Waving a large graphic as a prop in front of the White House, Donald Trump presented his new tariff plan as simple: “Reciprocal - that means, they do it to us, we do it to them. Very simple. It can’t get any simpler than that.”
However, the method used to calculate the most important numbers in international trade, politics and economics has shocked some of the world's leading experts.
The math, as Reuters reports, is simple at first glance: take the US trade deficit in goods with a country, divide it by that country's exports to the US and convert it to a percentage; then halve that figure to get the "reciprocal" US tariff, with a minimum rate of 10%.
Thus, the volcanic Australian territorial Heard Island and the uninhabited McDonald Islands in Antarctica ended up with a 10% tariff. You could say the penguins did well.
However, Madagascar - one of the world's poorest countries, with a GDP of just over $500 - faces a 47% tariff on the modest $733 million in vanilla, metal and clothing exports it made to the US last year.
"Probably no one buys Teslas there," John Denton, president of the International Chamber of Commerce, told Reuters, ironically alluding to Madagascar's inability to please Trump by buying luxury American products.
Madagascar is not alone: a crude application of this formula to poorer economies that simply cannot afford to import more from the US inevitably leads to high “reciprocal” rates – 50% for Lesotho in southern Africa, 49% for Cambodia in Southeast Asia.
On the other hand, Australia, which has a trade deficit with the US, like Great Britain, is only subject to a minimum rate of 10 percent.
This approach is problematic for several reasons, primarily because it greatly simplifies the causes of trade deficits. Economists argue that this calculation does not take into account the specifics of commercial relations with other countries.
"This approach is so flawed that it's hard to know where to start," Nobel Prize-winning economist Paul Krugman told AFP, noting that the calculations only take into account traded goods, leaving out services.
Economists have assessed that the US administration's methodology is deeply flawed from an economic point of view and will fail in its declared goal of "reducing bilateral trade deficits to zero." They added that, despite the White House's claims that "tariffs work," trade balances are determined by a number of economic factors, not just the level of tariffs.
Thomas Sampson, associate professor of economics at the London School of Economics, told the Financial Times that tariffs cannot remove the underlying macroeconomic cause of the US trade deficit. “Until the US saves enough to finance its own investment, it will have to borrow from the rest of the world. And that means it has to have a trade deficit. Tariffs don’t change that logic.”
Economists also criticize Trump's obsession with reducing bilateral trade deficits to zero as economically illiterate, since there will always be products that are impossible or economically unprofitable to produce within each country - for example, the US cannot grow bananas.
Oleksandr Shepotilo, an econometrician at Aston University in Birmingham, said the use of economic formulas only gives the US administration’s document “the appearance of being connected to economic theory,” but is in fact completely divorced from the reality of trade economics. “The formula gives you the level of the tariff that would reduce the bilateral trade deficit to zero. That’s an insane goal. There’s no economic reason for every country to have balanced trade with every other country,” he said.
The result of the tariffs, according to John Springford, a trade economist at the Center for European Reform, will not be to eliminate trade deficits, but to harm both American consumers and poorer countries. “This is a recipe for hitting poorer countries that have large trade surpluses with the United States, not for eliminating America’s trade deficits with them. Their surpluses will just be redirected to other poor countries that produce T-shirts and consumer electronics,” Springford told the FT.
"It will also hurt American consumers, because the pass-through of tariffs to prices is higher than the administration claims. And a stronger dollar will further neutralize the effects of tariffs, because it will make it harder for exports from the United States. In short, this is both stupid and harmful."
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