Trump's Tariff Formula Makes No Economic Sense. It's Also Based on an Error
169 comments
·April 5, 2025greaber
Eddy_Viscosity2
Yes. It also only looks at physical goods and not account for services.
It's utter incompetence and laziness. But when you vote in lazy incompetence, then that's what you get.
kristopolous
I wonder if he and his friends opened a bunch of options the morning of and are now collecting their winnings...
he does have a bunch of crypto pump and dumpers as advisors.
adamredwoods
Reddit's r/QuiverQuantitative. follows trades and puts by members of congress. MJ Greene bought stock in Dollar General.
lostlogin
I’m not in the US, what could this mean?
unsnap_biceps
Dollar stores are the stores that sell the absolute cheapest versions of products. Usually low to very low quality, but when you're tight on money, it's where you go. If we enter a recession or depression, those type of cheap stores are going to get a lot more shoppers as folks try to tighten their belts.
nxobject
The running joke is that American legislators make "surprisingly" good stock trades for "reasons." Regardless or not of whether these picks actually tend to be good long term investments, it really, really rankles to know that a legislator expects poverty to come, is banking on that, but is otherwise not telling diddly squat to her constituents.
https://www.morningstar.com/funds/2-etfs-that-track-congress...
vkou
It's a store chain that will soon be rebranded 'Ten Dollar General'.
tombert
I would think that it would be put options wouldn't it? Aren't puts the ones where you want the stock to go down?
kristopolous
they have terrible names. I can never remember. A put option I think gives me the right to sell you a stock at a price.
So say, ACME is trading at 110. I can buy the right to sell you ACME at 100. You say ok because it's at 110.
But then ACME crashes to 50.
I buy it at 50 and you are on the hook to buy it from me at 100.
bryanrasmussen
You're thinking of Puts and Put-ins. However it would be funny if they did calls.
jayd16
Not only that, but I assume they'll take more bites of the apple as they go down the list country by country and negotiate better rates for some kind of kickback and market manipulation opportunity.
kristopolous
it's kinda strange that the largest tariff is in a landlocked country a 5 hour drive from elon musk's hometown.
All the numbers on what a country is supposedly charging america appear to be a complete fabrication so we're forced to find other motivation for setting the numbers the way they did.
razemio
Not sure if I understand you correctly. I just watched a Youtube video explaining the formular. The Youtube user checked all 160+ countries. All have been calculated with the formular. So there seems to be no Motivation in this sense. All have received the same broken treatment.
adharmad
Or short sell one day before the tarriff announcements.
imadierich
[dead]
seydor
I believe the idea was "Very High Tarrifs" and the formula was some kid in MS Excel . They are definitely not reciprocal. They don't need to be, since the plan was to use the high tarrifs as negotiating tool to somehow reduce the US national debt
nxobject
I'd put my chips on the formula being $(LLM_OF_CHOICE), given the lack of attention paid to details like, say, uninhabited islands near the Antarctic.
https://arstechnica.com/tech-policy/2025/04/critics-suspect-...
iJohnDoe
I think this is really interesting and would be fun to find out what really happened.
https://www.theguardian.com/australia-news/2025/apr/04/revea...
I have three theories, based this article.
1. The administration used an LLM on certain data and it incorrectly conflated the countries.
2. Certain companies listed regions of export to avoid customs, duties, or for other reasons and it now indirectly got exposed. The article alludes to this without saying so?
3. The administration listed what seemed like inconsequential regions for the purpose of preventing Australia, for this example, of just saying it was exported from Norfolk Islands to dodge tariffs. Although, this is giving the administration way too much credit and if they are reading this don’t steal this as reason. :-)
ttyprintk
Lesotho, a small mountain within South Africa punished with a sudden 50% tariff, disproves #3 is evidence of an intelligent carve out.
Izkata
Article links here which explains how they did it, with reasoning and references: https://ustr.gov/issue-areas/reciprocal-tariff-calculations
seydor
Yea that's even more ridiculous. Epsilon*phi equals to 1 because i guess that's the best mathiness they could do.
watwut
I think that is just sane washing. Original idea was that tariffs are good and America is being ripped off whenever it buy stuff. The rest are mutually exclusive rationalizations by Trump loyalists trying to make it sound reasonable.
There are multiple of these explanations and none od them is consistent with actual decisions.
ttyprintk
I believe the forensic credit should go to James Surowecki:
https://xcancel.com/JamesSurowiecki/status/19075591892341969...
cute_boi
i don't think Trump cares about US national debt.
ttyprintk
Numerous times, he conflates debt and budget deficit. He has even confused the direction his budget goes in. These terms are just backdrops for the things he wants to talk about: immigration, lack of loyalty to whites from other races, etc.
qwertox
By the time companies decide to open factories in the US, these factories will be run with Chinese robots by companies which wouldn't care about a 500% tariff on Chinese robots if they are still cheaper than the work of an American worker.
