Trump Shocks Markets with Simplistic Tariff Formula, Breaking Reciprocity Promises

In a move that caught markets off guard, former President Donald Trump’s administration unveiled a new methodology for setting tariffs—one that relies on basic arithmetic and bilateral trade deficits rather than mirroring trade partners' tariff levels. This shift contradicts earlier pledges of tariff reciprocity and has left analysts scrambling to interpret the economic impact.

A Formula Rooted in Trade Deficits

According to a statement released Wednesday night (2) by the Office of the U.S. Trade Representative (USTR), the Trump administration calculated tariffs by dividing a country’s trade surplus with the U.S. by its total exports, based on data from the U.S. Census Bureau (2024). The resulting figure was then halved, producing what was termed the “discounted reciprocal tariff.”

For instance, China recorded a $295 billion trade surplus with the U.S. in 2024, with total exports amounting to $438 billion. The ratio (295/438) resulted in 68%, and under Trump’s formula, China was slapped with a 34% tariff. Similar calculations determined tariffs for other trade partners.

Unexpected Tariff Hikes for Surplus and Neutral Trade Partners

Surprisingly, even countries with which the U.S. enjoys a trade surplus were affected, facing a standard 10% tariff. This flat rate also applied to nations with balanced trade relationships, a move that confused economists and investors alike.

The USTR defended the approach, arguing that while it is technically possible to calculate tariffs based on actual trade barriers, Trump’s formula offers a more direct path to reducing trade deficits. “Although calculating the impact of thousands of tariffs, regulations, and fiscal policies individually is complex, if not impossible, their combined effects can be approximated by a tariff designed to eliminate bilateral trade deficits,” the statement read.

A Confusing Rollout Leaves Markets in Disarray

The rollout of the new tariffs was anything but smooth. Trump revealed the new rates during a ceremony in the White House Rose Garden, dramatically flipping over a chart showcasing the revised tariff levels. However, discrepancies quickly emerged. The tariff rates displayed on Trump’s chart differed from those listed in an annex of his executive order. South Korea, for example, was shown with a 25% tariff on the chart, but the annex listed 26%.

Adding to the confusion, the administration had initially promised that the methodology would account for not only tariffs but also non-tariff barriers, such as currency manipulation. The chart Trump presented bore the title: “Tariffs Charged Against the U.S., Including Currency Manipulation and Trade Barriers.” However, the formula ultimately used did not reflect this comprehensive approach.

Contradicting Earlier Directives

The abrupt shift in methodology contradicts an earlier memo from February 13, in which Trump directed officials to conduct a broad analysis of trade imbalances, considering tariffs, taxes, non-tariff barriers, currency manipulation, and other market access restrictions. Notably, the memo did not suggest using trade balance figures as the sole basis for tariff calculations, though it did link trade deficits to a lack of reciprocity in global trade.

Flawed Economic Assumptions?

Trump’s formula also incorporated two technical parameters—price elasticity of import demand and the elasticity of import prices relative to tariffs. However, these were both set in such a way that they effectively canceled each other out, resulting in a formula that, in practice, simply multiplied the trade surplus ratio by one.

What’s Next?

Markets are still digesting the implications of Trump’s new tariff strategy, with economists warning of potential retaliation from key trade partners. The policy, designed to address trade imbalances, may instead trigger higher costs for American consumers and businesses, raising concerns about inflation and global supply chain disruptions.

As the world watches how these tariffs unfold, one thing is certain: Trump’s unconventional approach to trade policy continues to defy expectations—often with unpredictable consequences.