While US President Donald Trump insists that his tariff war is based on a country-by-country logic, the way the administration applies the formula behind his so-called “reciprocal” tariffs is raising eyebrows — not only among economists, but even among his own supporters.
The Trump administration has temporarily paused its new round of tariffs it wants to impose on various countries, including the 31% tariffs on SA, but not before revealing its questionable method for calculating it.
“The formula being used to calculate the tariffs is bogus and is throwing up false numbers,” said Dr Kenneth Creamer, economist and lecturer from Wits University.
He is among a long list of experts criticising the Trump’s administration’s trade calculations.
Republican megadonor and Home Depot cofounder Ken Langone recently told the Financial Times the US president was being “poorly advised”, and that the 46% tariff on Vietnam was “bullsh*t”.
“This formula does not set US ‘reciprocal’ tariffs based on the tariffs that another country imposes on US goods, but rather sets tariffs based on the trade patterns — the level of imports and exports — between the two countries,” Creamer explained, adding that the formula ignores “well-established economic trade theory”.
Apart from their questionable theory, the calculation gets the denominator — the value of imports to the US — badly wrong, he said.
In the formula, the top part (the numerator) shows the trade balance between the US and another country. If the US sells less to that country (exports, shown as x) than it buys from them (imports, shown as m), it’s running a trade deficit — meaning the US is spending more on that country’s goods than it’s earning from selling its own.
The bottom part (the denominator) is meant to show how sensitive that trade is to changes in price. It starts with how much the US imports from that country (m), then adjusts for how people react when prices go up — which economists call elasticity (ε) — and how much of the tariff increase actually shows up in prices — called pass-through (φ).
Here’s where it gets strange: the formula assumes that for every 1% increase in price, demand drops by 4% (that’s elasticity = — 4), and that only a quarter of the tariff is reflected in prices (φ = 0.25). Multiply those together and you always get minus 1 — a fixed value that oversimplifies how trade really works.
The real mischief is that according to the literature quoted by economists, such as Dr Stan Veuger of the conservative think-tank the American Enterprise Institute, it is more likely that the pass-through rate from tariffs to import prices is closer to 1, that is, φ should be set in the formula as being 1 and not 0.25.
If φ is set to be 1, the denominator would be calculated as -4 x 1 x m, instead of as -4 x 0.25 x m. This correction would result in a denominator that is 4 times greater than in the current formula.
As a result, each of the tariffs that the US is proposing to impose on most countries would be set four times lower.
“If the numbers were handled correctly then the proposed tariff on Lesotho would have been around 12.5%, not 50%, on Vietnam 11.5%, not 46%, and on SA 7.5%, not 30%,” Creamer said.
He noted the flaws don’t stop at arithmetic, explaining that the formula “only focuses on trade in goods and generally excludes trade in services”.
“When trade in both goods and services is taken into account, there are likely to be instances where the US is exporting more to a country than it is importing from that country,” he said.
“But because the ‘reciprocal’ tariff formula doesn’t include services, it ends up raising tariffs on countries that actually buy more from the US than they sell to it.
“Many firms and many jobs around the world are linked to international trade flows. The US trade shock is putting much of this at risk,” he said.
Veuger told CNN on April 8 — the day before the latest tariffs were announced — that he and others had made cabinet minister and presidential adviser Peter Navarro, Stephen Miran (chair of the White House council of economic advisers), and treasury secretary Scott Bessent aware of these maths errors.
“They have not disagreed with us on the substance,” Veuger said, adding that they, in fact, distanced themselves from the formula, blaming “other people in the administration”.
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