Conservative Think Tank Finds Major Error in White House Tariff Formula
A recent tariff formula implemented by the White House is fundamentally flawed due to an incorrect calculation, resulting in tariffs roughly four times higher than intended, according to a recent analysis.
Economists from the American Enterprise Institute (AEI), a conservative think tank, identified a critical error in how the administration assessed price changes resulting from tariffs. The White House incorrectly applied retail price elasticity—the consumer-facing price—instead of import price elasticity, which represents the cost U.S. companies pay when purchasing goods from foreign suppliers. AEI determined the administration used an elasticity rate of 0.25, whereas the correct elasticity, reflecting import prices, should have been 0.945.
“Even if one were to take the Trump Administration’s tariff formula seriously, it makes an error that inflates the tariffs assumed to be levied by foreign countries four-fold. As a result, the ‘reciprocal’ tariffs imposed by President Trump are highly inflated as well.”
Stan Veuger, one of the AEI fellows involved in the analysis, described the error as amateurish for such impactful policy decisions. “It’s pretty bush league,” he remarked in an interview with Fortune. “For such a big policy, you’d expect a much higher level of professionalism.”
Veuger and coauthor Kevin Corinth criticized the flawed formula but urged accuracy, stating that even if the administration insists on using questionable methodology, precise calculations should be fundamental.
“Now, our view is that the formula the administration relied on has no foundation in either economic theory or trade law. But if we are going to pretend that it is a sound basis for U.S. trade policy, we should at least be allowed to expect that the relevant White House officials do their calculations carefully.”
AEI economist Derek Scissors suggested on Monday on CNBC the miscalculations were not mere mistakes but deliberate manipulations to inflate tariffs according to President Trump’s preferences.
“This whole thing was rigged. It was a manipulated way to get very high tariffs because President Trump wanted to announce very high tariffs.”
The flawed methodology has already negatively impacted financial markets worldwide. Following President Trump’s announcement of the new tariffs, U.S. markets, including the Dow Jones, S&P 500, and NASDAQ Composite, saw significant declines. Asian markets, particularly in Japan and Hong Kong, also faced sharp drops amid escalating trade tensions. European markets similarly suffered notable losses, declining approximately 4.5% after a challenging week.
The initial White House formula already faced criticism due to its simplistic approach, which involved dividing America’s trade deficit with a country by that country’s total exports to the U.S., then halving the result. Corinth and Veuger highlighted that such a method ignores essential market realities and “does not make economic sense.”
“The trade deficit with a given country is not determined only by tariffs and non-tariff trade barriers, but also by international capital flows, supply chains, comparative advantage, geography, etc.”
These reciprocal tariffs, initially promoted as carefully calculated responses to foreign trade barriers taking a multitude of factors into account, originated from President Trump’s insistence on the formula, according to the Washington Post.
Veuger attributes the policy primarily to Trump’s longstanding beliefs rather than sound economic reasoning.
“What’s driving the policy is that since the 1980s, Trump has been a protectionist, and he thinks trade deficits are losses and trade surpluses are profits. He just likes tariffs. Then, you can backfill them with various, a little more sophisticated, intellectualized rationalizations. But that’s what it is—it’s rationalization.”
In response, the White House defended its methodology by claiming retail prices are more relevant since they directly influence consumer decisions. A spokesperson even argued that tariff rates should have been higher, not lower.
However, Corinth and Veuger countered by citing research by Harvard Business School professor Alberto Cavallo, which the administration referenced in their own documentation. Cavallo clarified on social media last week that his research indicated an elasticity rate closer to 1, not the 0.25 used by the White House, underscoring the severity of the administration’s error.
“It is not entirely clear how they use our findings. Based on our research, the elasticity of import prices with respect to tariffs is closer to 1. If that figure were used instead of 0.25, the implied reciprocal tariffs would come out about four times smaller.”
Corinth and Veuger suggested that correcting this error would dramatically reduce tariff rates, benefiting global trade and potentially boosting economic activity. For instance, Cambodia’s tariff rate would decrease from 49% to approximately 13%, while Vietnam’s would fall from 46% to around 12.2%. Most nations affected by the White House’s policy would consequently face a significantly lower minimum tariff rate of 10%.
“Hopefully, they will correct their mistake soon: the resulting trade liberalization would provide a much-needed boost to the economy and may yet help us stave off a recession.”
Moumita Basuroychowdhury is a Contributing Reporter at The National Digest. After earning an economics degree at Cornell University, she moved to NYC to pursue her MFA in creative writing. She enjoys reporting on science, business and culture news. You can reach her at moumita.b@thenationaldigest.com.
