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Key Takeaways
- President Donald Trump's tariffs against trading partners announced Wednesday were billed as "reciprocal," targeting countries that have their own trade barriers against U.S. goods.
- But economists and experts in trade said that the White House’s calculation of the tariffs seems to be based upon trade deficits.
- Trade experts questioned this strategy as trade deficits may arise from other causes than unfair barriers.
Trade experts are left guessing about the strategy behind President Donald Trump’s “reciprocal tariffs” against trading partners, announced on Wednesday. They levy import tax on friends, enemies, and uninhabited island.
Trump’s long-awaited trade tariffs will impose a 10% import tax on all goods brought into the United States. Certain countries will be subject to higher rates.
Trump said initially that the tariffs were based upon countries’ tariffs, trade barriers, and “cheating”. The U.S. Trade Rep clarified that the tariff rates were based on a formula based upon the U.S. deficit in trade with each country.
The formula led to some surprising results that even economists and other experts were baffled by. Tariffs are high for long-standing U.S. allies (24% for Japan and 20% for Europe) but low for some of the U.S.’s adversaries (10% each for Iran and Afghanistan).
Several economists questioned whether it was logical to tie tariffs to trade imbalances.
Mary Lovely, a Syracuse professor of economics, said, “As a techni-cal economist, I can tell that there is no methodology here,” in a Brookings Institution webcast. “I don’t think the word reciprocal is accurate.”
Are Trade Deficits the Problem?
The USTR said its formula "assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing."
A trade surplus occurs when a particular country imports from another country more than they export in value. The U.S. has a global trade deficit and different trade balances. Trump has characterized trade imbalances as the result from the surplus country “ripping-off” its trading partners, but few economists think that way.
Economists have noted that trade deficits are often not caused by policies such as tariffs or other barriers, but rather because of the concept called comparative advantage. This is the fact that certain products are cheaper to produce in some countries.
Canada, for instance, exports aluminium to the United States due to its northern neighbor’s cheap hydroelectricity, which makes it more economical to carry out the energy-intensive process.
The fact that the “reciprocal tariffs” target even countries that buy more from the U.S.A. than they can sell, due to a minimum 10% rate, further muddies the waters. Australia will pay the minimum duty despite the fact the U.S. enjoyed a trade surplus of $17,9 billion with it in 2024.
Some economists believe that the tariffs are a starting point in negotiations and will likely be reduced.
The market is assuming these tariffs will be dropped or negotiated because they make no economic sense. This was written by Jim Reid, global director of macro-thematic research at Deutsche Bank.
