Digging into the 'insane' formula the White House used to calculate its tariffs
Not only are tariffs not 'reciprocal,' they're based on simple trade deficit formula, experts say
U.S. President Donald Trump stood in the Rose Garden of the White House on Wednesday brandishing a giant chart listing countries slapped with new "reciprocal" tariffs, which start at 10 per cent and grow steeper for countries with larger trade deficits with the United States.
One column of numbers claimed to show the value of foreign tariffs and "currency manipulation and trade barriers" that other countries had already placed on the U.S., while a second column listed the new tariffs from the U.S.
"They rip us off," Trump said of the European Union. "Thirty-nine per cent. We're going to charge them 20 per cent, and so we're going to charge them essentially half."
But where do these numbers come from? And are the new tariffs calculated based on trade measures that other countries have enacted against the U.S.?
The short answer is no. The White House's own fact sheet about the calculations reveals that the administration's new tariffs are based entirely on eliminating trade deficits — which is not what Trump's chart claimed to be measuring.
The tariffs were calculated using a formula that takes how much a given country sells to the U.S. (exports), subtracts how much that country buys from the U.S. (imports) to calculate the trade deficit, and then divides the trade deficit by that country's exports to the U.S., according to experts.
In the case of the European Union, the resulting number came out to 0.389, or 39 per cent. This number, according to the White House, represents alleged unfair trading practices.
It was then divided roughly in half to produce the U.S.'s "discounted reciprocal" tariff.
For comparison, the average tariff rate the European Union actually charges is just around three per cent, according to the World Trade Organization — nowhere near 39 per cent.
Tariffs not actually reciprocal
"This formula is insane," Dmitry Grozoubinski, a trade consultant based in Geneva and author of Why Politicians Lie About Trade ... and What You Need to Know About It, told CBC News.
"What they're basically saying is ... what we are going to do is assume that if you are selling a lot more to the U.S. than you are buying from the U.S., you must be doing something unfair," he said.
Countries that buy more American products than they sell to the U.S. weren't spared, either. The tariffs, which affect more than 100 countries, are set at a baseline 10 per cent, even for countries such as the U.K., which has a trade surplus with the U.S.
Calling these "reciprocal" tariffs just isn't accurate, Grozoubinski said, as they're not connected to any tariffs placed by other countries.
"The best analogy I've managed to come up with for all of this is like if you got to the pearly gates of heaven and St. Peter said, 'I am going to evaluate whether you've lived a righteous enough life to get in here.' And then all he actually did was divided your speeding fines by your parking fines to arrive at a percentage of righteousness."
Cristián Bravo, a professor and Canada Research Chair in Banking and Insurance Analytics at Western University in London, Ont., said it was "surprising" how simple the formula was considering that the tariffs will upend global trade.
"The fact that the formula that is being used to determine these tariffs is not grounded in any sort of economic knowledge really tells you that there is more of an ingrained belief in tariffs as an instrument rather than a clear economic plan based in what we know about the economy," he told CBC News.
The White House's reasoning is that any trade deficit is a sign that a country is somehow treating the U.S. unfairly. But global trade is enormously complex, and a one-size-fits-all approach can't be applied when different countries have different resources and vastly different levels of wealth, experts say.
Lesotho, a tiny African nation that is one of the poorest in the world, has been slapped with a 50 per cent tariff by the Trump administration simply because the U.S. buys significantly more from Lesotho than Lesotho can afford to buy from the U.S. Why? Two of Lesotho's biggest exports are jeans and diamonds.
When countries are unique providers of products that another country needs, a trade deficit isn't always a bad thing, Bravo said.
For example, if another country grows a fruit, like bananas, that doesn't grow in your country, and you want your citizens to be able to buy bananas cheaply, you would want to erase trade barriers that would jack up the price, he said.
"But this formula does the exact opposite," Bravo said. "By applying this at a country level, some countries [that] are actually providing the U.S. with goods that the U.S. cannot provide for itself are getting hit by a huge tax.
"This is basically a 10 per cent [minimum] tax on anything that the U.S. cannot produce internally, with the hopes that a whole bunch of things will be produced internally. And the reality is that many of the things they simply cannot, or it will take decades for them to adjust."
'Fake tariff rates' and shoddy math
After economists and the general public noticed that the "tariff rates" column on Trump's chart didn't seem to match any known tariffs placed by other countries, the true nature of the calculations was quickly reverse-engineered, with financial writer James Surowiecki sharing the details in a post on X on Wednesday.
After he explained that the "fake tariff rates" were just trade deficits divided by exports, White House deputy press secretary Kush Desai replied with a denial.
"No we literally calculated tariff and non tariff barriers," he wrote, sharing a complicated-looking mathematical formula. But once the Greek symbols were stripped away, it outlined the same thing Surowiecki had described.
There were actually two other parameters in Trump's formula, but although they made the formula look visually more complex, these figures had no impact on the overall calculation. These parameters — the price elasticity of import demand and the elasticity of import prices with respect to tariffs — were set at values that meant they effectively cancelled each other out, Bloomberg noted.
"If you look at the formula, it's literally one variable divided by another variable, times 0.5. You could write this on the back of a cracker.... It looks like they were just trying to hide the fact that they did this in the most reductive, lazy way imaginable," Grozoubinski said.
"This was so lazily and amateurly done that I would not have a lot of confidence that the people at the helm of the U.S. economy are treating governance with the seriousness it deserves," he said. "But with implications that run into the hundreds of billions."
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