At the Wall Street Journal Matt Grossman, Anthony DeBarros, and Konrad Putzier have an informative piece on the peculiar way in which the Trump Administration is calculating “reciprocal tariffs”:
A White House handout called these costs a tariff charged to the U.S., “Including Current Manipulation and Trade Barriers.” From there, in nearly all cases, the Trump administration imposed new “Discounted Reciprocal Tariffs” of roughly half that result.
“Drop your trade barriers…and start buying tens of billions of dollars of American goods,” Trump said Wednesday.
Several economists said that basing tariffs off of bilateral goods deficits is confusing and illogical.
and
Data sleuths on social media soon reverse-engineered the formula behind the White House’s calculations, zeroing in on the trade-related math. Dividing the U.S.’s 2024 goods-trade deficit with China—$295 billion—by the amount the U.S. imported from China resulted in the White House’s 67%.
The Wall Street Journal followed calculations highlighted in postings on social media, including by journalist James Surowiecki, a former business columnist for the New Yorker. The Journal found the calculations explained the costs attributed to nearly 100 countries, including all of the European Union, which the White House treated as a single bloc.
Read the whole thing.
Other commentators have pointed to the complexity of administering and enforcing such tariffs. I’ve already expressed my opinion—that China’s actions are in a class by themselves, were it up to me I would only impose tariffs on goods imported from China, and my tariffs on Chinese goods would be much, much higher.
My take on the tariffs is that Trump came into office with an economy with multiple landmines priming to explode; the most urgent to deal with is persistent high inflation, the Federal budget deficit / interest on the debt and debt, and the trade deficit / current account deficit.
One of the key contributors to high inflation is excessive demand from the high federal budget deficit; a deficit of 6% GDP like today has never seen outside of deep recessions or major war. This high inflation and high budget deficit in turn has lead the Federal Reserve to a high interest rate; which combined with debt to GDP of 100% means interest on the debt is 18% of revenues. Its unsustainable, and likely to trigger a crisis in the next 3 to 10 years.
The second landmine is the trade deficit. The trade deficit was 3% of GDP last year, and the US financed it with a 4% capital account deficit (i.e. we sold $1.1 trillion of assets like land, bonds, stocks to foreigners). What makes it urgent problem is two facts, first it gone so long and so far its eviscarated the manufacturing base to the point we are dependent on foreign countries to source PPE, medicine and other critical goods; and 2nd, the primary entity who benefits from the US financing over half the world’s net trade deficit is the PRC, which has over half the worlds net trade surplus and which the US has increasingly hostile relations with.
So from those two lens lets evaluate the tariffs. At 10%; they will raise $400 billion per year in revenue; at 20% its $800 billion per year. With a federal budget of $1.8 trillion; it would go a substantial way to making the budget deficit sustainable. It raises a 2 to 3 times more money then increasing income on the rich. Also, a tax on consumption reduces demand (i.e. growth slowdown or recession) and drives long term interest rates lower — and Treasury can refinance 9 trillion of short term debt due this year to decades from now at low rates, saving significant interests and buying time to repair the budget. Note Bessant and Trump seem to follow the value of the 10 year bond more then the S&P 500.
On the trade deficit; while the formula is simple, its application is interesting. It hits most heavily on China and the countries in SE Asia that China has used as transhipment hubs to bypass tariffs. In the ideal world, it could be a forcing function for those countries to buy more US goods, incresing US manufacturing; but the alternative is likely and acceptable, decreased trade and less US financing of China’s excessive production capacity. One advantage it has over other ways of calculating tariffs, currency manipulation and non tariff barriers is it measuring the end effect — competitive advantage is supposed to be neutral in the long term; i.e. imports and exports are supposed to balance out, only the composition of imports and exports change. A growing trade deficit for 30 years is a sign something other then free trade or even reciprocal trade has been occurring — no matter what the duty rates, and laws of other countries are on paper.
