How to read the White House's tariff formula
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The official formula for calculating the "reciprocal" tariffs on countries, as published by the U.S. Trade Representative, is much less complicated than it looks at first glance.
Why it matters: The word "reciprocal" notwithstanding, there's nothing in the formula that represents tariffs or any other trade barriers imposed on U.S. exports.
- That's despite the White House insisting that "we literally calculated tariff and non tariff barriers."
The big picture: Once you fight your way through the thicket of Greek letters, the formula is really very simple.
- The amount any country's tariff will rise is equal to our trade deficit with that country, divided by our total imports from that country — with a global floor of 10%.
How it works: You can ignore every i in the formula, that's just a mathy way of saying "for any given country."
- On the left hand side of the equation is ∆τ, which is the USTR's way of saying "this is how much we should raise tariffs."
- On the right hand side we find x and m, which are the second letters in the words exports and imports, respectively. So x means a country's exports to the U.S., m means its imports from the U.S., and x-m is the bilateral trade deficit.
- The equation takes the trade deficit and divides it by total imports. The higher the deficit in relation to imports from the U.S., the higher the reciprocal tariff. That's it.
Between the lines: There's another term in the equation, ε*φ. But that can be ignored, because the USTR has set ε at 4 and φ at 0.25, so when computed give an overall multiplier of 1 for the imports number. And multiplying by 1 makes no difference at all.
- For what it's worth, ε and φ are both measures of elasticity that end up canceling each other out.
For the record: Commerce secretary Howard Lutnick defended the formula on CNBC Thursday morning.
- "The Council of Economic Advisers, coupled with the United States Trade Representative, they have huge staffs of economists who study this and have been studying this for years," he said.
The intrigue: As it happens, if you ask ChatGPT the best way to calculate a tariff on another country to get the balance of trade to zero, it comes up with this exact formula.
- It will also tell you that "while revenue-matching tariffs might feel 'fair' on paper, they'd likely lead to economic inefficiency, international backlash, and serious harm to the superpower's own economy and global trade system."
The bottom line: The USTR isn't reciprocating actual tariffs. It's just placing the biggest tariffs on the countries running the biggest trade surpluses.
Ina Fried contributed.
