President Trump’s Liberation Day tariff formula makes no economic sense and includes some basic mathematical errors that means the tariff rates are four times higher than they should be, according to several economic experts.

“President Trump described the tariffs as reciprocal, equal to half of the rate of tariffs and non-tariff trade barriers imposed by other countries. However, they are nothing of the sort,” Kevin Corinth and Stan Veuger of AEIdea said in a note on April 4. “The formula for the tariffs, originally credited to the Council of Economic Advisers and published by the Office of the United States Trade Representative, does not make economic sense.’

The fundamental mistake was to confuse America’s trade deficit with a given country and trade barriers, which also involve international capital flows, supply chains, comparative advantage, geography, etc.

Moreover, there is nothing “reciprocal” about the trade tariffs, as while many countries like the EU do have trade tariffs on the import of US goods, these are mostly in the low single digits. All the White House has done is take the size of the US trade deficit with each country as a share of total trade turnover, divided that by two (for no explicable reason) and use the result as the “tariff” rate.

“Despite the president’s rhetoric about “reciprocity,” the White House’s numbers immediately didn’t add up. While the US and EU don’t have a free trade agreement, there is no way the average tariff rate the EU charges the US is 39%. And for South Korea, whom we do have a free trade agreement with, Trump’s chart claimed they are charging us a 50% tariff rate,” Cato Institute concurred in a separate note by Jeremy Horpedahl and Phillip W. Magness: “Trump’s tariffs aren’t reciprocal and are a massive tax increase on Americans.”

In fact, many of the countries that Trump singled out for “reciprocal” tariffs score above the United States on conventional measures of trade freedom.

“The USTR formula appears to be little more than economic alchemy,” the Cato analysts continued. “Its purported calculation consists of little more than the amateur arithmetic described above, albeit with the component data points represented in Greek letters to give it the appearance of scientific sophistication,” Cato said adding that the regime is “not based on any modern economic thinking whatsoever.”

Another fatal flaw in the regime is it has judged all countries on the grossly simplistic basis of their bilateral trade relationship with the US.

“Trump and his team have fallen prey to one of the most basic economic fallacies: that a trade deficit is bad,” Cato says. “But there is no reason to assume that all trade will balance.”

Numerous analysts have pointed out a deficit in bilateral trade is not necessarily a problem and a necessity in many cases. 

“The tariff plan displays a basic misunderstanding of the reasons why nations trade in the first place – reasons that imply the United States will run deficits with some trade partners (bilateral deficits) and surpluses with others (bilateral surpluses). The reasons reflect the operation of comparative advantage,” Maurice Obstfeld, said in a note for Peterson Institute for International Economics (PIIE), referring to the economic principle that countries should concentrate on making the things they are best at making. "Trade barriers certainly can influence bilateral trade balances, but to think that every persistent bilateral balance is due to trade barriers misunderstands the basic reason why countries trade... Trying to squash every bilateral balance to zero through brute-force tariffs is to levy taxes on international trade exactly where it provides the most benefits to Americans. Yet this is what Trump's tariff numbers are designed to do."

Ecuador can grow bananas that the US wants but doesn’t have the money to buy many US goods so there is a persistent deficit. However, that ensures a constant supply of cheap and high quality bananas the US cannot otherwise produce itself. Russia can produce aluminium cheaper than the US, but the US can use that to make aeroplanes it can export. These complicated chains need to be taken into account but have been ignored by Trump’s team.

"Since the overall trade deficit is the sum of US surpluses and deficits with all trade partners, the administration's attempt to eliminate all bilateral deficits is doomed to failure. At best, it will be able to shuffle them around, in a game of whack-a-mole where a smaller deficit with one country is matched by higher bilateral deficits with others. In the process, however, the efficiency gains from international trade are sharply curtailed.," says Obstfeld.

Maths mistakes set tariffs four times too high

But maybe the most egregious mistake in the formula has meant that tariffs assigned by the Trump team are four times higher than they should be, according to the little economic research they did bother to consult, according to AEIdeas.

Though in effect the formula for the tariff placed on the United States by another country is equal to the trade deficit divided by imports, the formula published by the Office of the US Trade Representative has two additional terms in the denominator that just so happen to cancel out: (1) the elasticity of import demand with respect to import prices, ε, and (2) the elasticity of import prices with respect to tariffs, φ.

The idea is that as tariffs rise, the change in the trade deficit will depend on the responsiveness of import demand to tariffs, which depends on how import demand responds to import prices and how import prices respond to tariffs.

“The Trump administration assumes an elasticity of import demand with respect to import prices of four, and an elasticity of import prices with respect to tariffs of 0.25, the product of which is one and is the reason they cancel out in the administration’s formula,” AEIdeas explains.

“However, the elasticity of import prices with respect to tariffs should be about one (actually 0.945), not 0.25 as the Trump Administration states. Their mistake is that they base the elasticity on the response of retail prices to tariffs, as opposed to import prices, as they should have done,” says AEIdeas.

Cato concurs: the USTR’s formula comes from its underlying parameters, which assume that the “elasticity of import prices with respect to tariffs, φ, is 0.25.” The White House justify this number by citing a 2021 paper in the journal American Economic Review: Insights, yet appear to have misread both its parameters and its main finding, namely that “so far, the tariffs’ incidence” from Trump’s previous term in 2018 “has fallen in large part on US firms,” the Cato analysts explain.

