Trump's surprisingly simple tariff math
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One of the surprises out of the big tariffs announcement on April 2 was that the Trump administration used a surprisingly simplistic approach to calculating these much-hyped reciprocal tariffs.
Why it matters: This was not a finely tuned set of import taxes calibrated to exert pressure on trading partners to adjust specific policies with which the U.S. has grievances.
- Rather, it was some simple arithmetic, based on overall trade data, that became the justification for the most sweeping U.S. duties in generations — a trade-weighted 22.5% tariff, per the Yale Budget Lab, up from around 2.4% last year.
- It implies fewer off-ramps for countries that seek tariff relief, and thus less potential for de-escalation. If tariffs are applied without regard to the details of each country's economic policies and circumstances, what is there to negotiate?
State of play: Some social media sleuths last week figured out, and the administration confirmed, that there was a simple formula behind the reason, say, Vietnam was slapped with a 46% tariff while Norway faces 15%.
- The formula is to divide the U.S. trade deficit with each country by that country's exports to the U.S. The final reciprocal tariff was then divided by 2, with a minimum of 10% (which applies even to those countries with which the U.S. has a trade surplus).
- "While individually computing the trade deficit effects of tens of thousands of tariff, regulatory, tax and other policies in each country is complex, if not impossible, their combined effects can be proxied by computing the tariff level consistent with driving bilateral trade deficits to zero," per the U.S. Trade Representative's explainer.
Between the lines: This logic implies that any country with which the United States experiences a trade deficit, regardless of the reason, is in some way a bad actor and requires tariffs as payback.
- But even if you believe that it's not good for the U.S. to run large, persistent overall trade deficits (which can contribute to financial imbalances and under-investment in key industries), it doesn't imply that there needs to be balanced trade with every individual country.
- Depending on U.S. consumer demand for a given country's exports, whether it seeks to buy U.S. financial assets, and myriad other factors, even in a world where there is balanced U.S. trade, some countries would be expected to run surpluses and others deficits.
- Moreover, the 10% minimum tariff — even on countries with which the U.S. runs a surplus — implies that tariffs of more than 4x their previous levels are a new minimum that will apply to the rest of the world, no matter how a given country tries to respond to U.S. concerns.
What they're saying: Tobin Marcus and Chutong Zhu of Wolfe Research write in a new note that "since these 'reciprocal' numbers are driven not by actual tariffs but by the simple fact of trade deficits, they will be very challenging to negotiate away, and policy changes may do nothing to alleviate them."
The bottom line: The calculation method used for this round of tariffs implies they won't be negotiated away quickly or easily.