My surprise in all this is Trump was willing to induce this much pain now. Its no guaranteee this course can prevent the mines from exploding.
One prediction — the tariffs / consumption tax is here to stay (it may eventually include domestic manufacturing). Even if Congress takes back emergency powers on tariffs — it won’t let go of the revenue stream when they realize how the bond market would react.
I like Curious’s breakdown. Also this from Oren Cass.
https://www.understandingamerica.co/p/happy-liberation-day-to-those-who?r=1ehke&utm_campaign=post&utm_medium=email&triedRedirect=true
1) 2.6% is high inflation? Meh. If that is too high than why are willing to accept the price increase that will come from tariffs? If you really think inflation is too high why do you want bond rates down?
2) Putting us into recession is a good way to pay off the debt? We will see decreased tax revenue. Anyway, wouldn’t it mean that if kept getting $600 billion/year that the overall plan is failing? That imports are staying high and factories are not back in the US?
3) ” imports and exports are supposed to balance out”. Not really. It is very much affected by what consumers in different countries decide to do. (It’s not countries trading with each other, its individual consumers making decisions.) In the US we spend a lot and save a little. In other countries they save a lot and spend a little. So Chinese need to consume more or we ned to consume less, but our economy is built around consumer spending so we wont want that.
4) This is a very large tax that will be passed onto consumers. Corporations can eat a bit of this a little while but not 50% increases. Congress may want to keep the revenue but if people complain about prices going up do they get voted out like Dems did because of inflation?
5) What is the long term going to look like? The US has shown itself to be an unreliable trading partner. Why wont other countries look to places like China to replace us? What kind of a hit does corporate America take? Factories were built and plans made based upon USMCA which has now been revoked without much lead time. So first NAFTA, then USMCA and now this? What about the companies that moved factories from China to other countries on the advice of the first Trump admin?
6) Tariffs dont have a very positive history and this is a big experiment. Hope it works. High price to pay if it doesnt.
Steve
1. 2.6% was reached for 3 month before the election and as of Jan 2025, had gone up to 3%. We aren’t anywhere close to the Federal Reserve’s revised goal of 2% per year over the business cycle (its been 4 years since there was a monthly print under 2%); never mind its historical goal of 2% as a ceiling. It is high inflation when considering the Federal Reserve is applying a restrictive real interest rate of 2+%.
2. Its not to pay off the debt. It is merely to keep the budget deficit at a sustainable level relative to GDP. And it is not a magical panacea; there will be painful budget cuts needed. And yeah, that why I was surprised; reducing a deficit of 6.2% to 3% in an economy that only grows at 2.8/2.9% by definition means a growth slowdown if not a recession.
3. Please cite a paper that says free trade is supposed to leave persistent or permanent trade deficits. I’ll give a paper from Michel Pettis who explains clearly what’s happening is not “free trade” or the “free choices of consumers” but “beggar thy neighbor”.
https://carnegieendowment.org/china-financial-markets/2024/02/can-trade-intervention-lead-to-freer-trade
This is the key paraphase, with the bold mine,
“But this misunderstands altogether the meaning of comparative advantage. As I explain below, surplus economies run surpluses mainly because of industrial policies that implicitly or explicitly force households to subsidize the manufacturing sector. Their competitive advantage in manufacturing comes not from comparative advantage but rather from transfers that distort comparative advantage and reduce domestic demand.
…
Comparative advantage doesn’t mean that some countries export and others import. It means that each country exports those goods and services in which it has a comparative production advantage to pay for imports of those goods and services in which it has a comparative disadvantage. Under a system of comparative advantage, in other words, the purpose of trade is to maximize welfare by maximizing the value of imports, which in turn means maximizing the value of exports used to purchase those imports. In a trading regime governed by comparative advantage, trade must be broadly balanced as countries exchange goods and services produced in their respective areas of comparative advantage for goods and services in which they are at a comparative disadvantage.
