On April 2, United States President Donald Trump unveiled a sweeping new “reciprocal tariff” regime he says will level the playing field in global trade – by treating other countries the way ( he claims ) they treat the US.
First, Trump’s strategy may impose a “baseline” 10 % tax on almost all products imported into the US, effective April 5. Therefore, from April 9, 57 states will experience higher “reciprocal taxes”.
These vary by state, according to a method based on individual business imbalances.
On face value, the new tax plan may sound like a easy answer for fairness. If a certain nation was taxing American imports with a 50 % price, it might seem good for the US to tax their goods at 50 % as well.
But appearances are deceiving.
These innovative “reciprocal” taxes apparently aim to eliminate the US trade deficit by making exports more expensive so that Americans buy less from abroad until goods similar exports.
But the Trump administration hasn’t instantly matched certain unusual taxes. Instead, they’ve opted for a simplistic method based on bilateral trade imbalances between the US and each particular state. Those aren’t the same items.
Trade imbalances aren’t taxes
A nation has a business gap when the full price of everything it imports from somewhere else exceeds the value of what it exports it. A business deficit is the same.
Trade imbalances and surplus – the balance of trade – may be calculated between certain countries, but also between one state and the rest of the world.
Taxes are unique things entirely – income a land charges on imports when they cross the border, paid by the buyer.
Trump’s fresh mutual taxes have been calculated by taking the US trade deficit with each nation, dividing it by full US exports from that country, therefore halving the resulting amount and converting it into a portion.
For example, in 2024, the US imported approximately US$ 605.8 billion from the European Union, but exported only$ 370.2 billion, resulting in a trade deficit of$ 235.6 billion.
Dividing the deficit by total imports from the EU gives a ratio of 39 %. The White House interpreted this figure as the EU’s trade “advantage” and subsequently imposed a “discounted” 20 % tariff on EU products – roughly half of 39 %.
This same calculation led to a 34 % tariff on China, 26 % on India, 24 % on Japan and 25 % on South Korea. More export-dependent developing countries, including many in Southeast Asia, face some eye-wateringly high reciprocal tariffs.
Trade experts swiftly criticised the methodology behind the tariffs. James Surowiecki, a financial journalist, labelled it “extraordinary nonsense”.
Just figured out where these fake tariff rates come from. They didn’t actually calculate tariff rates non-tariff barriers, as they say they did. Instead, for every country, they just took our trade deficit with that country and divided it by the country’s exports to us.
So we … https ://t.co/PBjF8xmcuv
— James Surowiecki ( @JamesSurowiecki ) April 2, 2025
While the use of economic formulas in the corresponding US Trade Representative document might give it an appearance of being grounded in economic theory, it is detached from the rigours of trade economics.
The formula assumes every trade deficit is a result of other countries ‘ unfair trade practices, but that is simply not the case. To see why, we need to understand why Trump’s obsession with trade deficits is wrong.
A government isn’t a household
Why does Trump detest trade deficits? He appears to think of the national balance of trade like a business or household’s finances.
Under Trump’s logic, if more money is leaving the “account” than coming in, that’s bad business. A$ 200 million trade deficit would mean the US is “losing” – with money and jobs being siphoned away.
Trump argues other countries have been taking advantage of America by running up big trade surpluses and “hollowing out” US industry. He has long argued that America’s massive deficits indicate unfair trade deals, foreign protectionism, and even a threat to national security.
Few economists share Trump’s view
The trade gap is not money simply being drained overseas by allegedly rapacious foreigners. Rather, it represents the exchange of value.
American consumer behaviour is a significant driver of the US trade deficit. As a consumption powerhouse, the United States sees its residents and businesses spending vast sums on imported products ranging from iPhones and TVs to clothing and toys.
Many of these are actually produced by US companies but made overseas. Moreover, those US companies license foreign factories to produce these goods, and the intellectual property revenues earned make up a huge US surplus in services trade.
But services trade does not feature in the formula. This shows the singular obsession with tangible things, or goods trade. Yet, in most supply chains, it is the services components that yield the most value.
Back on the goods side, when the US economy is robust and people have disposable income, imports naturally increase. Ultimately, while trade deficits indicate economic dynamics, they are not inherently negative nor do they signify economic weakness.
Rather, they often reflect a nation’s economic structure and consumer preference for diverse global products. After all, Australia has run trade deficits for decades, including with the US, and is one of the wealthiest countries in the world.
The uninhabited Heard and McDonald Islands, home to a large population of penguins, were hit with tariffs in this week’s announcement. Image: VW Pics/Getty via The Conversation
The real reason for the deficit
The formula used to calculate the reciprocal tariffs is highly misleading. Responsible policy makers would take account of many other factors in their calculations.
Among other variables, the US Trade Representative formula fails to consider strong US consumer demand for imports. It also overlooks the US government’s gigantic fiscal deficit. This requires it to borrow money from overseas, pushing up the value of the US dollar. This strong dollar supports US purchases of imports.
In other words, the US runs large trade deficits not primarily because other nations have high trade barriers but largely because Americans need to fund their debts and want to buy lots of imported goods. The misleading formula places the blame entirely on an ill-conceived notion, and we are all going to pay the price.
