Economists are questioning the tariff calculations employed by the Trump administration, asserting that the formula used is fundamentally flawed and yields inflated rates. Recently, the administration has begun to compute tariffs based on trade deficits. This leads to a very misleading picture of what is really driving import prices.
The formula used to derive that estimate assumes an elasticity of import prices with respect to tariffs equal to about 0.25. Many economists contend that this number ought to be much higher, near 0.945. This miscalculation adds to a misleading picture of the average tariff rates that the United States is applying to countries globally.
The Trump administration’s formula calculates tariffs by taking a country’s trade deficit with the U.S., dividing it by its exports, and then dividing that figure by two. Until recently, tariff rates ranged from 10% to as high as 50%. The examples you shared, almost every single country has a 10% baseline tariff.
As recently as 2023, the Cato Institute reported that the trade-weighted average tariff rate from China was a mere 3%. By comparison, the Trump administration asserted that this rate was even up to 67%. This discrepancy raises concerns about the accuracy of the trade-weighted average tariff rates used to justify reciprocal tariffs, indicating they may be higher than what is observed in reality.
If the elasticity assumptions in Trump’s formula were adjusted, economic analysis suggests that no country’s tariff would exceed 14%. Indeed, most countries could allow their tariffs to settle at this baseline norm of 10%. For instance, under these revised assumptions, Lesotho’s tariff rate would be calculated at 13.2%, a striking difference from the original 50% proposed under Trump’s plan.
Kevin Corinth and Stan Veuger of the American Enterprise Institute pointed out one big flaw in the administration’s approach.
“Their mistake is that they base the elasticity on the response of retail prices to tariffs, as opposed to import prices as they should have done,” – Kevin Corinth and Stan Veuger with the American Enterprise Institute.
Thus, this critique exposes a gaping flaw in the Trump administration’s approach to calculating such tariffs. That last bit bolsters the previous call by the economists for the administration to re-think its tariff strategy.
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