The Trump Tariff Equation Explained

What's behind the Trump Tariffs

The economic world reacted strongly to Trump's sweeping Tariffs which aim to re-address the US trading deficits with key trading partners. In what was billed as reciprocal tariffs to counter trade barriers, unfair practices and corruption, a list of nations with their US tariffs and the proposed reciprocal tariffs was presented by President Trump. Each reciprocal tariff was one half of the quoted Tariffs on US goods or 10% which ever was higher. Whilst on the surface this may seem fair, the quoted tariffs on US goods were not in fact tariffs but proportional trade deficits with those countries. These arise due to a host of economic factors.

The US Government published the now famous equation above, which was used to calculate the tariffs that other nations applied to US goods. The equation calculates the value of US exports to a particular country (x) minus the imports (m), dividing by the imports (m). The other two Greek characters are modifiers, ε is the price elasticity of goods i.e. the proportion that demand goes down for a proportional prise rise. An elasticity of -2 indicates that if price increases by 10% then demand falls by 20%. φ is the proportion of the tariff that is passed on to to the consumer. The US Government quoted a value of 0.25 for φ and -4 for ε, effectively these two values cancel each other out as multiplied together they equal (-)1. Some commentators on CNN recently pointed out that the quoted value for φ of 0.25 isn't correct as it is usually close to 1 or all of the price increase being passed on to consumers, but this actually doesn't tell the whole story as a price elasticity of -4 is likely to be an exaggeration in the opposite direction as most goods typically have a price elasticity of -1 to -2. Bundling a whole variety of goods under a single price elasticity is clearly a simplification. The table below gives the typical price elasticity for common goods.

Essentially the above equation estimates what tariff would need to be applied to imported goods from another country to reduce the import from that country to match the exports from the US to that country. The unexplained division of the values by 2 infers a price elasticity closer to -2, or a conservative approach to a price elasticity of -1. Off course this is a controversial topic and we have no political leanings. The outcome of the policy is unknown; on the one hand increasing trade tariffs over a long period of time could lead to protectionism, trade barriers, increased costs, reduced choice and stifled innovation, but it could also lead to a negotiated reciprocal reduction of tariffs.

Category	Examples	Typical Characteristics	Price Elasticity (PED) ε
Food Staples	Bread, milk, rice, eggs, flour, pasta, potatoes, cheese	Essential, frequent purchase, low unit price	–0.2 to –0.5
Beverages	Bottled water, soft drinks, tea, coffee, fruit juice, energy drinks	Brand loyalty, some substitution, moderately price-sensitive	–0.8 to –1.2
Personal Care	Shampoo, toothpaste, soap, deodorant, razors, facial cream	Routine use, habit-driven, brand stickiness	–0.3 to –0.7
Cleaning Products	Detergents, surface cleaners, bleach, disinfectants, sponges	Essential for hygiene, often bought in bulk	–0.2 to –0.6
Toiletries	Toilet paper, tissues, sanitary products, cotton swabs	Highly inelastic, essential daily use	–0.1 to –0.4
Snacks & Confectionery	Chips, candy, chocolate bars, gum, cookies	Impulse-driven, brand-driven, elastic	–1.0 to –1.8
Over-the-Counter Medicines	Painkillers, cold remedies, allergy medication, vitamins	Health-driven, necessity, but sometimes brand-substitutable	–0.2 to –0.6
Cigarettes & Alcohol	Cigarettes, beer, spirits, wine, cigars	Addictive, taxed, price-insensitive in short term	–0.3 to –0.7
Baby Products	Diapers, baby food, wipes, formula, baby lotion	Parental necessity, loyalty-driven	–0.2 to –0.4
Pet Food	Dog food, cat food, birdseed, pet treats, pet supplements	Substitutable, essential for pet owners	–0.4 to –0.8
Health & Wellness	Vitamins, protein supplements, fitness trackers	Health-focused, growing trend, moderate elasticity	–0.5 to –1.0
Technology Accessories	Phone chargers, headphones, screen protectors, cases	Impulse purchases, influenced by trends, moderately elastic	–1.0 to –1.5
Home Appliances	Vacuum cleaners, microwaves, refrigerators, coffee makers	Durability, often a one-time purchase, elastic	–1.0 to –2.0
Clothing & Apparel	Jeans, t-shirts, dresses, shoes, jackets	Fashion-driven, seasonal, relatively elastic	–1.0 to –2.0
Cars & Vehicles	Sedans, SUVs, trucks, electric vehicles, motorcycles	High price, durable, infrequent purchase, significant substitution	–1.0 to –2.5
Computers & Laptops	Desktops, laptops, tablets, gaming PCs, accessories	High price, performance-driven, rapid technological obsolescence	–1.5 to –2.5
Smartphones & Mobile Devices	Smartphones, feature phones, smartwatches, tablets	High brand loyalty, frequent upgrades, highly elastic	–1.5 to –3.0
Luxury Goods	Designer handbags, luxury watches, jewelry, high-end cars	Exclusivity, high-income customers, inelastic in short term	–0.2 to –0.5
Furniture & Home Decor	Sofas, dining tables, lamps, curtains, mattresses	Durable, infrequent purchase, price-sensitive	–1.0 to –2.0
Sports Equipment	Bicycles, gym equipment, sporting goods (e.g., tennis rackets, golf clubs)	Seasonal, sport-specific, elastic	–0.8 to –1.5

Elasticity Value	Interpretation
< –1	Elastic (very responsive)
= –1	Unit elastic
> –1 but < 0	Inelastic (less responsive)
= 0	Perfectly inelastic