Impressing the World with Tariffs

I am eligible for an Italian passport which my brothers and sister will obtain also. Not sure as to whether I will use it any time soon due to how much our president impresses the world. I had some explaining to do in Germany when I was working there for six weeks. The US does some stupid things and people wonder about us.

Richard Partington the Senior economics correspondent for The Guardian wonders the same.

Trump’s ‘idiotic’ and flawed tariff calculations stun economists | Trump tariffs | The Guardian

‘Willing sycophants’ came up with simplistic formula that has thrown global economy into disarray.

Waving a big chart as a prop in the White House Rose Garden, Donald Trump suggested his new tariff plan was simple: “Reciprocal – that means they do it to us, and we do it to them. Very simple. Can’t get simpler than that.”

Perhaps a bit too simple. The method used to calculate the most important numbers in international trade, politics and economics has left some of the world’s leading experts shocked.

For each country, the White House looked up its trade in goods deficit for 2024, then divided that by the total value of imports. Trump, to be “kind”, said he would, however, offer a discount, so halved that figure. The calculation was even distilled into a formula.

For example, take the figures for China:

• Goods trade deficit: $291.9bn
• Total goods imports: $438.9bn
• Those figures divided = 0.67, or 67%
• And halved = 34%

For countries without a large deficit, the White House applied a 10% baseline, ensuring tariffs would be applied regardless. This was the case for the UK, which the US Census Bureau reckons had an almost-$12bn surplus in 2024.

“[It is] quite an extraordinary calculation after months of work behind the scenes,” said Jim Reid, the global head of macro research at Deutsche Bank. “[It] didn’t add much confidence on there being an in-depth strategic implementation plan.”

For weeks, Washington had been talking about an in-depth policy exercise to establish figures based on a combination of tariff and non-tariff barriers to trade, as it perceived them to be; including alleged “currency manipulation”, local laws, regulations, and taxes such as VAT.

In itself that approach raised eyebrows with experts who said VAT was highly unusual to include; because it is a sales tax paid on domestically produced goods and foreign imports alike.

However, the White House appears to have confirmed it took a simplistic approach to making this judgment:

Reciprocal tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the US and each of our trading partners. This calculation assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing.

There are multiple problems with this – not least that it vastly oversimplifies the drivers of trade deficits. Trade deficits occur when a country buys more than it sells abroad. The US has run a deficit persistently since the 1970s. Typically trade deficits balance over time, as they create downward pressure on a country’s currency (as the result of demand for foreign currency, to buy imported goods, outstrips demand for domestic currency).

However, sitting atop the global reserve currency – used throughout the global financial system for payments and international trade – the US has managed to run larger trade deficits than other nations would be able to.

Another part of the reason is US goods are too expensive for consumers in developing economies to buy – helping to explain some of the particularly large trade deficits – and new tariffs – for poorer countries.

Adam Tooze, an economic historian at Columbia University in the US, said there were “grotesque” policies for south-east Asian countries, including a 49% Cambodian tariff, and rates of 48% for Laos and 46% for Vietnam.

“This is not because they discriminate viciously against American exports, but because they are relatively poor. The US does not make a lot of goods that are relevant for them to import,” he said.

Vietnam in particular has become part of the global supply chain for major manufacturers, including US tech and clothing companies such as Nike, Intel, and Apple.

Lesotho, the tiny southern African country, one of the poorest in the world, is another odd example, facing a tariff of 50%. Among its main exports to the US are diamonds and clothes – demonstrating how links around the world for rare minerals are important for the US economy, but also how the US sought to boost development in African nations in recent years – with policies to encourage manufacturing by companies including Levi Strauss and Wrangler.

However, Trump, with his “America First” strategy has upended decades of attempts by successive US administrations to exert global economic influence, in an earthquake for the global economy.

“This is not serious trade policy or grand strategy,” said Tooze. “The boss hates trade deficits and his team of willing sycophants came up with a formula, however idiotic, that ticked the box.”