What’s the Deal with Trump’s Reciprocal Tariffs?
On April 2, 2025, Trump declared Liberation Day with a promise to Make America Wealthy Again and create a Golden Age. He blamed foreign leaders of stealing jobs, cheating, ransacking, scavenging, ripping off, treating American unfairly and tearing apart the American Dream. He announced that through his new tariff chart, Americans will start to pay taxes ranging from 10% to 49% on goods they get from nearly every country in the world.
Average Effective Tariff Rate in the US
Economists pointed out that the percentages attributed to other countries on his 8 page chart were not tariffs. They were trade deficits, which are caused by the fact that America is very rich and likes to buy lots of things from poorer countries. Analysis showed that Trump’s tariffs will increase the overall tax rate on imported goods from 2% to 22.5% and results in the largest tax hike on imported goods for American citizens since 1909.
So, what’s really going on?
Trump’s Misleading Tariff Formula
Following Trump’s global tariff announcement, the administration published a complicated formula they used to assess global tariffs charged to the US. The formula was quickly proven to be crude and misleading. The Trump formula has nothing to do with tariffs charged to the US, currency manipulation or trade barriers. Instead it is simply the calculation of each countries trade deficit divided by imports. A single high school student could have created the entire 8 page document that Trump showcased in about 3 hours of work.
Here’s the Trump Tariff Formula and its simplification thanks to a document produced by Axios:
Why Trump Didn’t Use World Trade Organization Figures
Trump could have used the readily available World Trade Organization (WTO) figures on tariffs, but they would not have complimented his misleading statements about being mistreated by all the countries around the globe. By making up his own formula based on trade deficits instead, Trump was able to create the false impression of extremely high tariff charges by most of the countries around the world.
The figures on the Trump Chart are vastly higher. For example:
- Trump says the European Union charges the US 39% in tariffs whereas the WTO says the EU charges 2.7%
- Trump says Switzerland charges the US 61% in tariffs whereas the WTO says Switzerland charges 1.7%
- Trump says Cambodia charges the US 97% in tariffs whereas the WTO says Cambodia charges 7.9%
According to the WTO, 22 countries on the Trump Chart have their tariff overstated by at least 50%.
Why did Trump Create Misleading Information
Trump is a very smart man. His approach to tariffs produces multiple benefits to him:
- The taxes charged to American citizens on imported goods go straight to the federal government where they can fund the corporate tax cut that he promised in his election campaign. The poorer people in America will fund a tax cut for the rich. He might also divert these new funds to his new Sovereign Wealth Fund where he can then spend the money without approval from Congress.
- Poorer countries will be forced to negotiate lower rates with him. If he agrees to lower his made-up rate of 97% for Cambodia to say 10%, he scores a win because tariffs right now for Cambodia are actually only 7.9%. This is like the powerful mafia boss visiting vulnerable businesses to collect protection fees in order to, heaven forbid, ensure that something bad doesn’t happen to their store.
- The flow of goods into the US will decrease, which will improve the US trade deficit. This is a major goal for Trump, however economists point out that trade deficits aren’t inherently bad. We all have a trade deficit with our grocery store, but we don’t ask them to start buying things from us in return. The US is one of the richest countries on earth, so you can expect them to buy more than they sell.
The Manufacturing Myth
Trump promotes tariffs as the way to bring back manufacturing to the US. Unfortunately it can take years to get a factory up and running. Companies need stability in order to invest safely and Trump’s approach to tariffs has been anything but stable. Companies will be reluctant to invest in US manufacturing, because tariff amounts keep changing frequently.
Another factor making it hard to bring manufacturing back to the US is that labor costs are too high there. The average salary in the US is 33 times what it is in Cambodia. Garment factories will never make a comeback in the US until workers accept a 97% pay cut. The alternate solution is to fully automate the manufacturing process in which case there would be almost no increase in jobs for the US.
Trump might succeed in bringing a few manufacturing plants back to the US though and he might buy favor from some companies in return for exemptions from tariffs. He can score big wins with his supporters this way.
The # 1 Reason Trump Loves Tariffs
The best benefit Trump gets from tariffs is that it secures his legacy with his supporters:
- He creates uncertainty around the numbers.
- He creates a common enemy for his supporters to focus on – the unfair treatment of the US by every other country.
- He insults other countries while claiming kindness as the domain of the US.
His supporters either believe without question or fear retaliation from the party he controls. Either way, Trumps tariff policy is a big win for him. His supporters will endure higher prices and declining investments all in the name of the promised Golden Age.
What’s Next
Uncertainty and chaos – that’s what Trump loves.
Higher prices for goods.
Reduced spending, layoffs, recession.
Escalating trade wars with strong countries.
Weaker countries begging for a better deal and offering concessions.
Volatile markets.
Countries seeking new trading arrangements that replace US goods.
The US becoming more isolated from the rest of the world.
The path to the Golden Age will be filled with surprises, but you can be sure that Trump will soon announce that he’s made the best trade deals ever with the rest of the world. Bring on the excitement!
Prophetically, Trump put a 90 pause on these tariffs, except for China on April 9, 2025, the day after this article was posted.
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