The U.S. Trade Representative (USTR) has recently outlined its approach to tariffs on its official website, revealing a methodology that aims to address trade imbalances, particularly with China. While the new framework is conceptually based on cyber analyst analyses, there are some important differences. For the first time, the USTR has included demand estimates for the import price elasticities. This is our preferred measure of how responsive consumers are to foreign goods price changes.
In its recent interim tariff estimate, USTR offered guesses as to how increased tariffs effect imported products. They further provided an elasticity measure to back up their arguments. This USITC aspect speaks to the extent to which tariffs affect the final prices consumers pay at retail for imported products. As is customary with the USTR’s methodology, these estimates are included to allow for greater wiggle room during negotiations. Doing this would allow the U.S. government to make agreements go further with less effort.
The initial U.S. claim was setting the tariff rate at 67%. It was a huge trade deficit of $295.4 billion that the U.S. ran with China in 2024. The value of our nation’s imports from China skyrocketed to an all-time high of $438.9 billion. A little lateral arithmetic reveals that the trade deficit is roughly 67% of the deficit. This statistic is derived from dividing the deficit by the total value of imports, showing the depth of economic conflict between the two countries.
Vietnam has become a surprising force in this trade war, possessing the fourth-largest U.S. trade surplus. The country has proactively reduced its tariffs against the United States in anticipation of forthcoming tariff announcements, without any expectation of reprieve. This appears to be a wise move that places Vietnam in an advantageous position for future trade negotiations.
The White House has released a comprehensive list of tariff rates applicable to various countries, which includes considerations for “Currency Manipulation and Trade Barriers.” This analysis seeks to shed light on how various countries are affected by U.S. tariff actions.
Trinh Nguyen, a senior economist at Natixis, underscored the convoluted nature of the U.S. tariffs and widening trade imbalances. She noted that the USTR’s formula focuses on increasing trade deficits rather than reciprocal tariffs. This focus makes it more difficult for poorer Asian countries to hold out against U.S. pressure to adopt lower tariffs.
“The formula is about trade imbalances with the U.S. rather than reciprocal tariffs in the sense of tariff level or non-tariff level distortions. This makes it very difficult for Asian, particularly the poorer Asian countries, to meet US demand to reduce tariffs in the short-term as the benchmark is buying more American goods than they export to the U.S.” – Trinh Nguyen, senior economist of emerging Asia at Natixis
Nguyen criticized the implications of high tariffs on targeted countries:
“Given that U.S. goods are much more expensive, and the purchasing power is lower for countries targeted with the highest levels of tariffs, such option is not optimal.” – Nguyen
Robert Subbaraman, Nomura’s head of global macro research, outlined what he sees as the potentially dangerous ramifications of the USTR’s approach. Specifically, he argued that uncertainty about tariff numbers would create more room for flexibility in negotiations. He cautioned that it could erode the credibility of U.S. trade policies.
“All I can say is that the opaqueness surrounding the tariff numbers may add some flexibility in making deals, but it could come at a cost to US credibility.” – Rob Subbaraman, head of global macro research at Nomura
To be clear, the USTR’s recent framework is a bold active step in addressing intricate international trade realities. It wounds long-standing populist anti-globalization criticism of trade deficits and tariffs. These negotiations are still ongoing. It remains to be seen how well this new methodology can help close the gap between the U.S. and its trading partners.