This is very different from a world of “competitive advantage,” in which a country’s subsidized manufacturing leaves domestic consumers unable to absorb domestic production. In that world, the purpose of exports is not to maximize the value of imports but rather to externalize the consequences of suppressed domestic demand.”
4) The administration has made the decision to absorb the pain now. One thing that should be said, tariffs / consumption taxes are a one time increase in the price level; but likely to be deflationary (decrease the rate of increase) in the medium term. Pretty simple reasoning, unless the central bank increases the money supply, the increased price means consumer can afford to buy less, decreasing demand; a tax on consumption will decrease consumption.
5) I don’t know what the long term is, and if anyone does, they are selling you a bridge. But the existing structure of 6% budget deficits and trillion+ trade deficits were unsustainable beyond a few years anyway, so change is coming and as uncertain as it is now, it probably beats trying to plan in a US sovereign bond crisis or an unprepared crisis in East Asia.
I acknowledge the pain and difficulty to rearranging supply chains. But the risks of overseas supply chains have been foreshadowed for a decade now. Trump came to office in 2017, China tariffs occurred in 2018/2019, COVID hit in 2020, Russia/Ukraine war in 2022. If a companies response is keep 90% of production in the PRC or move it to a neighbor which could be affected in a crisis, the tariffs should be thought of as a blindness tax.
On China taking the role of the US; if it is willing to be a consumer of last resort, it would replace the US for many countries and I think the US should welcome the burden sharing. Unfortunately, as Pettis explained, for the Chinese to go from the worlds foremost trade surplus country to a trade deficit country would be an order of magnitude more difficult then what Trump is attempting. The EU is better positioned to being a partial consumer of last resort and the influence that goes with it; but it would decimate many key constituencies; like kiss goodbye German industry.
Anyway, pulling the rug on the game has occured before. Nixon dropped out of the dollar standard, screwing over all our major allies and industrial powers; Reagan had import quotas on Japan, and arranged the Plaza accord; against the wishes of the rest of the G7.
6) Tariffs should be a tool of last resort. But if the circumstances are correct, it can be a valid tool.
1) Meh. Semantics. Still, defending tariffs that will raise prices while you claim to be worried about inflation doesnt seem very consistent.
2) AS I noted, it likely kills GDP. If your concern is our debt, then cut spending and/or find revenue sources that dont kill our growth.
3) Yup, Pettis and Cass (who isn’t really an economist) and maybe a handful of others believe what you cite. The other 98% of economists do not and it’s not really that hard to see why. There is no reason why trade needs to be balanced between any 2 countries. If some country receives money from a consumer in the US they can either save that money or use it to buy stuff from another country. Should be obvious. Note that no one forces people in the US to buy stuff from other countries. They could save money or buy exclusively US stuff. It’s not the US or any other country but rather a sum of consumers making buying decisions. Would be different if we had barter based economies.
BTW, I only occasionally read Pettis. What is the purpose of passing the 10% tariffs on countries with whom we have a surplus?
4) How do you know what the current admin intends. I can provide Trump quotes (and others from his people) saying we are now going to be rich. They are not really advertising this as we are going to take pain now. There is no way to tell if it will be inflationary or deflationary and at any time in the cycle we could see either. Read Cowen from today. Prices will go up not just directly due to tariffs but also because we are going to move resources out of productive use into less productive use driving up land costs. Also we are going to need to expand lots of businesses all at once. Construction costs likely do not have just a one time increase but persistent increases.
https://marginalrevolution.com/marginalrevolution/2025/04/why-do-domestic-prices-rise-with-tarriffs.html
5) You have already made a number of long term predictions which seem unlikely to me, and almost everyone with expertise who writes on the topic. What I am saying is that we have shown ourselves to be unreliable. We unilaterally cancel deals that will cost other countries billions after they assumed the trade deals that we insisted on negotiating would be honored. Is it really that hard to see other countries, but really other corporations, looking for other trade partners? Seems like a pretty obvious likelihood.
