Donald Trump’s Tariff Formula ‘Based on an Error’—Conservative Think Tank

As President Donald Trump’s tariffs spark alarm and criticism from across the political spectrum, analysts at conservative think tank the American Enterprise Institute (AEI) believe the formula used to calculate the import levies is “based on an error.”

Newsweek reached out to the White House for comment on Saturday.

Why It Matters

Trump’s tariff move sent Wall Street and the global economy into a tailspin when he announced on Wednesday that the United States would impose a 10 percent “baseline” tariff on virtually all imports. He also singled out roughly 60 countries for what he described as “discounted reciprocal tariffs,” with some being set at more than 40 percent.

He explained that the “reciprocal” tariffs were based on tariffs those countries imposed on the U.S. The numbers Trump cited, however, were inaccurate and the White House clarified later on that the formula it used was based on just two variables: the U.S.’s trade deficit with a foreign country divided by that country’s exports to the U.S.

Trump then halved that number to arrive at his “discounted reciprocal tariff,” which he said he was doing to be “kind.”

What to Know

The Washington Post reported Friday, citing two sources who requested anonymity to discuss internal deliberations, that the final tariff rates Trump displayed on a chart he held up during a widely televised Rose Garden speech were set just three hours before the address.

Trump’s decision to use his simplified formula also scuttled weeks of efforts by government officials across federal agencies, who had deliberated over how to set the tariffs while taking into account a wide range of tariff and non-tariff barriers and global trade practices, the newspaper’s report said.

On Friday, AEI released a report on the formula, which criticized the tariffs and said the purported formula was incorrect. The new analysis was titled, “President Trump’s Tariff Formula Makes No Economic Sense. It’s Also Based on an Error.”

The report’s authors, senior fellows Kevin Corinth and Stan Veuger, wrote that a “trade deficit with a given country is not determined only by tariffs and non-tariff trade barriers, but also by international capital flows, supply chains, comparative advantage, geography, etc.”

The two added that even if the formula is taken seriously, “it makes an error that inflates the tariffs assumed to be levied by foreign countries four-fold,” causing the tariffs to be highly inflated.

“The formula published by the Office of the U.S. Trade Representative has two additional terms in the denominator that just so happen to cancel out: (1) the elasticity of import demand with respect to import prices, ε, and (2) the elasticity of import prices with respect to tariffs, φ,” the authors wrote.

Their analysis continues: “The idea is that as tariffs rise, the change in the trade deficit will depend on the responsiveness of import demand to tariffs, which depends on how import demand responds to import prices and how import prices respond to tariffs. The Trump Administration assumes an elasticity of import demand with respect to import prices of four, and an elasticity of import prices with respect to tariffs of 0.25, the product of which is one and is the reason they cancel out in the Administration’s formula.

“However, the elasticity of import prices with respect to tariffs should be about one (actually 0.945), not 0.25 as the Trump Administration states. Their mistake is that they base the elasticity on the response of retail prices to tariffs, as opposed to import prices as they should have done. The article they cite by Alberto Cavallo and his coauthors makes this distinction clear. The authors state that ‘tariffs [are] passed through almost fully to US import prices,’ while finding ‘more mixed evidence regarding retail price increases.’ It is inconsistent to multiply the elasticity of import demand with respect to import prices by the elasticity of retail prices with respect to tariffs.”

What People Are Saying

Polling analyst Nate Silver shared the report on Friday on X, formerly Twitter, and wrote: “OMG they applied their stupid f***ing formula incorrectly?!?”

In a separate X post, Silver wrote that the administration “dramatically increased the chance of a recession, wiped out trillions on wealth, and delivered a COVID-magnitude shock to the global economy…because they applied their stupid f***ing formula incorrectly?”

Pau Pujolas, professor of economics at McMaster University, previously told Newsweek: “The way in which we calculate the tariffs is using a sophisticated quantitative model that needs to go through a supercomputer to speed up what the tariff rates are. I do not think that that’s what they have done.”

Trump trade adviser Peter Navarro told CNBC this week that the calculations were “based on very sophisticated analyses in the trade literature for decades.”

President Donald Trump on Truth Social on Saturday: “THIS IS AN ECONOMIC REVOLUTION, AND WE WILL WIN. HANG TOUGH, it won’t be easy, but the end result will be historic. We will, MAKE AMERICA GREAT AGAIN!!!”

What Happens Next?

Trump and his allies have said there may be some temporary economic “disruption,” but that tariffs will ultimately benefit the U.S. economy and Americans.

Trading partners have responded in various ways to the newly imposed tariffs, with some announcing reciprocal measures. Others are holding off or attempting to negotiate with the Trump administration to lower the rates.

Meanwhile, the stock market reacted negatively this past week, with the Dow Jones Industrial Average shedding more than 1,500 points on back-to-back days for the first time ever. The average plunged more than 2,200 points on Friday after dropping over 1,600 on Thursday.

The president has insisted that markets will “boom” as a result of his trade war.