“Trump Tariff” Math — Deep Dive

by Aman Verjee

April 6, 2025

The recent tariff announcement from the Office of the United States has some math in it. It’s important to understand what this math means because the math is just a numerical expression of the current Administration’s policy desires.

So, how exactly were the tariffs that now apply to each country calculated?

The USTR formula divides a country’s trade surplus with the US by its total exports … and then, for the most part, multiplies the result by 50% to get the “Trump tariff.” (This math works on 71 out of 184 countries … more on the rest of the world later).

The exact formula is:

What does this all mean? Well, the left side of the equation is “the change in the tariff rate.” The numerator on the right side is “exports of goods minus imports of goods.” And the denominator is “Epsilon times phi * imports by the US.”

(I’ve ignored the “i” subscripts here, because thy simply index the countries and if we think about just one country at a time we can ignore them.)

We can also greatly simplify this formula The “epsilon” is “the elasticity of imports with respect to import price,” phi is “the passthrough from tariffs to import price,” according to the USTR. In order to calculate th tariff, the USTR set epsion to -4 and phi to 0.25, so if you multiply them together you just get -1 … in effect, they cancel each other out.

This leads us to the much simpler formula without the unnecessary Greek letters:

Where the tariff rate (tau) just equals a) “imports minus exports” (aka the trade deficit in goods) divided by b) imports.

(Notably, Trump’s people only used the trade deficit in goods. So even though we run a trade surplus in services with the world, those exports don’t count as far as Trump is concerned.)

All of this means that:

1. What the USTR calls “reciprocal tariffs,” (i.e. tariffs levied based on unfair tariff disparities and non-tariff barriers) are in fact tariffs based on a country’s trade surplus with the US;
2. The trade surplus with the US is calculated based on goods only … it’s not made clear why the formula focuses on goods (where the U.S. runs a $1.2T annual deficit) but omits services (where the U.S. runs an annual surplus of nearly $300B);
3. The formula applied the exact same math to all countries, whether they have hefty non-tariff trade barriers or wide open markets. It considers only the size of a trade deficit, not why the deficit exists.
4. The only way that the “Trump tariff” goes to zero is if WE ELIMINATE THE TRADE DEFICIT IN GOODS ENTIRELY.

Is this smart policy?

First, the perceived problem that the tariffs are trying to solve isn’t foreign trade barriers: it’s the existence of trade deficits. But are trade deficits really a problem? You could characterize trade between Mecico and the U.S. in the following way: (1) Mexican wages are lower than US wages, so Mexicans make cars and trucks that they sell to the US cheaply for dollars and (2) the Mexicans then invest those dollars in US financial assets. The U.S. is good at generating financial assets, Mexico is good at making low-cost automobiles, so we trade.

The result is that Americans get to buy lots of cheap vehicles, which get made where they are at the lowest cost. Our companies get lots of investment capital which makes our stocks and bonds go up, and U.S. companies put that money to use in R&D and into employing Americans. It‘;’s a win-win … comparative advantage, Adam Smith & David Ricardo, et al.

Trade deficits are neither unusual nor extraordinary: we’ve been running them for 53 years. They’re also not a “threat” — they happen whenever a country runs a “capital account surplus.” And THAT usually signifies a growing economy, one that requires a large influx of investment capital from around the world.

(The U.S. ran trade deficits for its first 100 years of existence, an ran trade surpluses during the Great Depression.)

So what’s the problem?

Second, the USTR makes the quite explicit assumption “that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing.” But does a trade deficit only happen because of unfair secret trade barriers? Every week, my family runs a trade deficit with McDonald’s. And that’s a result of rational economic choices that make us happier, not because Grimace and the Hamburglar are secretly tariffing me.

Which brings us to the math. What if the US runs a trade surplus with a foreign country? Did the U.S. refrain from tariffs (which would be logical given policy aims)? Well, no. For 113 countries our of 184 countries, the U.S. just applied a 10% tariff in violation of its own math. That means that we’re hitting allies like the U.K., Singapore, Argentina, Australia and most of the GCC with tariffs of 10% … can’t be “reciprocal” (because these countries have trade agreements with the US and don’t assess 10% tariffs on the US) and they don’t relate to a trade deficit (becaus we have surpluses).

Third, these executive orders are likely illegal. Because trade deficits are neither unusual nor extraordinary, this executive order is also illegal — it’s a violation of the International Emergency Economic Powers Act, enacted in 1977, because under that l the President may only act “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the President declares a national emergency with respect to such threat.” See 50 U.S. Code § 1701.

The IEEPA does not even mention tariffs. Under Art. 1, § 8 of the Constitution, Congress has sole authority to control tariffs, which it has done by passing detailed tariff statutes. The President cannot bypass those statutes by invoking “emergency” authority in another statute that does not mention tariffs.

The President’s attempt to invoke the IEEPA here invites application of the Supreme Court’s “major questions doctrine,” which tells courts not to discern policies of “vast economic and political significance” in a law without explicit congressional authorization.

If the IEEPA were held to permit this executive order, then the statute would run afoul of the nondelegation doctrine (which places strict limits on Congress’s authority to delegate power to federal agencies) because it lacks an “intelligible principle” to limit or guide the president’s discretion in imposing tariffs.

Fourth, it’s a violation of our own stated foreign policy. Because of the application of formula, we’re hitting some allies with higher tariffs than what we’re doing to international bad actors and rivals. For instance, we applied higher tariffs to the EU (20%) than we did to Venezuela (15%), Truleu (10%) or Afghanistan (10%). Israel, which agreed to drop off tariffs against the U.S. on April 1, faces a 17% tariff whereas its GCC rivals Qatar and Saudi Arabia are set at 10%.

Taiwan just got with with an even higher 32% tariff, while fighting to remain independent of an expansionist China and producing two-thirds of the world’s semiconductors.

So no, this isn’t smart.

It’s a bad policy, poorly executed.

Aman Verjee is the general partner and founder of Practical Venture Capital.