Trump's 'reciprocal' tariff formula is all about trade deficits
The United States Trade Representative detailed a formula that divides a country’s trade surplus with the US by its total exports, based on data from the US Census Bureau for 2024. And then that number was divided by two, producing the “discounted” rate
President Donald Trump's administration calculated its raft of new tariffs primarily based on existing trade balances — a departure from pledges to match the tariff rates and other trade barriers from other countries.
In a statement published Wednesday night to explain its methodology for tariffs that rocked the globe, the United States Trade Representative detailed a formula that divides a country's trade surplus with the US by its total exports, based on data from the US Census Bureau for 2024. And then that number was divided by two, producing the "discounted" rate.
China, for instance, had a trade surplus of $295 billion with the US last year on total exports of $438 billion — a ratio of 68%. Divided by two according to Trump's formula, that yielded a tariff rate of 34%. The same calculations roughly produced the rates for other economies like Japan, South Korea and the European Union.
Keep updated, follow The Business Standard's Google news channel
Countries where the US runs a trade surplus were also hit, facing a flat 10% rate regardless, as did nations where trade was roughly even.
The USTR statement said that while it was technically possible to calculate rates for actual barriers, this methodology would achieve Trump's goal of driving down trade deficits.
"While individually computing the trade deficit effects of tens of thousands of tariff, regulatory, tax and other policies in each country is complex, if not impossible, their combined effects can be proxied by computing the tariff level consistent with driving bilateral trade deficits to zero," said the statement, which was unsigned.
Trump unveiled a range of tariffs in the Rose Garden on Wednesday by flipping around a placard with a series of rates based on "tariffs charged to the USA" and, at half the rate, the "discounted reciprocal tariff."
The method for calculating the tariffs had been largely unknown in the run-up to Trump's announcement. Adding to the confusion, the rates released by Trump differed slightly from those in the annex accompanying Trump's executive order. South Korea, for instance, was listed at 25% on Trump's board and 26% in the annex.
Trump's administration had said the rates would be a calculation that would factor in both tariffs and non-tariff barriers, including taxes. And Trump's board displayed the rates under a category titled "Tariffs Charged to the USA Including Currency Manipulation and Trade Barriers."
The actual formula used isn't how the White House initially signalled the calculations would be done.
In its 13 February memorandum teeing up the reciprocal tariffs, Trump ordered an analysis of "comprehensive scope, examining non-reciprocal trade relationships with all United States trading partners," including their tariffs, taxes, non-tariff barriers, currency manipulation and "any other practice" that "imposes any unfair limitation on market access or any structural impediment to fair competition."
It didn't list trade balances, but separately said non-reciprocal trade is "one source of our country's large and persistent annual trade deficit in goods."
Trump's formula included two other parameters — price elasticity of import demand and the elasticity of import prices with respect to tariffs. These were set at figures that effectively cancelled each other out, together amounting to multiplying by one.