__MatrixMan__
It makes plenty of sense if you consider that it wasn't designed to benefit the US, but rather to drive US trade to our competitors.
tombert
Considering how open they've been about their clear conflicts of interest (Trump launching a cryptocurrency on day 1 of his presidency, being in charge of a publicly traded company that he's made no effort to remove himself from, and the Diablo cheater being in charge of a department that gets to determine "efficiency" while also bidding on government contracts), I think we should really consider the possibility that Trump and Musk shorted or bought Puts on companies that would be hit especially hard by tariffs.
I debated doing that. I wish I had, I would have made a bit of money in the last few days.
mandeepj
> I debated doing that. I wish I had, I would have made a bit of money in the last few days.
The details weren't public. You can stop feeling being bad about yourself.
tombert
Well, he announced when “liberation day” was going to happen. I debated buying one that expired on Friday.
jayd16
Too bad oversight is "inefficient"
DarknessFalls
Plan for the tariffs to reverse course once enough political pressure mounts. Calls for say, three months out.
wraaath
calls for 3 months out only make sense once the stock price is decimated, and there's no certainty that prices will recover given the bumbling antics of this administration.
__MatrixMan__
Would the tariffs make more sense if this were true?
I mean, I don't doubt that it's true, but it seems more like an opportunity to make some money on the side than a reason to do it in the first place.
user1241320
Funny he put like Martinique which is a territory governed by France
dragonwriter
It is even worse than that as Martinique is a “territory governed by France” in much the same way that Hawai’i is a territory governed by the USA.
Martinique is a region and department of France—and administrative subdivision of the same type as those in the French mainland, differing only in that the the top two levels of subdivision (region and department) are coextensive rather than nested in Martinique and the other overseas region/departments.
user1241320
Potentially France could have all imports from US pass by Martinique and they’d save a lot of money
throw0101d
> Potentially France could have all imports from US pass by Martinique and they’d save a lot of money
The EU shares a border with the UK (island of Ireland) and the UK also has lower rates: just drive a truck over the border.
qwertox
And offer a loophole to any European company.
throw0101d
> Funny he put like Martinique which is a territory governed by France
More 'funny': Diego Garcia (officially British Indian Ocean Territory).
An island in the Indian Ocean whose only inhabitants are UK and US military personnel.
* https://en.wikipedia.org/wiki/Diego_Garcia
* https://www.cnbc.com/2025/04/03/5-bizarre-locations-hit-by-t...
It might actually be ha-ha funny if this wasn't creating havoc on international commerce and people's lives.
overdrive110
First I thought it could make sense considering the territories have some differences in taxes on imports. But in that case, why is Åland missing then?
ornornor
Because they couldn’t figure out how to type « Å » on the murrican keyboard.
klooney
I feel bad for Lesotho- 50% is tough.
walkingthisquai
Well you've got to get those diamond manufacturing jobs back to the US somehow
usrusr
Unfortunately, now that some people appear to think that annexations are something to be considered, this joke has a very unexpected element of not funny.
oblio
Lesotho is a landlocked enclave. The US would have to chew through South Africa, first.
Also, would MAGA want a new US state from Africa?
baxtr
Askshually… I thought it was possible nowadays to manufacture diamonds?!
thih9
Does anyone here know what is the impact of this for Lesotho in practice?
I found an article[1] but perhaps someone here knows more or is there in person.
> Lesotho exported $237m of goods last year to the US and imported $2.8m. Agoa[2], which has allowed tariff-free access to the US market for thousands of product types since 2000, created a thriving garment industry, accounting for about 20% of GDP.
> There are about 30,000 garment workers in Lesotho, mostly women, with 12,000 making clothes for US brands including Levi’s, Calvin Klein and Walmart in Chinese- and Taiwanese-owned factories.
> “(…) If we lose our jobs here, I’m almost certain that many of us will end up sleeping on empty stomachs.”
[1]: https://www.theguardian.com/global-development/2025/apr/04/l...
[2]: https://en.wikipedia.org/wiki/African_Growth_and_Opportunity...
colechristensen
I want the people who work to make the things I use to earn more than $150 per month.
A sane tariff policy would be set up to penalize these very low wage exporters to give competitive advantage to exporters and local producers with higher wages but also to incentivize higher wages in a way that set rates make producers more profitable if they paid workers more (and likewise other human development and environmental etc issues)
Hojojo
What you're advocating for is these 30.000 people to lose their jobs, not earn anything and starve.
How does that help them? Oh, right. You don't care about them, actually. You just have this vague ideal that people should earn more money. Maybe not even that. You just want tariffs for some inexplicable reason. Because tariffs cannot give these people higher salaries. That's not how any of this works.
GIFtheory
I don’t see how tariffs magically create wealth for foreign exporters that translates into higher wages. Let’s say I can buy a $10 shirt from Lesotho with zero tariff. Now a 50% tariff gets imposed. I can either eat the tariff and pay $15, in which case Lesotho still gets their $10, or Lesotho can eat the tariff to keep their exports competitive, in which case Lesotho now makes $5.
The part about giving a competitive advantage to local producers is true, though…
rocqua
This makes sense. I think even MAGA might agree if you pitch it as "we use tarrifs to prevent American labor from being undercut.
But it is clear that the reasoning here is "I want tarrifs, how do I easily get them". And then they found the easiest possible way to say something about 'countries putting a tarrif on the US'.
The stupid theory behind this is effectively: not having a minimum wage is equivalent to putting a tarrif on the US. Which would suggest that the low US minimum wage is actually already a tarrif on the EU.
pj_mukh
"incentivize higher wages in a way that set rates make producers more profitable if they paid workers more"
That sounds amazing..how would that work?
readthenotes1
Well, this gets closer. There used to be a garment industry in the USA...
tdb7893
Yeah, it sucks and I bet these countries won't forget this for a very long time.
theGeatZhopa
make lesotho great again!
fblp
I don't quite understand the error this article is pointing out and how it could lead to a four fold inaccuracy. Can someone try explain with an example?
roenxi
They used a 0.25 constant in a formula and the article is arguing they should have used 0.945 instead (difference of ~4x). The constant the Trump administration used seems to have been the one for estimated effect of tariffs on retail prices (ie, consumer facing) and it was more appropriate to use the one for the effect on prices at the border.
I assume that is similar to me being a computer company importing chips, a 25% tariff on microprocessors will make the imported cost of microprocessors go up by ~24% (because some really expensive ones don't get bought) but it would increase the price of the computers I build by ~5% because most of the computer isn't a microprocessor.
It is an exciting time to learn about the country of Lesotho.
adamredwoods
My understanding is they are saying the elasticity of the price (what can be absorbed by tariff increase) comes from the transaction in the retail market it ultimately sells to, yet the "equation" was using elasticity of the import costs.
In other words, Trump's equation thinks that import price will absorb (elasticity) the tariff's impact, but that's not true. It's passed on almost entirely (the 0.945 number, so 0.055 may be absorbed).
So it's using wrong numbers to justify the effective tariffs. IMO, I don't think Trump cares. I think the equation was a "straw-man".
whatever1
The funny part is that China yesterday imposed a 34% tariff on US imports.
The “reciprocal” formula does not even consider this. China can impose a 1000% tariff and the formula will not move :facepalm:
croes
> if the US imports $100 million worth of goods and services while exporting $50 million to a country, then the Trump Administration alleges that country levies a 50 percent tariff on the United States
The Trump Administration ignores the services and only looks at goods. So the base is already wrong.
rusk
They’re also rolling up local taxes like VAT as Tariffs it seems
maeil
Wonder why this has been flagged.
walterbell
> The formula for the tariffs, originally credited to the Council of Economic Advisers and published by the Office of the United States Trade Representative, does not make economic sense.
There is a 2024 paper (40 pages) by Stephen Miran, chair of the Council of Economic Advisers, https://news.ycombinator.com/item?id=43589350
The root of the economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international trade, and this overvaluation is driven by inelastic demand for reserve assets. As global GDP grows, it becomes increasingly burdensome for the United States to finance the provision of reserve assets and the defense umbrella, as the manufacturing and tradeable sectors bear the brunt of the costs... Tariffs provide revenue, and if offset by currency adjustments, present minimal inflationary or otherwise adverse side effects.
> Miran.. points to Trump’s application of tariffs on China in 2018-2019, which he argues “passed with little discernible macroeconomic consequence.” He adds that during that time the U.S. dollar rose to offset the macroeconomic impact of the tariffs and resulted in significant revenue for the U.S. Treasury.. “The effective tariff rate on Chinese imports increased by 17.9 percentage points from the start of the trade war in 2018 to the maximum tariff rate in 2019,” the report said. “As the financial markets digested the news, the Chinese renminbi depreciated against the dollar over this period by 13.7 per cent, so that the after-tariff USD import price rose by 4.1 per cent.”
nprateem
This is the most important doc to read. I'm surprised even the FT don't mention it (although commenters do).
Next step is currency devaluation. Think I'm going to sell all my US stocks despite the recent battering as they're likely to fall further.
Doesn't this formula also punish circular trade patterns in a strange way, like if the US imports $X of good from country B and country B imports $X of goods from country C and country C imports $X of goods from the US, and there are no flows in the opposite direction, then the US would impose an infinite tariff on country B since US imports from B are zero?