Leaving aside the wisdom of slapping every country in the world with “reciprocal tariffs”, there are now growing concerns about the methodology that the United States used to arrive at country wise tariff rates. When Donald Trump first spoke about reciprocal tariffs, his idea was fairly straightforward: the US would simply levy the same tariffs on imports from a particular country as the tariffs levied by that country on imports from the US. This is not how the US has actually gone about things. So, how has the US calculated reciprocal tariffs? The very first statement of the US Trade Representative memo on this calculation states the following: “Reciprocal tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the US and each of our trading partners.” This is fundamentally different from saying that the US will impose tariffs that will equal the other country’s tariffs. Instead, what the US seemingly wants from these tariffs is to raise them to a level where the trade balances out — it is not as concerned with the actual level of tariffs imposed against it but with using tariffs to wipe out its trade deficit. For instance, India has a trade deficit of around $46 billion with the US. As such, the governing principle for the US while deciding the rate of reciprocal tariff against India is not to find what India charges but to raise tariffs to a level such that India’s exports to the US get neutralised completely. In other words, at 27% (which is the reciprocal tariff rate chosen for India), the US believes India’s trade surplus against the US will be wiped out completely. On paper at least, this will happen because the 27% tariff on Indian exports will make them too costly for US consumers, who, in turn, will decide to not import those goods from India. The USTR memo states: “To conceptualise reciprocal tariffs, the tariff rates that would drive bilateral trade deficits to zero were computed. While models of international trade generally assume that trade will balance itself over time, the US has run persistent current account deficits for five decades, indicating that the core premise of most trade models is incorrect.” The memo yet again goes back to Trump’s notion, however misplaced, that a trade deficit implies cheating by the other country. “The failure of trade deficits to balance has many causes, with tariff and non-tariff economic fundamentals as major contributors. Regulatory barriers to American products, environmental reviews, differences in consumption tax rates, compliance hurdles and costs, currency manipulation and undervaluation all serve to deter American goods and keep trade balances distorted. As a result, US consumer demand has been siphoned out of the US economy into the global economy, leading to the closure of more than 90,000 American factories since 1997, and a decline in our manufacturing workforce of more than 6.6 million jobs, more than a third from its peak,” the memo states. What is wrong with this calculation? It may be politically prudent at home to criticise trade deficits, and question why trade between two countries should not be balanced, if it is fair. But in the real world, countries run deficits with some partners and surpluses with others. While tariffs, non-tariff barriers, and currency manipulation do contribute to the eventual trade deficit or surplus, tariffs alone cannot solve deficits nor are all deficits a proof of trade between two countries being unfair. For instance, a predominantly rice-eating country is unlikely to have much imports from a country which predominantly produces and exports wheat, regardless of tariff levels. That’s because there isn’t enough demand for wheat in the rice-eating country. The rice-eating country, however, could run a massive deficit against a country that produces high-end irrigation equipment or high-end computers since that is what it needs but does not produce domestically. This deficit is neither unfair nor necessarily undesirable. At the end of the day, there is no solid economic rationale to wipe out all bilateral trade deficits to zero, since there will always be items that are impossible or economically unviable for countries to grow or make themselves. The worst implication of calculating reciprocal tariffs this way is that American trade partners cannot assume that the rates unveiled on April 2 are final. Imagine a scenario where the dollar appreciates against the rupee, and the US consumers do not feel the pinch of higher tariffs on Indian imports. As such, the demand for Indian imports will not diminish, meaning that the US will continue to experience a trade deficit with India. In other words, if wiping out the trade deficit is the central goal, then the US will further raise tariffs on India because by definition, reciprocal tariffs are the tariffs that balance trade. This is why the fact that some of India’s neighbours have been slapped with even higher tariffs is not the “opportunity” (for India to grow its exports to the US) that some Indian talking heads say it is. At the end of the day, the only thing that matters to the Trump administration is that India enjoys a trade surplus with the US. In theory, it will continue to raise tariffs until this surplus is wiped out.
