Trump told us that he was the Tariff Man. We expected he would do something as he continued to falsely claim that tariffs are paid by exporters and not the importers. During the election campaign he claimed he would bring inflation down on his first day in office, and he said his goal was to reduce grocery prices. Unfortunately, some voters believed him. No inflation reduction plan has been proposed as post-election he says it is too hard.
So, on April 3, Trump released his tariff plan imposing tariffs on imports from large, medium and small countries and on the European Union, and even on uninhabited islands. Those uninhabited islands were included as Trump set a “universal” 10% minimum tariff, but somehow Russia, though it had a trade surplus with the U.S. in 2024 of $2.481 billion, according to the U.S. Census, it escaped with no tariffs- making Russia a new Most Favored Nation in Trump’s eyes.
A Sample of Trump Tariffs
European Union 20%
China 34%
Japan 24%
Vietnam 46%
South Korea 26%
Taiwan 32%
India 27%
Switzerland 32%
Thailand 37%
Indonesia 32%
South Africa 31%
Cambodia 46%
Bangladesh 37%
Lesotho 50%
CNN explained that the Trump tariffs were not reciprocal and are not based on the trading partner’s rates:
Trump pitched the tariff as “reciprocal,” where the rates would be based on the tariff rate that trading partners charge the United States when factoring in currency manipulation and other trade barriers. But that is not the case.
Instead the reciprocal rates follow a simple formula: the country’s trade deficit divided by its exports to the United States, then halved. The calculation was first suggested by journalist James Surowiecki in a post on X and backed up by Wall Street analysts.
For example, America’s trade deficit with China in 2024 was $295.4 billion, and the United States imported $439.9 billion worth of Chinese goods. That means China’s trade surplus with the United States was 67% of the value of its exports — a value the Trump administration labeled as “tariff charged to USA.”
Half of that 67% rate is the 34% reciprocal tariff rate set for China.
This means that tariffs from other countries were not really factored into the calculation. Instead, the measures target countries with large trade surpluses relative to their exports to the United States, noted Mike O’Rourke, chief marketing strategist at Jones Trading, in a note to investors Wednesday.
This is how Lesotho, a country with which the United States has a $234 million trade deficit — nowhere near its $295 billion deficit with China — ended up with the steepest 50% reciprocal rate.
The Trump methodology for calculating tariffs was ridiculed and rejected by many economists and commentators. Paul Krugman, the Nobel prize-winning economist, was very critical of the methodology:
There’s so much wrong with this approach that it’s hard to know where to start. But one easy thing to point out is that the Trump calculation only considers trade in goods, while ignoring trade in services. This is a big omission. Notably, the European Union runs a substantial surplus with us if you only look at trade in goods — but this is largely offset by an EU deficit in services trade:
Source: European Commission
So if Trump’s people had plugged all trade with the EU, not just trade in physical goods, into their formula they would have concluded that Europe is hardly protectionist at all.
Binyamin Applebaum, the New York Times lead writer on economics and business, assailed the Trump methodology:
Trump said repeatedly on Wednesday that the tariffs are “reciprocal,” but that’s not true. The tariff rates announced by the Trump administration are not related to the tariff rates charged by other countries. They were calculated using a childish formula based on trade imbalances.
The White House later said imbalances are a measure of all the ways that other countries cheat the United States. But as Lesotho illustrates, imbalances are a bad measuring stick. Other countries engage in unfair trade practices. So do we. Instead of doing the work to identify and target those problems, the Trump administration has decided to carpet-bomb the global economy.
The Trump tariffs were much higher than anyone expected. Paul Krugman produced a chart showing how high Trump’s tariffs were, exceeding even the infamous Smoot-Hawley tariffs of 1930, which were widely viewed as extending the length of the Great Depression:
America created the modern world trading system. The rules governing tariffs and the negotiating process that brought those tariffs down over time grew out of the Reciprocal Trade Agreements Act, devised by FDR in 1934. The growth in international trade under that system had some negative aspects but was on balance very good for America and the world. It was, in fact, one of our greatest policy achievements.
Yesterday Donald Trump burned it all down. Here’s what just happened to the average U.S. tariff rate:
The tariffs Trump announced were higher than almost anyone expected. This is a much bigger shock to the economy than the infamous Smoot-Hawley tariff of 1930, especially when you bear in mind that international trade is about three times as important now as it was then.
Countermeasures and Retaliation by U.S. Trading Partners
Trump has threatened if U.S. trading partners impose countermeasures including their own increased tariffs, he will increase their “reciprocal” tariffs even higher. This is typical Trump bullying and acting as though he were an international mafia boss making demands on trading partners not to retaliate.
But only 36 hours after Trump’s Rose Garden tariff announcement, China imposed a tariff of 34% on U.S. imports, the same rate as Trump set in his “reciprocal” China tariff. So, if U.S. importers and their customers pay the 34% tariff on China, and if Chinese importers and customers pay the same 34% Chinese tariff rate, and the amount of the imports are similar, then any advantage the U.S. achieves by its 34% China tariff is offset by the 34% Chinese tariff on U.S. goods.
The tariff calculations done by the U.S. Trade Representative do not take into account any likely countermeasures that trading partners may impose. The European Union is also preparing countermeasures to the U.S. 20% tariff. They say they will first negotiate with Trump, but they are prepared to impose countermeasures if negotiations with Trump are not successful.
It is likely that other trading partners will also impose countermeasures. If Trump follows through with his threat to increase U.S. tariffs if another trading partner imposes countermeasures, we will then see a full scale trading war.
Trump’s tariffs on China imposed in 2017 resulted in China cancelling U.S. grain purchases such as soybeans, and U.S. farmers were financially hurt, leading to a Trump billion dollar financial assistance package for U.S. farmers. There are reports that work is being done to launch a similar farmer aid package again.
Trump’s reaction to countermeasures imposed by trading partners could make the trade war he started even worse.
Initial Market Reactions to Trump’s Tariffs
When markets opened on April 3, stock prices headed for the cellar largely due to the shock of the size of the Trump tariffs. The steep declines continued on April 4. The Dow Jones Industrial Average sank from 42,490 to 38,315, a 9.8% drop in two days. The S&P 500 sank from 5,674 to 5,074, a 10.5% drop in two days. The Nasdaq sank from 17,818 to 15,588, or a 12.5% drop in two days.
International markets also suffered steep declines.
Trump’s reaction was to say everything was wonderful, and he remains adamant to keeping his tariff plan as is.
What is Trump’s Game Plan?
Are Trump’s tariffs intended to be permanent or will they have a fixed time period? Is Trump the sole decider of when or if the tariffs are to be changed, reduced or ended?
How will we get from the inflation induced economy to Trump’s dream of wealth and prosperity from the Trump tariffs? When will get to the bridge to economic heaven where tariffs are not inflationary or destructive of the economy?
Trump and his advisors need to explain the Trump plan, if there is one, or is this just Trump asserting his power without any thought of the consequences?
Trump owes the world an explanation of how he will convert economy destructive tariffs into his magical vision of prosperity for some with payments by all.
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Harold “We know this”. The question is “What is to be done?”