What was the logic behind the tariff rates announced by President Trump on 2 April 2025? Spoiler: it’s not logic. It’s algebra guided by an obsession with bilateral trade deficits.
This essay is based on the official explanation in an official document posted on the USTR web site: Reciprocal Tariff Calculations.
The document couldn’t be clearer about the goal of the tariffs:
Reciprocal tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the US and each of our trading partners.
It acknowledges that there are many types of foreign trade barriers but asserts that these can be quantified into tariff-rate equivalents.
This calculation assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing.
The document also shows that the fallacy of tariffs being able to close trade deficits is the foundation of the tariffs. (see Chapter 6 of my freely downloadable eBook, The Great Trade Hack, for detailed examination of the fallacy.)
Tariffs work through direct reductions of imports.
The key assumption
The document states that calculating the trade deficit effects of numerous tariffs, regulations, taxes, and other policies in each country is "complex, if not impossible". But then comes the masterstroke. Economists simply to clarify, as my father, Robert Baldwin, used to say. This next assumption is certainly a simplifier, but the only thing it clarifies is POTUS’s belief that trade deficits put a dollar measure on the extent to which America is being victimized by the world trade system.
If you really believe that foreign barriers are the sole cause of US bilateral deficits with its foreign trade partners, then you can use the size of the bilateral deficit to estimate that tariff it would trade to close it. Once the Trump administration economist embraced that (ridiculous) assumption, it was just a matter of simple comparative statics. Here they are.
Two things are not covered by the calculation.
- First, the US should provide import subsidies (negative tariffs) to nations that had bilateral deficits with the USA – since the goal was to drive all trade to bilateral balance.
Obviously, that was not then intent. That would admit that the US, by reciprocal logic, had been ripping off the countries with which it runs a surplus. Since that does not fit into the victimhood vibe of the Grievance Doctrine driving the 2 April tariffs, the deficit nations got 10%.
The 10% is not explained, but it does correspond to the campaign promises of the President.
The other thing that doesn’t come from the maths is the fact that all the implied tariffs were divided by two.
- Second, the tariffs calculated to balance bilateral trade are divided by two; no reason is given.
This is how the President explains that as a gesture of goodwill:
"We will calculate the combined rate of all their tariffs, nonmonetary barriers and other forms of cheating," and then, "we will charge them approximately half of what they are and have been charging us."
This is what he called a "discounted reciprocal tariff" strategy.
It is probably not a coincidence that this division by two landed the tariff at 57% for China when the 20% Fentanyl tariffs are included. Remember, he promised to put 60% tariffs on China while he was campaigning for office.
The plot that confirms the rule. If the tariff rates were actually generated from this formula, then the scatter plot of bilateral surpluses and tariff rates should be a straight line for partners with a surplus. The chart below confirms this.
