Trump tariffs: All about the deficits
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Hello and thank you for downloading the More or Less podcast. We're the program that runs a deficit in deceitful data at a surplus in statistical accuracy. And I'm Tim Harford. Now, unless you've had your head stuck down a rabbit hole, and honestly, I envy you, you will know that Wednesday, the 2nd of April was Liberation Day, aka the day President Trump dropped this economic bombshell on the planet. In a few moments, I will sign a historic executive order

instituting reciprocal tariffs on countries throughout the world. Reciprocal. That means they do it to us and we do it to them. Very simple. Can't get any simpler than that.

For years, hardworking American citizens were forced to sit on the sidelines as other nations got rich and powerful, much of it at our expense. But now it's our turn to prosper. You're the largest economy in the world by most measures, but OK. The president came armed with a lovely board that claimed to show the tariffs other countries impose on U.S. goods and the new tariff that the U.S. will put on their goods.

This reciprocal tariff is said to be only half of what the US exporters must endure from those dastardly foreigners. They rip us off. It's so sad to see. It's so pathetic. Right. Now, some of these alleged tariffs are big. Implausibly big. China, 67%. That's tariffs?

charged to the USA, including currency manipulation and trade barriers. So 67%, so we're going to be charging a discounted reciprocal tariff of 34%. Cambodia, oh, look at Cambodia, 97%. We're going to bring it down to 49%. They made a fortune with the United States.

It all gets a bit weirder because also on Trump's tariff list are the tiny and uninhabited Heard and McDonald Islands, an Australian external territory 1,000 kilometres north of Antarctica.

I say uninhabited, but they are of course home to plenty of penguins. Whether they're Eastern Rockhopper penguins, King penguins, or my personal favourite, the Macaroni penguins. Have a Google, it is worth it. Anyway, all these lovely penguins have been slapped with Trump's 10% minimum tariff, which is bad news for their fledgling semiconductor industry. What on earth is going on?

Thomas Sampson is an associate professor at the London School of Economics. Thomas, when I saw the presentation by the president, I was very confused because he

He was talking about imposing reciprocal tariffs, all these very high tariffs that other countries impose on America. And America is just going to respond in a measured way by just imposing half the tariff that the rest of the world imposes on it. But then when I saw these numbers, none of them made any sense. They didn't bear any resemblance to any of the tariff numbers that I could think of.

So can we just say, is it true that the rest of the world imposes huge tariffs on American products? No, it's not true. And the tariffs that the rest of the world imposes on America haven't factored into this

calculation. In fact, most countries impose relatively low tariffs on US exports. For example, the average tariff the EU imposes is in the low single digits. So the numbers that Trump has announced, they are not reflective of the tariffs that US exporters face abroad. The EU, by the way, will be facing a 20% tariff from the US. OK, so if they're not worked out in retaliation for other countries' actual tariffs, how are they calculated?

So the way they have calculated these tariffs is to take each country's trade deficit with the US, so how much it exports to the US minus how much it imports from the US, then express that as a share of its exports to the US. So you get a number in percentage terms, and then they divided that by two. And that's the tariff you face.

Right. So if you exported a bunch of stuff to the US and you didn't have any imports, that number would be 100% and you would get a 50% tariff. But if you exported twice as much to the US as you imported, the number would be...

50%, I think, and you'd get a 25% tariff. Is that right? Yeah, that's right. And then there's one little extra add-on they've done, which is that there's a floor of 10%. So if your number comes in negative or less than 10%, you still get a 10% tariff, which is the situation the UK is in.

Do these numbers apply to all imports and exports or is it only physical goods? So the tariffs are only for goods. The UK and the US are kind of two of the biggest service exporters and they've just excluded all those services exports from these calculations. And they are calling their tariffs reciprocal on the basis that if there's a trade deficit, there must be some kind of trade barrier between

even if it's not an explicit tariff. Does that logic stand up? Unfortunately, it really doesn't. There's no direct way of linking these tariffs they've come up with

to trade barriers that the US faces when exporting to these markets. There are many different reasons why a country may run a trade surplus with the US. All of those different effects have gone into this tariff calculations. It would be a mistake to think of them as reciprocal tariffs. It's just they've converted the trade deficit into a tariff, regardless of why there's a trade deficit.

If you want a good example of this, take the small, landlocked African nation of Lesotho. Lesotho is a very poor country. So at that level of income, they're simply not able to buy much from America. Consumers in Lesotho don't typically want to buy the kind of goods that American firms produce. At the same time, Lesotho's main export is diamonds.

So it does export a reasonable amount of diamonds to the US, and this leads to it having a very large bilateral trade surplus with the US. So they're selling diamonds to the US, but they're not using the proceeds to buy diamonds.

iPhones or Ford pickup trucks. They're spending the proceeds presumably on buying food and commodities more locally. Yeah, absolutely. So what drives the imbalance is not trade barriers that the SOTO has put on the US. It's just that they are two countries at very different levels of development that want to buy different things.

But by the President's logic, Lesotho has been raping and pillaging the poor United States and as a result, those diamonds, and the textiles they also export, will have a 50% tariff slapped on them. The more general point is that these bilateral trade balances don't really tell you much about anything.

Imagine three countries which all trade with each other in a triangle. A sells oil to B. B uses that oil to make steel, which it sells to C. C uses the steel to make oil rigs, which it sells to A. By Trump's logic, each country would have a terrible trade deficit with one of its neighbours.

But the whole thing works just fine and nobody is pillaging anybody. It's the economy, stupid. Fundamentally, bilateral trade deficits don't tell us anything about whether one country is taking advantage of another country or what barriers it's imposing on imports from that country. They just tell us about which country produces stuff that other countries want to buy. One of the curious things about this is that rather than focusing on the US trade deficit as a whole, it seems to be...

aiming to put the US in trade balance with every individual country in the world. That's interesting. Yes, it's an unusual way to think about these issues. There's no real economic logic behind it. I think it purely reflects the fact that President Trump for a long time has been obsessed with these country-specific trade deficits. But fundamentally, it doesn't make sense to target them as a policy outcome.

Our thanks to Thomas Sampson from the London School of Economics. That is it for this week, but please keep your questions and comments coming in to moreorless at bbc.co.uk. And for those of you who were expecting a fascinating interview with Jenny Kleeman on The Price of Life, fear not, that will be here next time. Until next week, goodbye.

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