A note on US tariff formula

US government’s tariff formula for a balanced trade is

dT = (x – m)/(e*f*m)

Here   x: export

            m: import

            e: elasticity of imports with respect to import prices

            f: price pass through

            dT: additional tariff that will balance trade

From empirical data, f is about 0.25. This means that for every dollar of additional tariff, final price is increased about 0.25 dollar. The other 0.75 dollar is absorbed by the supply chain, probably mainly by the exporters. For example, we studied the Canadian softwood lumber export to US. With the imposition of 27% tariff, Canadian lumber business profit dropped about 90% while output increased. Overall, tariff benefits the importing countries. This is why countries impose trade tariffs if they don’t worry about retaliatory measures.

From empirical data, e is about 2. However, US government chose to use 4. Their justification is that e could reach 4 in some extreme cases. Taking extreme value in a broad policy initiative apparently is not a proper method. Taking an extreme value for a parameter in a model, the final result doesn’t look so extreme. There must be some serious problem with the model. Furthermore, the adopted additional tariff is halved from the calculated value, making the policy tariff ¼ of the theoretical calculation. Trump team stated that this represents “generosity” to foreigners. But in a trade war, generosity to foreigners is meanness for Americans. Does Trump team tried to be mean to Americans? The real reason, even at ¼ of the theoretical value, trade tariffs look excessively high. Furthermore, US government charges every country a base tariff of 10%, even those US run a trade surplus. This shows US is not interested in a “fair” trade, whatever that means.

Reference

US government calculation of tariffs

https://ustr.gov/issue-areas/reciprocal-tariff-calculations