US President Donald Trump’s trade officials not only used a flawed theory to design its tariff policy, they also appear to have done the resulting calculations incorrectly.
Researchers at the American Enterprise Institute, a conservative think-tank, claim the Trump administration set its bilateral tariffs four times higher than its own formula required.
The Trump Administration calculated a theoretical tariff on US exports based on the trade deficit with a country and its imports from that country, then applied 50% of that amount as a reciprocal tariff on US imports.
An additional part of the formula calculated elasticities of import demand and import prices, adjusting the tariff based on their sensitivity, but these factors cancelled each other out.
AEI’s researchers said the theory underpinning this formula does not make economic sense, but it also includes an error that overstates the theoretical tariffs four-fold.
Officials used the wrong number to calculate how much import prices would change when tariffs were added. They used 0.25 based on a reaction to retail prices but should’ve used 0.945 based on actual import prices.
A study cited in Trump’s explanation of the calculation said tariffs were passed through to import prices almost entirely, while the response in retail prices was often muted by sellers reducing margins and the pass through rate was closer to 25%.
Correcting this error would reduce the tariffs allegedly imposed on US exports to a fourth of the original levels, and therefore slash the so-called ‘reciprocal’ tariffs by the same amount.
Tariffs on almost all countries would fall to the 10% minimum rate, while tariffs on the few exceptions wouldn’t go much higher than 13% — instead of up to 50%, in some cases.
“Now, our view is that the formula the administration relied on has no foundation in either economic theory or trade law,” the AEI researchers wrote.
“But if we are going to pretend that it is a sound basis for US trade policy, we should at least be allowed to expect that the relevant White House officials do their calculations carefully”.
13 Comments
Howard Marks makes a good point in his recent Bloomberg interview about the new tariffs, what if other countries decide to stop holding US debt because they feel the US treated them unfairly?
If tariffs stay, they could not only raise inflation but also lead countries to sell US treasuries, which may push interest rates higher.
With stocks dropping and money moving into debt, the near future could be a good time to lock in debt long-term before the trade war starts to have an impact.
I suspect the US TSY sell down will be one of the non-tariff responses by a number/collective of nations.
kraken,
What might they hold instead?
As the magician said, think of a number and work backwards from there. Speaking of sums, remember way back, tackling your algebra homework. Get the answer from the back of the book and fiddle round with the equations until you got there. Even so have to admit never really got to understand either the equations or the answer. And that is more or less the same here. Trump has immunity, he has been made unaccountable. Add that to his self proclaimed infallibility and what does it then matter if he cheats, if nothing is true, nor adds up. He just needs to say it is and does.
Foxglove,
As the dust begins to settle, I have little doubt that the current tariffs will change-be reduced. Trump and his cronies will then make up stories-lies-about these changes.
As Oilprice.com reveals, many US producers cannot make money at the current oil price and OPEC is raising production. He will bluster and bully those who have no power, but like all bullies will back off those who have the ability to fight back.
There will be some reversals and bending of knees, but the overall theme is of an isolationist, protectionist United States that is giving a finger to the rules based global order.
The trajectory is mostly set, with likely more bombshells to come.
If the rest of us were smarter, there'd be a wide scale, retaliatory tariff on the US' larger export sectors in the thousands of percent, unless they knock this malarky off. Instead everyone will be trying to protect their own nest.
In the battle of the bullies, waiting to see how much middle finger Trump takes from Putin who has already put it on a don’t call me, I’ll call you footing. Likely a forthcoming exposure of the true test of the mettle.
Did Trump get his numbers wrong
😅 What numbers? 🤣 Trump doesn't calculate numbers, he just makes them up.
I believe it's been determined that the tariff rates are just halving any trade imbalance.
Which is some sort of maths, but not very good maths. For instance, some of the higher imbalances are by poorer nations, shipping raw goods to the USA, who's average citizen earns $500-$1000 a year - they aren't capable of buying American goods, because they're dirt poor.
"What is for certain is that Washington has relinquished its leadership of the free world. "
https://www.abc.net.au/news/2025-04-06/trump-tariffs-america-in-danger-…
(a lengthy & comprehensive read)
Sounds like Peter Berezin thinks these tariffs are here to stay.
VIX is at 45, going to be an interesting week.
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