Economists say the way Trump calculated tariffs makes no sense

Boston Globe

03-04-2025

The math used to come up with those rates is what experts are lampooning.
A formula released by the US trade representative ties those punitive taxes to the United States' bilateral trade deficit in goods with each country — in other words, how much more the US imports from those countries than it exports to them. The calculation finds the ratio between the US trade deficit with a country and that country's total exports to the US. It then divides the ratio in half to produce what the administration called a 'discounted reciprocal tariff.'
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Economists criticized the formula for its assumption that persistent trade deficits are a reflection of allegedly unfair trade practices by US trading partners. They point out that the math apparently leaves out services — which make up the bulk of the US economy and an important proportion of its exports — from calculations of trade deficits, which has the effect of making US trade relationships look more one-sided. They also say there's nothing 'reciprocal' about the punitive tax rates because they're disconnected from any actual barriers countries impose on US imports.
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'They've got an indefensible foundation to an indefensible policy,' said Douglas Holtz-Eakin, president of the conservative American Action Forum.
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The administration says this approach takes into account tariffs as well as so-called nontariff barriers that include regulatory restrictions or currency manipulation.
The problem, economists say, is that trade imbalances can be driven by lots of factors that have nothing to do with trade barriers or unfair practices.
Bananas and coffee, for instance, can't be grown at scale in the United States and have to be imported. That drives up the US trade deficit with any country that grows a lot of those products. Another example: Though the US has a trade deficit with Canada, it's not because of trade restrictions. That deficit is partly driven by Canadian exports of a heavy grade of oil that US refineries are particularly good at refining.
On Thursday morning, Commerce Secretary Howard Lutnick defended the formula, suggesting the White House's Council of Economic Advisers and the US trade representative have large staffs of economists who have studied the issue of tariffs and nontariff barriers for years to come up with the administration's methodology.
'This is a reordering of global trade, and it's really thoughtful,' he said on CNBC. 'If you understood how rough these other countries are on American products … and they have subsidies, and they have trade barriers, and [American companies] can't sell.'
'The rules of the world are so stacked against us,' he added.
The formula produces significantly different results based entirely on the size of a country's trade deficit or surplus with the United States, heavily penalizing any nations that have sold more goods here than they have bought. For instance, Vietnam and Cambodia face massive additional tariffs of 46 percent and 49 percent, respectively, because of their large trade deficits with the United States — deficits that sprang up recently in part because companies moved production to those countries when the US government indicated it didn't want them making goods in China. The European Union, with a more modest trade deficit, faces a 20 percent added tax.
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Meanwhile, countries that don't have a trade deficit with the US will pay only the flat 10 percent tax imposed on all goods. Countries the White House included in that club include Britain, Brazil and Singapore.
Beyond questioning the administration's methodology, experts on international trade said the punitive taxation of imported goods would not achieve the administration's stated goal of reducing US trade deficits to zero.
Maury Obstfeld, a senior fellow at the Peterson Institute for International Economics, said the new system will just reshuffle US trading relationships, like a game of whack-a-mole. Countries hit with particularly high tariffs might reroute their imports through lower-tariff destinations, though importing from those places will still entail a 10 percent tax. He also said consumers could simply shift purchases to similar products from countries hit by lower tariffs.
'All we're doing here is reshuffling our trading relationships in ways that are particularly injurious because they basically penalize trade in the areas where it's of most value to us, and without mitigating the perceived problem that overall the country has a deficit with the rest of the world,' he said.
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Holtz-Eakin said the punitive import taxes are arbitrary — but probably by design.
'Trump probably liked it that way, because then it all comes down to a negotiation' with each country, he said. 'That appeals to him, but it's terrible policy for the global trading system.'