Trump’s ‘reciprocal’ tariff formula is all about trade deficits
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US President Donald Trump’s administration calculated its raft of new tariffs primarily based on existing trade balances.
PHOTO: REUTERS
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WASHINGTON - US President Donald Trump’s administration calculated its raft of new tariffs
In a statement published on the night of April 2 to explain its methodology for tariffs that have rocked the globe, the United States Trade Representative (USTR) detailed a formula that divides a country’s trade surplus with the US by its total exports, based on data from the US Census Bureau for 2024. And then that number was divided by two, producing the “discounted” rate.
China, for instance, had a trade surplus of US$295 billion (S$396 billion) with the US in 2024 on total exports of US$438 billion – a ratio of 68 per cent.
Divided by two according to Mr Trump’s formula, that yielded a tariff rate of 34 per cent. The same calculations roughly produced the rates for other economies such as Japan, South Korea and the European Union.
Countries where the US runs a trade surplus were also hit, facing a flat 10 per cent rate regardless, as did nations where trade was roughly even.
The USTR statement said that while it was technically possible to calculate rates for actual barriers, this methodology would achieve Mr Trump’s goal of driving down trade deficits.
“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,” said the statement, which was unsigned.
Mr Trump unveiled a range of tariffs during an event held at the White House Rose Garden on April 2, by flipping around a placard with a series of rates based on “tariffs charged to the USA” and, at half the rate, the “discounted reciprocal tariff”.
The method for calculating the tariffs had been largely unknown in the run-up to the announcement. Adding to the confusion, the rates released by Mr Trump differed slightly from those in the annex accompanying Mr Trump’s executive order. South Korea, for instance, was listed at 25 per cent on Mr Trump’s board and 26 per cent in the annex.
Mr Trump’s administration had said the rates would be a calculation that would factor in both tariffs and non-tariff barriers, including taxes. And Mr Trump’s board displayed the rates under a category titled “Tariffs charged to the USA including currency manipulation and trade barriers”.
The actual formula used is not how the White House initially signalled the calculations would be done.
In its Feb 13 memorandum teeing up the reciprocal tariffs
It did not list trade balances, but separately said non-reciprocal trade is “one source of our country’s large and persistent annual trade deficit in goods”.
Mr Trump’s formula included two other parameters – price elasticity of import demand and the elasticity of import prices with respect to tariffs. These were set at figures that effectively cancelled each other out, together amounting to multiplying by one. BLOOMBERG
