To improve the trade deficit, Trump proposed a 32% tariff on Taiwan, which would have a significant impact compared to the current 70% tariff exemption on exports to the United States. Additionally, other countries such as Japan, the European Union, and some trade partners will also face various tariffs. Trump demonstrated, through a formula, why increasing tariffs is reasonable; this formula takes into account the changes in the U.S. trade deficit and import demand. For example, if tariffs on China reach 67%, it would help eliminate the deficit, but it was ultimately set at 34%. However, raising tariffs does not address the fundamental issue of the U.S. trade deficit, as the lack of export capacity has not been examined. Furthermore, the WTO once proposed the Swiss formula to adjust high tariffs and enhance the trade environment, but no consensus was reached. Trump might consider the Swiss formula as a better solution.
To improve the trade deficit, Trump recently proposed reciprocal tariffs, with Taiwan's rate reaching 32%, which is undoubtedly a startling change compared to the current zero tariffs on the 70% of our exports to the United States.
Furthermore, countries such as Japan, mainland China, and the European Union have also received different tariff rates, and even countries like the United Kingdom, Singapore, and Australia, which have trade deficits with the United States, are required to pay a 10% tariff.
Trump used a formula to demonstrate the rationality of taxation, where the numerator is the U.S. trade deficit with specific countries, and the denominator represents the import demand reduced by a 1% tax rate.
For example, if a 1% increase can reduce imports by $1 billion and the deficit is $30 billion, then the tariff for that country would need to be raised to 30% to balance the deficit.
The U.S. Trade Representative has set two figures to evaluate the impact of tariffs: the price effect of tariffs is 0.25, and the price elasticity of demand is -4, which means a 1% increase in tariffs can reduce import demand by 1%.
Taking China as an example, in 2024, the U.S. trade deficit with China reached $295.4 billion, while total imports amounted to $438.9 billion. Each 1% increase in tariffs could reduce imports by $4.389 billion, which means the tariff rate would need to be set at 67% to eliminate the deficit. Ultimately, mainland China's reciprocal tariff was set at 34%.
The main idea of the formula focuses on reducing imports while neglecting the impact of export growth on the trade deficit. If the United States' export capacity were to increase, the deficit might also decrease.
Trump pointed out that certain countries do have excessively high tariffs on their products, affecting the export interests of American businesses; however, this phenomenon also exists within the United States itself.
To address this issue, the World Trade Organization proposed the Swiss formula during the Doha Round negotiations, which could reveal hidden high tariffs and facilitate significant reductions. This formula requires setting a coefficient, and after adjustment, the tariff rate must be below this coefficient.
For instance, when the coefficient is set at 10%, all product tariffs will be reduced to below 10%. If set at 5%, all product rates will also remain below 5%.
In 2005, at the WTO ministerial conference held in Hong Kong, it was decided to adopt the Swiss formula to reduce tariffs on non-agricultural products, but consensus on the coefficient setting was never reached.
If it had been foreseen that Trump would propose this unreasonable formula, perhaps all WTO members should have stood up to adopt the Swiss formula method.
Compared to the panic caused by the reciprocal tariff formula, the Swiss formula might be a more constructive option.
Profile: The Swiss formula is t1= (a*t0)/(a+t0); regardless of how high t0 is, the adjusted t1 will always be less than the coefficient a, indicating that high tariff products can experience a significant decrease through this adjustment, while the decrease for low tariff products is relatively small.
Profile: The Doha Round negotiations aimed to use the Swiss formula to promote a reduction of high-tariff products to lower levels, thereby improving the freedom of the trade environment. However, developing countries felt excessive pressure regarding the reductions, ultimately preventing consensus.