6) Its a huge experiment. One that no one was prepared for including US companies. They used methodology they made up that no one has heard of before and even at that looking at their citations they copied down the wrong numbers. If they had copied down the correct ones the tariffs would be about 1/4 of what they are. If you are a TRUMP supporter then I guess you just believe in this because he says so, but if you look at how it was done, including the whole issue of doing this because its an emergency bypassing Congress, I dont see how you have much confidence.
Steve
Oh awesome! A 90 day pause. Yup, I would definitely start planning to bring my factories back to the US with this level of certainty. Is Liberation Day delayed Liberation denied?
Steve
Oops! Markets went way up on the rumor.
Steve
The link to Oren Cass wasn’t meant to relate directly to Curious’ comment. I was texting from my phone in Springfield, Ohio and don’t have the patience for a longer description. Oren Cass seemed at that time to be the only person to understand there are three classes of tariffs here.
First, the 10% tariff is not a protective tariff; it is a revenue tariff. See Don Boudreaux here:
https://cafehayek.com/2024/09/revenue-tariffs-differ-categorically-from-protective-tariffs.html
A revenue tariff is broad and generally applicable to all imports, but is set at a level where it doesn’t limit imports, which would defeat the purpose of raising revenue. Most of the papers people are citing are not addressing these 10% tariffs. Domestic industry is not going to expand dramatically differently with a 10% tariff than without. At the margins perhaps, but in confluence with other circumstances. Economists don’t necessarily oppose revenue tariffs (at link).
Biden put 100% tariffs on Chinese EVs, as I believe have Canada and the EU. How that works or doesn’t work explains how protective tariffs.
The tariffs just imposed on Chinese imports are protective tariffs also, but these are more like divorce proceeding for Chinamerica. Retaliatory tariffs don’t hinder the divorce, they advance them. I don’t have a lot of sympathy for businesses that are surprised by this turn of events because it was entirely foreseeable.
The third purpose of tariffs is to give another country an incentive to negotiate better trade deals. For all of the countries between China and the 10% rate, they will negotiate a deal or won’t. How that turns out will be judged by the outcomes. I’m most curious about Vietnam, which I’m seeing described variously as competitor to China or as a Chinese agent.
I have seen the claim that the 10% is intended for revenue but its revenue specifically to make up for trade deficits. Why are we doing this country with which we have a trade surplus? So lets assume its just for general revenue since we are suddenly worried about our debt. Why then is Trump et al telling us to expect record tax cuts? Is the goal just to shift to more regressive taxes? Why is it assumed there wont be any response to these revenue tariffs?
There really isn’t much of a history of “protective tariffs” being effective. It’s an experiment being run that will at best cost us a lot of money to see if it works. Specific tariffs in response to specific products or areas may have a role just not seeing how the negatives dont outweigh the positives in tariffing everything.
Nice piece at link on bringing jobs back to US. It’s going to take years and we need to develop workers, which takes another year or two on top of that. Means we will need to keep the tariffs up for a long time.
https://x.com/molson_hart/status/1908940952908996984?s=46
Steve
“Trump: China will now pay a big number to our treasury. This is all taxes. And don’t let them keep telling you that this is a tax on our people. I hate that. You know, they say it’s a tax. No.”
Steve
Mr. Trump does not seem to recognize that it’s the importer who pays the tariffs.
Mr Trump is the rare politician who boasts how much tax revenue he collects from taxes he instituted. I guess the lesson is if you are going to wear it; wear it proudly.
Of course he boasts. He believes that the other countries are going to pay the tax.
BTW, I fully believe that Monday was just a trial balloon to see how the markets would react if the bond vigilantes acted up like they did yesterday and today. Just for fun I have been reading Zero Hedge a bit more often. Pretty awesome that on the same day they were lauding him for being “fearless” (Their choice of words) for holding firm on tariffs we find that Trump caves to the bond market.
Steve