While President Donald Trump announced sweeping tariffs on America’s trading partners he stressed that each country’s rate is determined by a reciprocal equation, meant to reflect long-standing barriers to trade imposed on US products.
The White House clarified the methodology of the calculations, but independent experts did not confirm it.
The rationale behind Trump’s reciprocal tariffs
Trump’s administration calculated the new tariffs by taking the US deficit in trade with each country, and dividing that by the total exports of that country to the US.
To reduce the impact of the change, the final tariff was halved.
Deutsche Bank confirmed that this is the case, noting the higher the tariff rate a country will pay under the new system, the greater its trade deficit with the US.
The White House published an explanation of the formula on the US Trade Representative website.
The USTR stated that “while individually computing the trade-deficit effects of tens or thousands of tariffs, regulatory, tax, and other policies in every country is complex, if it’s not impossible, the combined effects can be approximated by computing the level of tariffs consistent with driving bilateral deficits to zero.”
It added: “If trade deficits persist because of tariff and other non-tariff fundamentals and policies, then the tariff rates consistent with offsetting those fundamentals and policies are reciprocal and fair.”
The calculations, which included mathematical symbols in their calculations, ultimately aligned themselves with the trade deficit based approach that was suspected previously.
BBC’s Faisal Islam posted the formula
THREAD: The “reciprocal tariff” does not reflect the tariffs that are charged elsewhere directly, but rather the size of the trade surplus of a particular country. This has been used to represent the tariffs. The equation is aimed primarily at levying an amount that would bring this surplus down to zero.
Economists express skepticism about the simplistic nature of formula
Experts in trade and economists expressed skepticism about the formula’s simplicity.
Emily Kilcrease, former deputy assistant US Trade Representative and director of the Center for a New American Security, said that the administration was looking for a quick fix, but this method appears to be a “approximation”, which is consistent with the policy goals.
Deutsche Bank has highlighted three major concerns about the tariff policy.
First, it appears that the US administration is primarily focused on countries with significant goods trade deficits, while services are excluded.
This approach relies more on a rigid formula than a nuanced assessment of tariff and nontariff barriers.
Second, there’s a stark difference between recent official statements that suggest a thorough review of bilateral trade relations and the actual implementation these tariffs.
This discrepancy raises questions about the credibility of the administration’s policies moving forward.
Markets might begin to question whether major economic decisions were made in a well-structured manner.
Third, the method used to calculate these tariffs introduces a unpredictable element into future trade negotiations.
Instead of laying out clear and specific demands, the administration seems to be using tariffs to pressure countries to reduce trade imbalances. This leaves room for significant uncertainty during upcoming negotiations.
How unheard of are the tariffs?
Shane Oliver, AMP’s head of investment strategy, compared the current tariff climate to the Smoot-Hawley Tariff Act from the 1930s that exacerbated the Great Depression.
He estimated that Trump’s latest tariff measures would push the US average rate of tariffs above levels seen during that era and increase recession risks.
As analysts analyze the potential impact, global economic stability is becoming a concern.
Oliver said that the US dollar could be weakened by the uncertainty caused by tariffs, while Deutsche Bank warned the uncertainty could cause the US dollar to weaken.
China’s response will be significant.
If Beijing retaliates by imposing counter-tariffs, or by taking economic measures, this could further disrupt the supply chain and destabilize the markets.
This post explains how Trump tariffs are calculated and why experts have concerns about the method? This post may be updated as new information unfolds
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