In our Sunday, April 13, post, entitled “Yippy,” we offered the following paragraph:
We will write separately about the technical miscalculations used in the original trade release from the Trump administration. They are an absolute embarrassment for Navarro and company and their so-called experts. When their miscalculations were revealed in detail, the powers that be realized they had formulated a prescription for a Great Depression-level collapse and that the formula for reciprocal tariffs was hopelessly flawed. Skilled market agents already knew it, which is why they were running for the exits. My guess is that the detailed information explaining the error led Treasury Secretary Bessent to go to Suzie Wiles, who went immediately to Trump, who abruptly staged the theater of the temporary, 90-day pivot. I will have more on the technical issue in a future missive. (“Yippy,” https://kotokreport.com/yippy/.)
Here’s the promised explanation.
First, let me offer hat tips to the American Enterprise Institute (AEI) and two researchers there, Kevin Corinth and Stan Veuger; to Don Rissmiller of Strategas for adding analysis; and to Jill Fornito of the Global Interdependence Center for sharing information with the GIC’s College of Central Bankers and Advisory Board members.
The AEI research piece tells the story in technical terms. See this link for the full article: “President Trump’s Tariff Formula Makes No Economic Sense. It’s Also Based on an Error,” https://www.aei.org/economics/president-trumps-tariff-formula-makes-no-economic-sense-its-also-based-on-an-error/.
See also this link for the 2021 research that was cited and incorrectly used by the Trump-tariff designers. “Tariff Pass-Through at the Border and at the Store: Evidence from US Trade Policy,” https://www.aeaweb.org/articles?id=10.1257/aeri.20190536.
The error was in the formula that the Trump team incorrectly quoted from the original source and apparently didn’t proofread. They then used the factors in the formula and made two errors that cancelled each other out. They took a factor of “4” and multiplied it by a factor of 0.25. So, the combination yielded the number “1”; hence the impact of the tariffs’ elasticity was neutral in the calculation.
The erroneous calculations were then placed in the infamous chart that President Trump held up in the White House Rose Garden.
The chart had the blessings of the people who prepared it — of Commerce Secretary Lutnick, who handed it to Trump; of the trade-organizing folks; and of Trump’s top trade advisor, Peter Navarro. Collectively, they have embarrassed their presidential boss, and they have cost investors losses in the trillions and thrown global markets into full disarray.
As the research papers above reveal, the formula’s number 4 is supposed to be closer to the number 1. In fact, it is estimated at 0.945. That is the first error. The second — the tariff figures themselves — is made clear when the multiplication is done correctly with the correct number. The resulting tariff rates should, in fact, be much lower than the numbers that appeared on the chart.
For example, the Trump team calculated the target tariff on Israel as 17%. The true number would be the 10% floor. Vietnam should have been 12.2%, consisting of the floor 10% plus the addition of 2.2%. Instead, it was 46% on the Trump chart. Switzerland would have remained at the 10% floor, given the correct math. Instead, its tariff was 31%. Note that the entire list of calculations and errors is in the AEI research paper.
Remember, it was the president of the United States who read these wrongly calculated numbers to the entire world. He didn’t create them; his trusted and appointed folks did. It was the Commerce Secretary who handed him the chart. It was advisor Peter Navarro who defended that chart in TV interviews.
As I said in my earlier missive, we are witnessing incompetency and playing with fire. And worldwide investors have lost trillions because of Trump and company, all for no reason, as skilled observers saw the error in minutes and started to run for the exits. Who can blame them?
Now, here’s the question for you: How does the Trump Administration repair such a gaffe? It won’t happen by saying things will be great again. Repeating promises and fulfilling them are two different things. And it won’t happen by saying we planned it that way all along. And it won’t happen given the whipsaw of volatility that has been created.
IMO, the credibility of the United States has been damaged by the president and his so-called experts. They can try to repair that damage by being honest and admitting the error. Then they can cut out the BS and start with direct negotiations using the truth. And lastly, the spineless Congress can take back the authority it gave away years ago and hold hearings publicly to discuss this error and how it happened and who did it and whether it was an accident or planned.
They can also take a course in what the word elasticity means in economics and in how to determine the elasticity of import prices to tariffs and how this elasticity transfers to retail prices from those tariffs.
Obviously, the Trump team doesn’t understand that, or didn’t look at it.
There’s the explanation of the errors by Trump’s team. Please spend time with the two research papers from AEI so you can satisfy yourself that what I have described is correct.
As we wrote in that controversial Sunday post, “Yippie-yi-oh, yippie-yi-aie! Ghost riders in the sky…”
The administration has a learning opportunity that we hope they and Congress will seize. We don’t want to chase a stampeding herd of misbegotten tariffs across endless stormy skies. Better to listen to a wise tariff lesson from an old cowboy, President Ronald Reagan: https://www.youtube.com/shorts/Mj6N-WBPrVw.
If you found this commentary informative and valuable, please share it with someone else you think would be interested. And if you are here for the first time, we are glad to see you. Please subscribe below and check out previous posts.
