The Trump administration’s method of calculating which countries should be hit with what reciprocal tariffs is “so crude and misleading”, say experts.
In an over nine-minute-long video explainer released on April 4, foreign outlet ‘CBC News’ breaks down the methodology adopted by the US to hit countries with reciprocal tariffs.
Douglas Irwin, professor of economics at Dartmouth College said, “I am surprised that they actually had a formula; it seemed like the tariffs were sort of random and plucked from air and it wasn’t clear what criteria one was going to use.”
Last Wednesday, US President Donald Trump celebrated ‘Liberation Day’ by announcing universal and reciprocal tariffs against almost every single country. Trump brought out a big chart with three columns: countries, tariffs charged to the US, and reciprocal tariffs charged by the US.
According to the list, the tariffs charged to the US include currency manipulation and trade barriers that US goods face in other countries. But the actual calculation reveals that the method is arbitrary.
The Office of the United States Trade Representative has released the following formula to calculate the tariffs: the trade deficit (difference between imports and exports) is divided by the product of elasticity, pass-through and imports.
Epsilon takes into account how sensitive customers are to higher prices, while Phi calculates how likely prices are to increase. The two factors were set at 4 and 0.25. When multiplied, they cancel each other out to equal one. The simpler form turns out to be: US trade deficit with the country divided by total US imports from the country.
The US then offers a ‘discounted rate’ by dividing the tariff percentage by 2. According to the list, Pakistan imposes 58% of tariffs on US goods; the discounted rate turns out to be 29%.
Experts have pointed out flaws in this calculation. In the video, Irwin added that the formula is not measuring other countries’ tariffs. “It is not measuring non-tariff measures; it is not even measuring currency manipulation. It is only taking the trade deficit as an ipsso facto reflection of those things.”
In his conversation with The News, macroeconomist Ammar Habib Khan said that such calculations have only been used for the latest tariffs, adding “this is not really a formula for tariffs”.
“This basically penalises a higher trade deficit. The higher the trade deficit that the US has with a country, the higher the implied tariff — which means that countries will be looking to reducing their trade deficit with the US, and import more from the US,” Khan explained.
Fears of inflation
There are concerns that these tariffs could affect pricing for US consumers. Khan sees this as an opportunity for Pakistan.
“Pakistan’s largest export to the US is textile, and that may not be affected as much — since on a relative basis, the tariffs on Pakistan are lower than other regional competitors. Exporters [here] have an opportunity to increase their market share in the US by taking up the market share of countries that have [been hit by] higher tariffs, including Vietnam, Cambodia, Sri Lanka and Bangladesh. Pakistan should strengthen its trade relationship with the US given its relatively advantageous position.”
According to Khan, “Pakistan and the US will be negotiating lower tariffs. Pakistan should ideally be looking at reducing its trade deficit with the US, by importing more from the US, thereby reducing imports from China in the process, whether that is soyabean or RLNG.”
