Geopolitics Review Extra - 1st May 2025
The Donald Diaries: Tariff Equations and Pauses
Contents
Introduction
The Equation
The Pause
The Would-Be Effects Of Trump’s Tariffs
Concluding Remarks
Bitesize Edition
One aspect of Trump’s Liberation Day tariffs that was overlooked was how they were decided for each nation. I’m sure many of us, me included, suspected that this would be a complex formula built around different models that would assess the benefits to the United States and the impacts on global trade. This wasn’t the case.
The tariffs were essentially confirmed to be aiming to reduce the trade deficit to zero, since the trade deficit was divided by imports, and then divided by two. The complex terms, which are represented by Greek symbols, are merely swapped for fixed numbers regardless of which nation is being calculated for.
This fails to take into account how different nations will be more or less sensitive to these tariffs, and the fixed probability of prices increasing will differ from sector to sector and nation to nation. This already places the tariff equation on flawed grounds, and it implies that the intention was never for tariffs to remain in the long term. We’re currently in a paused period for 90 days, but July 4th looms in the distance. Based on the flaws of this formula, could they ever return, or would they cause more harm than good? Also, what second and third-order effects would be felt if they did return on a more permanent basis? Regardless of the future, we’ve already entered into a new trade paradigm.
Introduction
The Liberation Day tariffs were initially short-lived. However, with Trump’s ability to turn on a dime in regard to his policy decisions, we could see them return. In light of this, I believe it is prudent to explore the equation that was used in deciding what tariff to place on whom. Is the equation a marvel of mathematics, or is it another example of random-number-generator maths, a term I attribute whenever mathematics is seemingly pulled out of thin air and made to seem plausible? Also, I’ll dive into more detail on Trump’s Liberation Day tariff pauses and the potential for their return. If the tariffs return on July 4th, what economic effect would they have? Let’s dive in.
The Equation
With such an extensive package of tariffs, it’s worth asking how these were decided. These tariffs, before being announced, were believed to be reciprocal. When Trump emerged in the Rose Garden with his display boards, we saw he had been kind enough to only place half of the tariffs on other nations that he believed were being placed on the United States. This sounds like it should be complicated, especially when the White House released a full document explaining the equation used, and that it contained Greek symbols. This sounds complicated, but I promise you it’s the opposite. The formula in its full form can be seen below:
Let’s break down each term one by one:
Firstly, the top of the fraction is the trade deficit with the nation being calculated for, since this is the country’s imports (US exports) minus the country’s exports (US imports).
Moving to the bottom of the fraction, the biggest takeaway here is in the Greek symbols. These symbols represent numbers, which, regardless of the nation being calculated for, are always the same. The Trump administration has assumed that Lesotho is as sensitive to higher prices as Vietnam, the EU, or Jordan. The figure chosen here is 4. Already, we’re sensing red flags. It is an incorrect assumption that all nations are equally sensitive to higher prices. We also have a flat probability that prices will increase in the nation being calculated at 25%. This is also the same for every nation in the calculation, as well as every sector in the world of global trade.
Now, you could wonder how the figures for price sensitivity and probability of higher prices were calculated? Ultimately, it doesn’t matter because when we multiply 4 by 0.25, we get 1. Anything multiplied by 1 is itself, and so we are reduced to the following formula:
This formula that decides the tariff for each nation is the trade deficit divided by total exports out of the country and into the United States. The U.S. then divided this figure by two, as a gesture of “goodwill” to the rest of the world for “overcharging them”.
For example, the U.S. has a trade deficit with China of $295 B. The total amount of goods the U.S. imports from China is $ 440 B.
The U.S. has a trade deficit with the EU of $235.6 B. U.S. imports from the EU were $605.8 B.
The result from the first calculation is rounded to the nearest whole number before being divided by two.
Such a formula would be great if the aim was to reduce the trade deficit to zero, but that isn’t what we’ve been told the aim is. When Trump brought out his tariff boards, currency manipulation and other trade barriers were included as factors that were taken into account in the calculations. This simplistic formula demonstrates otherwise and implies that the aim is to reduce the trade deficit. As Bessent has said in recent interviews, Trump is using tariffs as a negotiation tool. He wants to draw countries to the table to formulate trade deals that are favourable to the United States, while clearly also reducing the trade deficit.
As we now know with the wonderful power of hindsight, the effects of the tariffs weren’t felt for too long, unless you’re China, because Trump scaled them back. How did the pause come about, and where are we heading now? Could a restart of tariffs be enforced in the future?
The Pause
Tariffs were confirmed to be a tool for hopeful negotiation when Trump paused them when faced with a collapsing stock market and the likely no-bid at a treasury auction.
Everything Trump does is to get others to respond to him. He said over 70 countries have called him and are “kissing his ass”. Yes, that’s a direct quote from the leader of the most powerful nation on Earth.
The only effect this is going to have is further disillusionment with the United States. In the short term, nations could well need to “kiss ass” and Trump could even formulate some trade deals. India and the UK seem to be interested in such deals, and progress is reported to be going well. But, in the long term, the lack of trust in the United States has already been solidified. Even if nations maintain relations with the United States, they will hedge against U.S. reliance and volatile foreign policy. Other nations have realised they need more cards, and they’re in pursuit of them.