“The White House’s ‘reciprocity’ calculation has no basis in mainstream economic analysis. Instead, it seems to have been improvised on the fly as a rationalisation for Trump’s pre-existing intention of levying heavy tariffs on almost all of our trading partners,” says Cato.

Correcting just the obvious error concerning price elasticity would reduce the tariffs assumed to be applied by each country by a quarter of their published level, and as a result, almost all the tariffs in the regime would fall to the minimum 10% set up Trump.

Who is to blame?

It’s unclear who is responsible for devising this formula that would earn any high school student an “F” in his midterm economics’ test.

The White House statement credits it to the Council of Economic Advisers; however, online chatter has suggested it may have partly come from Chat GPT, which appears to have been used to produce the formula. Oren Cass, a protectionist tariff activist at American Compass, appeared to claim responsibility  in a thread on X. Others have pointed to Trump-loyalist and long-time tariff advocate Peter Navarro as the originator of the tariff policies.

Navarro has been especially vocal in the support of tariffs and is a Trump advisor. In comments over the weekend, he said tariffs should stay on “forever,” arguing that if there is room for negotiation or the possibility that they will be lifted then companies will not invest in new production in the US.

Navarro has come in for ridicule, as he has based most of his arguments supporting his hardline tariff policies on the “academic research” of so-called expert Ron Vara. However, as Rachel Maddow of MSNBC reports, Ron Vara doesn’t exist and is simply an anagram of Navarro’s name.

These tariff increases are likely to be some of the biggest tax increases in US history and will result (if fully implemented) in some of the highest tariff rates the US has ever seen since the notorious Smoot-Hawley tariff of 1930, which fuelled the Great Depression. 

“Like all tariffs, some large portion of these new levies will be paid by US consumers and businesses in the form of higher prices. Trump’s stated goal is to help American workers, but it will do the opposite,” the Cato analysts said. “And it won’t lead to an American manufacturing renaissance, as the US is still producing, by most measures, near-record amounts of manufactured goods. We just don’t need as many workers to produce that output, thanks to massive efficiency gains (a big part of why we are so rich today).”

President Trump’s Tariffs Announced April 2, 2025, actual and with corrected formula
Country	(Announced) Tariff	(Corrected) Tariff
Lesotho	50%	13.20%
Cambodia	49%	13.00%
Laos	48%	12.70%
Madagascar	47%	12.40%
Vietnam	46%	12.20%
Myanmar (Burma)	44%	11.60%
Sri Lanka	44%	11.60%
Falkland Islands	41%	10.80%
Syria	41%	10.80%
Mauritius	40%	10.60%
Iraq	39%	10.30%
Guyana	38%	10.10%
Bangladesh	37%	10.00%
Botswana	37%	10.00%
Liechtenstein	37%	10.00%
Serbia	37%	10.00%
Thailand	36%	10.00%
Bosnia and Herzegovina	35%	10.00%
China	34%	10.00%
North Macedonia	33%	10.00%
Angola	32%	10.00%
Fiji	32%	10.00%
Indonesia	32%	10.00%
Taiwan	32%	10.00%
Libya	31%	10.00%
Moldova	31%	10.00%
Switzerland	31%	10.00%
Algeria	30%	10.00%
Nauru	30%	10.00%
South Africa	30%	10.00%
Pakistan	29%	10.00%
Tunisia	28%	10.00%
Kazakhstan	27%	10.00%
India	26%	10.00%
South Korea	25%	10.00%
Brunei	24%	10.00%
Japan	24%	10.00%
Malaysia	24%	10.00%
Vanuatu	22%	10.00%
Cote d’Ivoire	21%	10.00%
Namibia	21%	10.00%
European Union	20%	10.00%
Jordan	20%	10.00%
Nicaragua	18%	10.00%
Zimbabwe	18%	10.00%
Israel	17%	10.00%
Malawi	17%	10.00%
Philippines	17%	10.00%
Zambia	17%	10.00%
Mozambique	16%	10.00%
Norway	15%	10.00%
Venezuela	15%	10.00%
Nigeria	14%	10.00%
Chad	13%	10.00%
Equatorial Guinea	13%	10.00%
Cameroon	11%	10.00%
Democratic Republic of the Congo	11%	10.00%
Source: Annex I, https://www.whitehouse.gov/presidential-actions/2025/04/regulating-imports-with-a-reciprocal-tariff-to-rectify-trade-practices-that-contribute-to-large-and-persistent-annual-united-states-goods-trade-deficits/. Note: Countries with an announced tariff of 10% are not included in the table. Their tariffs would not change.

 

Selected Trump’s “reciprocal” tariffs vs actual tariffs
Country	US "reciprocal" tariff	Average actual tariff imposed on US goods
China	34%	Approx.7%
European Union	20%	Approx.3%
Japan	24%	Approx.2%
India	26%	Approx.13%
South Korea	25%	Approx.5%
Canada	25%*	Approx.0.8%
Mexico	25%*	Approx.0.7%
Source: bne IntelliNews