Economists dispute with Trump's pricing formula, the argument rate is inflated

The formula at the heart of President Donald Trump's pricing announcement, who continues to mark the markets is confusing economists, who say that it is based on erroneous assumptions.

Economists argue that Trump's formula is based on a defective underestimation of a key metric, causing swollen rate rates for countries.

According to the office of the US trade representative, the formula that underpins Trump's “reciprocal” “reciprocal” tariff plan is the country's trade deficit with the United States, divided by its exports, then divided by two. Trump has also implemented a 10% baselinetariff on almost all countries.

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However, Trump's formula to calculate tariff rates for nations around the world is based on an elasticity rate lower than what it should be in practice, according to senior scholarship holders Kevin Corinth and Stan Veuger of the American Enterprise Institute. The formula supposes an elasticity of import prices with regard to prices of approximately 0.25, but economists say that this number should be closer to 1.0 (0.945).

“Their error is that they base elasticity on the price response of prices, as opposed to prices of importance that they should have done,” wrote the scholars.

The prices that Trump has imposed vary from 10% to 50% on the nations of the world. If the hypotheses surrounding elasticity are adjusted in Trump's formula, no price of countries would exceed 14% and most would be at 10% exactly, the baseline established by the Trump administration.

For example, as part of the plan, Trump was deployed this week, the rate rate for Lesotho, the country with the highest rate, was 50%. But if it was adjusted, it would be 13.2%.

Another report this week from the Cato Institute also found a defect in the formula that Trump used to justify the prices.

The report revealed that weighted average rate rates according to the trade that Trump used to justify his reciprocal rates are higher than in practice.

For example, the Cato Institute said that the average weighted rate rate according to trade in 2023 from China was 3%, but the Trump administration said it was 67%.

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