What a revolving door circus Trump’s tariff policy has become.

Yesterday, I noted Trump Backs Down More on Tariffs Exempts Smartphones, Electronics from China.

Today, we learn Tech Products Will Face Separate Levies, Lutnick Says:

Futures markets opening Sunday evening are [were?] expected to rise after President Trump issued tariff exemptions for smartphones, laptop computers, memory chips and other electronics in a move that could benefit Apple and other tech companies that import many of their products from China.

After issuing his latest exemptions late Friday without a statement, Trump told reporters aboard Air Force One on Saturday that more exemption details will be revealed Monday.

But on Sunday, Commerce Secretary Howard Lutnick said the reprieve may be temporary.

Smartphones and other tech products that won an exemption Friday night from the latest so-called reciprocal tariffs will still face separate levies in a month or two as part of a trade investigation into semiconductors, Commerce Secretary Howard Lutnick said Sunday on ABC’s “This Week.”

“This is not a permanent sort of exemption,” he said.

Tech products will soon get separate sectoral tariffs along with semiconductors following a Section 232 investigation, Lutnick said. Section 232 allows a president to adjust imports that pose a threat to national security and is also being used for other sectoral tariffs like autos and potentially pharmaceuticals.

The technology exemptions were the latest jolt on the economic roller coaster ride the president has taken the nation over the past week and a half since he first rolled out a shock-and-awe level of tariffs on April 2 that he moderated following wild market swings.

Revolving Door Circus

The administration had months of on-off announcements in which everyone was waiting for the big reciprocal announcement.

On February 13, I noted Trump Fails to Pull the Trigger on Reciprocal Tariffs, Will Study the Issue:

For all Trump’s huffing and puffing over Canada, the US goods trade deficit is only $64 billion. The entire deficit (and then some) is oil imports at a cheap price, very beneficial to the US.

The big announcement came on April 2, when I explained Trump’s Big Announcement Is Half-Reciprocal Tariffs on the World:

Factoring in value added taxes and other alleged manipulations, Trump announces Half-Reciprocal Tariffs with a minimum baseline of 10 percent.

The formula for reciprocal tariffs is ((Trade Deficit / Imports) / 2). It’s actually a bit more complicated, but that is what it nets to. There is an error in the formula, in addition to the nonsensical idea that reciprocal tariffs are not based on tariffs at all.

Trump Partially Capitulates

I commented Trump Capitulates with a 90-Day Pause on Tariffs, DOW Jumps 2,200 Points.

That backdown left the 10 percent tariffs across the board. However, Trump did not fully back down on Mexico or Canada, treating our two best trading partners worse than the rest of the world.

Administration Lie of the Day

The administration lie of the day was “Trump Goaded China into a Bad Position”:

Treasury Secretary Bessent is a bad liar. Clowns portray it as 5D chess.

Competing Theories

1. Trump concocts ridiculous definition of “reciprocal” to goad China into retaliating. Stocks and bonds crashed in response. And China will stop buying agricultural goods from the US. But that’s OK because Trump will again to bail out US farmers, with taxes collected from US citizens via tariffs to bail out the farmers but no one else. This is 5D chess.

2. Trump capitulated with a 90-day pause reacting to the plunge in stock and bond markets.

Trump then upped tariffs on China to 145 percent, and China responded by hiking tariffs.

Proving that the US was also in a bad position, the Chinese were told – once again – that Chinese President Xi Jinping should request a call with US President Donald Trump. Xi did not answer the call, but Trump backed down on technology tariffs from China, anyway.

Today we learn, not so fast. Technology tariffs are not yet set.

Definition of Reciprocal Revisited

(Click on image to enlarge)

Noticed the crossed out variables in the denominator, image from Axios.

As applied by the Trump administration, the variables cancel out.

The AEI reports President Trump’s Tariff Formula Makes No Economic Sense. It’s Also Based on an Error:

Though in effect the formula for the tariff placed on the United States by another country is equal to the trade deficit divided by imports, the formula published by the Office of the US Trade Representative has two additional terms in the denominator that just so happen to cancel out: (1) the elasticity of import demand with respect to import prices, ε, and (2) the elasticity of import prices with respect to tariffs, φ.

The Trump Administration assumes an elasticity of import demand with respect to import prices of four, and an elasticity of import prices with respect to tariffs of 0.25, the product of which is one and is the reason they cancel out in the Administration’s formula.

However, the elasticity of import prices with respect to tariffs should be about one (actually 0.945), not 0.25 as the Trump Administration states. Their mistake is that they base the elasticity on the response of retail prices to tariffs, as opposed to import prices as they should have done. The article they cite by Alberto Cavallo and his coauthors makes this distinction clear. The authors state that “tariffs [are] passed through almost fully to US import prices,” while finding “more mixed evidence regarding retail price increases.” It is inconsistent to multiply the elasticity of import demand with respect to import prices by the elasticity of retail prices with respect to tariffs.

Correcting the Trump Administration’s error would reduce the tariffs assumed to be applied by each country to the United States to about a fourth of their stated level, and as a result, cut the tariffs announced by President Trump on Wednesday by the same fraction, subject to the 10 percent tariff floor. 

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 US trade policy, we should at least be allowed to expect that the relevant White House officials do their calculations carefully. 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.

Applied mathematically correctly, the Reciprocal tariff on Vietnam should be 12.2 percent, not 46 percent.

The Trump administration cited Alberto Cavallo but he also says they applied the formula incorrectly, nearly 4 times too high, not that the idea makes any sense in the first place, which it doesn’t. If your brain is as dense as lead, you think this is 5D maneuvering.

Trump is desperately trying to find some level of tariffs the stock and bond markets won’t react negatively to. However, the revolving door clown show is destabilizing in and of itself.

More By This Author: