RECIPROCAL TARIFFS AND THE BIZZARE CALCULATION THAT WENT BEHIND IT

 On 2nd April 2025, a series of Reciprocal tariffs ,called it “Liberation Day” tariffs were unleashed.

A reciprocal tariff does exactly what it says it does. It reciprocates. As Donald Trump said “Whatever they tariff us, other countries, we will tariff them. That’s reciprocal, back and forth”. Tit for tat or an eye of an eye.

The idea was that almost every other country on this planet has “ripped off” the US for decades and the reciprocal tariffs were to retaliate against them. So on April 2nd, 2024, Trump unleashed this massive list of reciprocal tariffs for over 150 countries (almost the whole damn world). 

Now let's focus on the way the world has “been ripping off” the US. The claim is that other countries are charging the US a massive amount on tariffs. In fact, the list of reciprocal tariffs published by the White House also showcases the percentage of tariffs each country charges the US, except people found them very… questionable to say the least.

HOW THE HECK WERE THE TARIFFS CALCULATED

The United States Trade Representative published the calculation that went behind the finding out the percentage of tariffs charged by each country.

Now I know this looks complex with all those Greek symbols, formulas, and crazy terms but that is because it is complex. So let's break it down.

The Greek symbol ɛ represents “elasticity of imports with respect to import prices” or easier said how much the imported amount changes due to the price of the imported goods.

The other Greek symbol φ represents “passthrough from tariffs to import prices”. Basically how much does the price of the imported good increase due to tariffs.

∆τi shows the change in tariff rate.

Next, xi represents the total exports from country i meaning how much the US exports to country i. Similarly, mi represents total imports from country i meaning how much does the US import from country i.

Basically this whole thing says ɛ=4 and φ=0.25. So the calculation becomes

Based on this, are you thinking what I'm thinking? Because if you're thinking 'so they just used a bunch of fancy Greek letters to make it look like it was some genius formula?' then 1) yea we're thinking the same thing and 2) the answer to that question is yes. 

If that doesn’t make sense to you then don’t worry because you’re not the only one. In fact, Ken Lagone, founder of Home Depot and a major Republican donor told the Financial Times the president was being "poorly advised" saying "I dont understand the goddamn formula" (this actually cracked up up ngl)

The news organization CNN had economists Dr. Stan Veuger and Dr. Kevin Corinth on their show to discuss this calculation. The former said the value of φ=0.25 chosen by the USTR is wrong and that value should've been close to one. Basically, that would change the denominator to 4 x imports by the US. This means the value of the tariffs that each country appears to charge the US is 4 times more than it should be.

Which doesn’t make it any better either way. The latter, Dr. Kevin Corinth argues that it doesn’t make sense to say that the trade deficit only depends on tariffs and that a lot of other factors are being ignored.

THE 90-DAY PAUSE

On April 9th, 2025, the administration announced a '90-day pause’ on the reciprocal tariffs. This, by the way, does not include the 10% baseline tariff. And that pause also doesn’t apply to China. To sum it up, almost all countries face the baseline 10% tariff right now while there is a pause on the reciprocal tariffs since more than 75 countries have already reached out to discuss trade deals (Source: The white house website). The only exception is China which retaliated and hence is facing a 145% tariff from the US in total (125% reciprocal and 20% fentanyl tariff)

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WHAT ON EARTH IS A TARIFF AND WHY IS EVERYONE FREAKING OUT OVER IT?

                                        

Lately, even if you haven’t bothered to look at the news, you’d still hear one word people keep saying - Tariff. “Oh Trump tariffs” “Reciprocal tariffs” “China tariffs” and so on. Now, if you’re reading this I’m assuming you have absolutely ZERO clue what a tariff is so I’m going to start from the very basic (because why not)

Lets get straight to the point. A tariff is somewhat similar to an import tax. Basically, additional money that is charged for buying a good from another country.

Better explained through an example: Random country A has imposed a 25% tariff on country B. What this means is that if some company that produces phones for example, buys a part costing $100 from country B, it’d pay the $100 to country B and additional $25 to the govt of country A.

Some people tend to have this misconception that the country which exports pays additional money to the govt. But no, its actually the importing company pays the tariff to its own govt.

Now you might’ve heard that tariffs lead to increase in prices and if you’re wondering how, then lets continue with the previous example.

Due to the tariffs the company who imports the goods obviously has to pay more. It doesn’t matter who they’re paying to, at the end of the day they still have to spend more. Say , before the tariff, they spend $100 on getting the part, then some additional money for manufacturing so production cost $150 and then sold it for $200 ( clearly a very imaginary scenario). But after the tariffs were imposed they spend $125 on getting the part, then additional charges which leads to production cost being $175. Now if they sell it for $200 their profit is gonna decrease by $25, which might not seem like a lot but even if the company sells say 1000 phones then their pre-tariff era profit of $50,000 would go down to $25,000.

Okay so you might say ‘I don’t care. That phone is still $200 for me”. Well….I have bad news. Companies don’t want to loose profit (obviously) so they’ll charge you more too. In order to make up for the money spent on tariffs they’d charge the customers extra. All of a sudden that $200 phone costs $225

So yea, ultimately the price falls onto the consumers. And the example I gave is just an imaginary scenario. In reality, manufacturing a phone means multiple parts bought from multiple different countries and hence more tariffs.

Now that you have a basic idea of what a tariff is, let’s talk about why everyone is talking about it.

Even if you were living under a rock, you’d know that the new US President is Donald Trump. And less than 5 months since he took office, he has implemented at least half a dozen tariffs. Now the whole thing is sort of complicated because he implemented some then he paused them and then implemented more and....well its just complicated. He’d initiated “Reciprocal tariffs” for over 150 countries (a whole new thing that I would perhaps explain in a different post) that, in a matter of days, were paused for all countries except for China for whom it seems to increase on a daily basis. To make it simple, as of now, almost every single country is facing a baseline 10% tariff from the US. Except for China, who has a 145% percent tariff. Basically any good that comes from China would now be more than twice as expensive as it was before.

So why implement tariffs if the consumers ultimately suffer?

Well, the US president once said, quote “Tariffs is the most beautiful world to me in the dictionary”. He believes tariffs are absolutely necessary because “the world is ripping off the US”. Why? Because well, US has a trade deficit with most countries. Basically US imports more than they export. Trump believes its a bad thing and everything should be MADE IN AMERICA like "Stop buying from other countries. Stop giving them money". To sum it up, the approach is tariffs=more price=people buy US made goods=US doesn’t buy from other countries=No trade deficit.

And on paper, that seems like it would work. Except there are drawbacks.

1.Consumer prices

As mentioned before tariffs mean higher import cost which ultimately is passed on to the consumers leading to inflation.

2. Countries will retaliate

Other countries aren’t just gonna sit back and do nothing. Tariffs mean that their goods become expensive which lowers the demand and hence they make less profit. So in return, they’d hit back with their own tariffs too. As of now, China has already hit the US with 125% as retaliation to the 145% tariff the US set on China.

3. Disruptions in the supply chain

Supply chain basically means I’ll sell you a raw material and you’ll make a finished product out of it. Implementing tariffs mean additional cost on all the raw material. Take the automobile industry for example, basic stuff like gears, shafts etc they’re imported, each from a different country, which means tariffs on them.

And we’re already seeing the impact of this. In America protests have erupted across 50 states (yea the whole country), stock market has crashed and the current scenario is literally being called a TRADE WAR across the globe.

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