intimidating, you do not need to be a mathematician to know that multiplying these numbers gives you 1, which makes them somewhat irrelevant in the overall calculation.
So what are we left with? The U.S. trade deficit with each country divided by the value of imported goods.
“That’s exactly what they did,” said Anson Soderbery, an associate professor of economics at Purdue University. One of his studies is cited by the U.S. trade office in its methodology. “It’s a bit puzzling because the point of that paper was to combat these types of reductionist policy evaluations,” he said in an interview. “It doesn’t fit the narrative.”
The U.S. trade office said it arrived at a rate for each country that would eliminate deficits that persist because of tariff and nontariff policies, adding that offsetting these policies is “reciprocal and fair.”
But this broad approach does not consider how tariffs will affect various industries, and ultimately introduces a “wild amount of inefficiencies” into the economy, Prof. Soderbery said, such as price increases that will directly hit consumers and producers.
“These types of formulas scare me a little bit because they’re not really thinking hard about the effects on industry-specific economies that are being impacted by these tariffs,” he said.
Andrei Levchenko, an economics professor at the University of Michigan, also had one of his papers cited by the U.S. trade office. Specifically, the administration referred to a paper he co-authored about elasticity and tariffs.
“Our elasticity estimate should not be directly applied in this tariff calculation,” he said in an e-mail. The problem is such assumptions hold that everything else will remain the same, which isn’t how the world works. If other countries retaliate, he said, U.S. exports could fall, potentially undoing any impact of U.S. tariffs on trade deficits.
Jennifer Lee, a senior economist at Bank of Montreal, said she expected that calculating tariff rates for so many countries would be a monumental task. “I thought there would be hundreds of people working 24-7 trying to figure those numbers out,” she said.
So she is a bit confused by how the Trump administration arrived at its figures. “It doesn’t reflect tariffs. Just the deficit itself,” she said. What’s more, countries that have a trade surplus with the U.S., such as Britain, are subject to the baseline 10-per-cent tariff.
The White House math claims that the European Union, for example, is charging a 39-per-cent tariff on U.S. goods, which is orders of magnitude more than other calculations. The European Commission, for one, has said the rate is approximately 1 per cent.
The Trump administration grasped the spirit of another economic paper cited in its methodology – this one co-authored by Pau Pujolas, an associate economics professor at McMaster University in Ontario – but appeared to gloss over some important details.
The study shows that deficits matter during a bilateral trade war. “If I buy products from you and you don’t buy them from me, I can tariff you but you can’t tariff me,” Prof. Pujolas said. “I will reap the benefits of impoverishing you, and you can’t do anything about it.”
Thus, a U.S. trade war against China can make sense, but not one against the EU, he said. Nevertheless, the U.S. is applying a steep 20-per-cent reciprocal tariff on the EU.
“Our results arise from a heavily computational exercise. We use supercomputers to find the optimal tariffs,” Prof. Pujolas said. “The Trump administration seems to have taken a bit of a shortcut.”