How Should You Calculate a Reciprocal Tariff Anyway?
The critics have a point, but they also miss the point.
President Trump’s announcement last week of new “reciprocal” tariffs sent global markets into a frenzy and set off a chorus of condemnation from establishment economists. One former Treasury official wrote in the New York Times that the administration had “got it all wrong.” Another critique from the American Enterprise Institute bluntly declared that the formula “makes no economic sense.”
So, is the criticism fair? To some extent, yes.
The formula used by the Office of the U.S. Trade Representative (USTR) to calculate reciprocal tariffs is deceptively simple. It takes the U.S. trade deficit with a country, divides it by U.S. imports from that country, and then divides the result by two—with a floor of 10 percent.
So, if the U.S. imports $100 billion from Country X and exports $50 billion in return, the bilateral deficit is $50 billion. Divide that by $100 billion and then by two, and you get a 25 percent tariff. If there’s no trade deficit—or even a surplus—the country still gets a 10 percent tariff.
That’s the policy. But the justification for it—provided by USTR in a short methodological note—relies on some basic assumptions from international trade economics. One of those assumptions has drawn the most fire.
The USTR assumes that only 25 percent of the tariff is passed through to import prices. This means that when the U.S. slaps a 20 percent tariff on a good, the price at the border only rises by five percent. The rest is supposedly absorbed by the foreign exporter or the supply chain.
But Brent Neiman, a University of Chicago economist and former Biden administration Treasury official, says this completely misreads the research. “Alberto Cavallo, Gita Gopinath, Jenny Tang and I studied the tariffs placed on Chinese exports in 2018 and 2019,” he wrote in the New York Times. “We found that tariffs of, say, 20 percent caused domestic importers to pay nearly 19 percent more. This represents a pass-through into import prices of about 95 percent.”
Indeed, in the academic paper Neiman co-authored, the researchers concluded: “A 20 percent tariff… would be associated with a 1.1 percent decline in the ex-tariff price and an 18.9 percent increase in the total price paid by the US importer.” The authors further note: “The price incidence of the import tariffs falls largely on the United States.”
The AEI critique, co-authored by Kevin Corinth and Stan Veuger, reinforces this point:
“The elasticity of import prices with respect to tariffs should be about one (actually 0.945), not 0.25… Correcting the Trump Administration’s error would reduce the tariffs assumed to be applied by each country to the United States to about a fourth of their stated level.”
That’s the fair criticism. The tariff rates were inflated due to a misapplied elasticity. And the White House has not clearly defended its numbers. The methodology note is short, vague, and doesn’t explain the choice of elasticity values.
It’s important to note, however, that prior to the Liberation Day announcement of the new tariffs, one of the big criticisms of the idea of tariff reciprocity was that it was impossibly complex. There are millions of different tariff rates charged across the globe—and even more non-tariff barriers. Just collecting all of these is a Herculean task and putting a final number on a single reciprocal tariff rate for each country may not be possible.
So, what the administration appears to have done is to cut through the clutter by making the trade deficit the focus of the tariffs. Instead of addressing trade deficits indirectly by wading through the calculations chaos of computing values for non-tariff barriers and adding those to millions of tariffs, the Trump administration decided to use bilateral trade deficits as a proxy for trade barriers. That might not be intellectually satisfying, but even the critics have not proposed a more sophisticated approach.
We should also note that the focus on import prices might be a mistake in itself—though in the opposite direction from the critics’ argument. The reciprocal tariff formula assumes that raising prices at the border reduces import volumes. But in reality, if U.S. retailers or importers absorb those price increases instead of passing them on to consumers, import volumes may not fall much at all. In that case, a tariff based on border prices might actually be too low to shrink the trade deficit.
Tariffs Are a Starting Point for Negotiations, Not the End
But here’s what the critics are missing: this isn’t really about mathematical precision—it’s about strategic leverage.
These tariffs are not an academic exercise. They’re a negotiating tool. The policy is designed to tell the world: if you want access to the U.S. market, you’ll need to give us access to yours. If the tariff rates are a little high, that may not be a bug—it may be a feature.
As Oren Cass recently wrote in a New York Times op-ed, “Liberation Day” is not the end of the fight—it’s the beginning:
“Last week’s ‘Liberation Day’ marked a kind of D-Day in the effort to reorder the international economic system… With the tariffs, too, success or failure depends on what happens next, and the nation will have to bear real costs while the outcome hangs in the balance.”
Cass adds that the 10 percent global tariff, which has already taken effect, is “the right starting point” and should be made permanent by Congress. This isn’t just a temporary shock—it’s the foundation of a more resilient economic system that funds the U.S. government, reindustrializes the country, and reasserts American sovereignty over trade.
He also makes a critical point that ought to be echoed in every discussion about the so-called “reciprocal” tariffs: “Few expected these tariffs would be set so high… These appear to be temporary in nature, intended as leverage to make other countries adopt policies that promote balanced trade.”
Exactly right. These country-specific tariffs are not ends in themselves. They’re pressure designed to push allies and rivals alike to the negotiating table.
And it appears to be working. Speaking with Larry Kudlow on Fox Business, Treasury Secretary Scott Bessent said: “There are 50, 60, maybe almost 70 countries now who have approached us about negotiating.”
He credited the clear structure of the reciprocal tariff plan with giving foreign governments a reason to engage seriously: “What [President Trump] has done is we outlined the tariffs on April 2 and then gave countries several days to think about it.”
This is the point. The reciprocal tariffs are doing what they were meant to do: putting leverage on the table, shaking foreign complacency, and opening the door to new trade arrangements that better serve American workers and producers.
Critics can quibble over elasticities and import price formulas. But the reality is that the old trade regime produced trillion-dollar annual deficits, widespread industrial decline, and one-sided deals. Trump’s tariffs are not a return to some demonized protectionism of the past—they’re a reset. And it’s already changing the game.
The tariffs may not be perfect. The math may be off. But the strategy is working.
And for the first time in decades, we’re pushing the terms of global trade in ways that will benefit American workers.
