Trump "completely miscalculated" the reciprocal tariffs! AEI scholars reveal: the tax rate is inflated by 4 times, key parameters are misunderstood.

The American Enterprise Institute (AEI) pointed out that there were major errors in the reciprocal tariff calculation formula used by the Trump administration, resulting in the actual tax rate being overestimated by four times. Scholars have criticized that the algorithm has no basis in economic theory and any trade law. (Synopsis: Betrayal of Trump, 7 Republican lawmakers defected to support the tariff limitation bill, lawyers are ready to take Trump to court) (Background supplement: Trump threatens China: If the 34% retaliatory tariff is not withdrawn today, the United States will increase the weight to 50%! US President Donald Trump has promoted the "Reciprocal Tariffs" policy, trying to use mathematical formulas to impose high tariffs on countries with trade deficits as a tool for trade retaliation. However, according to economists at the American Enterprise Institute (AEI), there are key errors in the core calculation formula of this policy, resulting in the final tax rate being overestimated by up to 4 times, resulting in other countries innocently bearing huge tax burdens, most notably Switzerland and Taiwan. According to the Economic Times, AEI economists Kevin Corinth and Stan Veuger pointed out that the Trump administration's calculation of "reciprocal tariffs" (as shown in the figure below) is to divide the U.S. trade deficit with a country by the total amount of imports from that country to obtain a tax rate. But the problem is that the Trump administration mistakenly used "tariff transmission rate to retail prices (0.25)" for "tariff transmission rate to import prices", resulting in a significant overestimation of the entire formula. In fact, the correct conductivity should be 0.945, meaning that almost all tariffs will be reflected in the import price, not just the retail price. The two scholars criticized the Trump team's misuse of the transmission rates of different price levels in the same formula, which is a logical error in basic economic theory. For example, if the correct formula is calculated, the tariff on Vietnam should be 12.2%, but the Trump administration's erroneous calculation has issued punitive tariffs of up to 46%. Detailed explanation of the reciprocal tariff algorithm According to the "calculation of reciprocal tariff rates" published on the website of the Office of the United States Trade Representative, this formula is used to calculate how much punitive tariffs (Δτ_i) the United States imposes on a country to eliminate the bilateral trade deficit (that is, let exports = imports). This reciprocal tariff formula is: the difference between U.S. exports and imports to a country (that is, the trade deficit), divided by the previous set of parameters representing the sensitivity of import prices to tariffs. The parameters are explained as follows: Δτ_i (Delta tau): The new tariff rate (%) of the United States for the ith country. x_i: The amount of U.S. exports to the country. m_i: The amount of U.S. imports from the country. ε (epsilon): The elasticity of import demand to prices, which means how much the demand for U.S. imports will change when the price of imported goods changes (for example, because tariffs become more expensive). ➤ is a negative value (because the price goes up and demand goes down), but it is usually only an absolute value in the formula. φ (phi): The passthrough of tariffs on import prices, that is, what percentage of tariffs are passed on to actual import prices. What is wrong with the Trump administration? According to AEI economists, the key to the Trump administration's error is the misuse of the parameter of "tariff conduction rate to price" (φ), Trump data uses φ = 0.25 in the calculation, which is actually the "tariff transmission rate to retail prices", reflecting the price changes that occur after the import of goods through the channel and retail stage. However, what the formula really needs is the "transmission rate of tariffs to import prices", that is, how much the price of imported goods will respond immediately once tariffs are applied. Scholars point out that this correct value should be φ = 0.945, which is nearly four times different, resulting in a fourfold overestimation of reciprocal tariffs. How to calculate official US reciprocal tariffs Switzerland is subject to a 31% tax rate: "We don't charge US tariffs at all!" One of the most obvious victims of the absurdity of the wrong tariff formula is Switzerland. Despite Switzerland's 0% tariff on U.S. imports and the creation of 500,000 jobs in the U.S., the Trump administration imposed "reciprocal tariffs" of up to 31%. Swiss President Karin Keller-Sutter has publicly stated that it is "incomprehensible" but stressed that there will be no retaliation at this time, preferring a negotiated settlement with the United States. The New York Times reported that Switzerland's exports to the United States are mainly chemicals, pharmaceuticals and gold, resulting in a US deficit of $38.5 billion with Switzerland in 2024. Since Trump's algorithm does not look at actual tariff policy at all, but only at the total deficit, even if Switzerland is actually friendly in trade, it is still heavily punished. Taiwan is subject to a 32% tax rate just because of a trade deficit A similar situation occurs in Taiwan. Taiwan's exports to the United States reached $116.3 billion in 2024, with a trade surplus of $73.9 billion. The Trump administration used this data to calculate a "reciprocal tax rate" of 64%, and then discounted it by half, resulting in the current 32% tariff on Taiwan. This completely ignores Taiwan's actual tariff policy towards the United States, and only uses the trade deficit as the sole basis for taxation. Based on the erroneous elasticity corrections pointed out by AEI economists, the effective tax rate could only be around 8%, well below the current setting. This mistake not only damages the export competitiveness of Taiwanese manufacturers, but also misleads the understanding and support of trade policy within the United States. The Trump administration emphasizes the concept of "reciprocity" and intends to balance the trade balance, but it distorts the market because of the wrong formula. Professor Harvard Alberto Cavallo, although one of the sources cited by the US side, also expressed uncertainty about whether the government used the results correctly. AEI scholars are more blunt: "This formula is neither in line with economics nor based on any trade law." If the policy is based on the wrong formula, it will not only have distorting economic consequences for the United States itself, but will also have a more than expected impact on other trading nations. Swiss watch and chocolate companies have begun to raise prices in the United States, reflecting cost pressures, while American consumers are afraid of a pass-through price increase, and fears of renewed inflation are emerging. Related reports Trump suspends tariffs and troubles oolong" Bitcoin pin 81,000, U.S. stocks ride roller coasters, Fed May interest rate cut expectations rise sharply Musk and Trump turned their faces? Attack tariff barriers, support Europe and the United States to build a "zero tariff" free trade area "Who cares about Taiwan" foreign tweet was choked: Chip hegemon, you dare to speak? Trump cancels tariffs, the stock market will turn V! 〈Trump "simply miscalculated" reciprocal tariffs! AEI scholars exploded: tax rate irrigation 4 times, key parameters did not understand" This article was first published in BlockTempo "Dynamic Trend - The Most Influential Blockchain News Media".