The United States’ crudely calculated tariffs were not reciprocal and risk fracturing global trade as China and Europe vow to retaliate and protect their own markets

US President Donald Trump has kicked off the biggest trade war in roughly a hundred years based on a made-up methodology for calculating theoretical trade barriers.

The so-called “reciprocal tariffs” were calculated by estimating the rate needed to balance trade deficits the US has with its trading partners. It explicitly assumes that any deficit can only be the result of tariffs and other trade barriers.

In this novel theory, comparative advantage—the idea that countries specialise in what they do best—is viewed as a trade barrier, along with factors like consumer spending, savings, and investment that naturally shape trade flows.

Officials calculated the rate that would drive the US goods trade deficit to zero and presented that to the public as if it were an actual tariff imposed on its exporters. That’s how they overstated New Zealand’s tariff by a factor of 10: 20% instead of less than 2%.

Kyla Scanlon, an economic commentator who coined the term ‘vibe-cession’, put it best when she asked on social media: “Perhaps the question is – does it need to be so stupid?” 

These are not reciprocal tariffs. Retaliation was simply an excuse to put up a wall around the American economy and reduce any goods trade deficit it has with another country. 

Services are completely ignored, even though they account for about a third of all US exports and generate a services surplus with the rest of the world. Trump doesn’t talk about this, ever. 

Nor has he made any efforts to reduce the few trade surpluses America runs with countries like the United Arab Emirates or Australia. They have received a 10% tariff just like everyone else; this was never about fairness. 

Foreign Minister Winston Peters boasted in Parliament that his diplomatic efforts had secured the lowest possible tariff, insisting the media should be celebrating his achievement.

However, his trip to Washington DC was completely irrelevant. The White House applied a simple formula based on the trade balance, and New Zealand received the resulting tariff.

Peters learned about this the same way as everyone else: watching it on television. Even hours later, he still appeared unclear on how the alleged 20% tariff was calculated or why a 10% retaliation was chosen.

Now the world teeters on the edge of trade war escalation. Was it Mahatma Gandhi who said, a tariff for a tariff makes the whole world poorer?

Fight, fight, fight 

The direct 10% tariff on New Zealand is not such a big deal. Westpac economists said the maximum revenue loss for exporters would be about $900 million or 0.2% of NZ GDP. 

The most exposed industries are meat and wine which both send roughly a third of their exports to the United States, worth $2.6 billion and $692 million respectively.

But most of the added cost will be funded by US importers and then passed onto American consumers. Although the higher prices will slow demand generally.

Economists are much more worried about the extremely high tariffs imposed on other countries, such as China, which now faces a minimum rate of 54%. Other additional tariffs may bring the average rate for Chinese imports as high as 76%, some have estimated.

Jennifer Welch, the chief geoeconomics analyst for Bloomberg Economics, said if Trump’s first tariffs “took a hammer to US-China trade, [Thursday’s] actions are a bazooka”.  

Overnight, China promised to retaliate. The country sells more than US$400 billion worth of goods into the US and doesn’t have an obvious alternative market of that size. 

Europe has also vowed to retaliate against the US, but European Commission President Ursula von der Leyen said it may also need to shield its market from a rush of Asian exports.

“We will also be watching closely what indirect effects these tariffs could have. Because we cannot absorb global overcut capacity, nor will we accept dumping on our markets,” she said.

China and the European Union are the only economies big enough to retaliate against the United States, although Canada has also been thrown into the trade war. Most other countries, including New Zealand and Australia, have said they will not retaliate.

It is this escalating trade war that NZ officials fear the most. Niven Winchester, an economics professor at the Auckland University of Technology, modelled the effect of direct retaliation. 

“At the global level, GDP decreases by US$500 billion (0.43%). This result confirms the well-known rule that trade wars shrink the global economy,” he said.

But Trump and his administration have promised to respond to any retaliation with even more tariffs, risking a tit-for-tat spiral which could completely fracture global trade. 

Treasury Secretary Scott Bessent told the media the baseline tariffs would act as a ceiling provided other countries do not hit back.

“My advice to every country right now is, do not retaliate. Sit back, take it in, see how it goes, because if you retaliate, there will be escalation. If you don’t retaliate, this is the high watermark."

Under Trump’s tariffs, the average tariff rate on all imports will rise to the highest level since 1933. pic.twitter.com/2q5GpgPxTR

— Tax Foundation (@TaxFoundation) April 3, 2025