We can’t know what will happen in the future, but the 90-day pause would take us to Independence Day, July 4th. Is Trump signalling that his tariff policy is as important as American Independence? Does he see this as a new American Independence, as he hopes his pursuit of his America First policy will see strength come from internally? Ultimately, it doesn’t matter what Trump’s character implies here, regardless of how interesting it might be to ponder, because we can assess the economic impact these tariffs would have if they did return. As a tool of economic statecraft, viewing the tariffs through this lens can allow us to assess their chance of success, and hence whether their return would be viable at all.
The Would-Be Effects Of Trump’s Tariffs
In its current form, I question whether these tariffs would be beneficial for the United States if they are reimplemented. With the Greeks cancelling out at 1, the Trump administration is essentially saying that elasticity would not be an issue because it would cancel out the price rise. Elasticity refers to the responsiveness of one economic variable to a change in another variable. When supply or demand is inelastic, it means that price changes don’t massively change the quantity demanded or supplied, because businesses can’t easily adjust to the changes, or because consumers need access to necessities even if prices rise.
In this case, elasticity will measure the change in behaviour of buyers and sellers when prices rise, specifically a fall in demand from buyers. But the equation implies that any increase in price and fall in demand would be manageable or harmless. This is a flawed assumption because not all goods are equally elastic.
The most recent example of this we can remember was COVID. Supply became inelastic because global trade came to a sudden halt. If factories are closed or raw materials are unavailable, finding alternative sources or even maintaining current production levels becomes difficult. The result is higher prices, but with global trade slowing so heavily, higher prices didn’t help to reopen factories or find alternative inputs. As a result, supply didn’t change much, and a supply-based inflationary price environment emerged.
Demand for some goods is also inelastic because people hoarded toilet paper, tinned goods, and other products. Regardless of the price rises, people needed these products, and so demand didn’t fall. On the flip side, in other sectors such as luxury items and travel, demand went the opposite way and became very elastic, because these items aren’t essential. This led to gluts due to demand collapses.
In this tariff environment, not everything is a necessity, so how can it be assumed that fixed values in the equation would be universal across sectors? This simplistic equation isn’t representative of the complex real world of trade. Of course, Trump has to send the message that tariffs wouldn’t hurt the United States because to say otherwise would be politically damning, but if they return, it can’t be denied how economically risky they would be.
Will Trump’s tariffs have similar effects to any we saw in 2020? The most important relationship here to assess is the U.S.-China relationship. The 245% tariffs on China will act like a supply constraint, as imports from China will be more expensive or less available as demand collapses, suppliers withdraw, or China retaliates. In goods that the United States imports heavily from China, and that which China has a high percentage of market share, this will lead to inelastic supply because Americans won’t be able to easily find an alternative supply. These global supply chains are optimised for Chinese production today because cheap labour was exported there for decades. They now have huge control over the periodic table of global raw materials, and such tariffs will hence not pressure China to back down if they are maintained, as they stated they will “fight until the end”.
The tariffs won’t have such a huge impact as COVID did because this isn’t bringing global trade to a halt, but it is redrawing it, and it’s a different story for different sectors. Even Trump is surely not likely to commit this level of self-sabotage, unless, of course, that is his plan.
Alas, the tariffs on most nations are currently paused, but the China-U.S. trade war is well and truly reignited. My current base case is that the Liberation Day tariffs won’t return because it would be self-sabotage on a magnitude we haven’t seen before. However, this trade war with China will remain and will have sector-specific impacts.
If the Liberation Day tariffs did return, I can’t see how such a flawed equation and the impact on global trade wouldn’t hurt the United States, especially in heavily Chinese-controlled sectors. Trump can hope to boost U.S. manufacturing and exports, but he can’t do this overnight. Yes, the world needs the United States, but the United States needs the world, too.
One clear thing is that if we returned to a tariff environment where the U.S. hit the biggest sellers to the United States with the highest tariffs, a complete physical global trade reshift would be confirmed. However, the psychological shifts have already begun. We’re entering a new trade environment.
Concluding Remarks
In summing up this tariff situation, I found that Morgan Housel summed it up well. If you hire a plumber, the plumber isn’t taking advantage of you. He is better at the task and is fulfilling a purpose you need. You hence pay for this service. You have a trade deficit with the plumber in this situation, but if you try to get this to zero, you have to figure out the plumbing yourself.
The U.S. has goods and services that it’s good at, just as other nations do. They shouldn’t punish nations for their specialisations, because it’s going to hurt the U.S. by going after these nations and their specialities.
Also, to highlight how flawed the Liberation Day tariffs were, what does the United States gain by placing 30% tariffs on Nauru? In what way is Nauru threatening to the United States? They aren’t. The strategy aims to bring nations to the negotiating table, but many of the nations that were hit by high tariffs truly have nothing to offer the United States. They typically would have exported a small number of products and materials into the United States in large volumes that they have a specialisation in. Nations with lower tariffs will now likely take their place because the importing costs will be cheaper.
Although some nations are in pursuit of trade deals, the current opinion is that one of Trump’s biggest strategies, the tariff negotiation strategy, has faltered at the first hurdle, and he is seeking de-escalation. Look at the words of Scott Bessent over the last few weeks. He has even stated that the U.S. is seeking de-escalation with China. Trump could well drag himself over the hurdle and find rhythm once again with his tariffs as a negotiation strategy, but his first fall won’t be forgotten, and the impact will certainly be felt further up the track.
There is still more to discuss on the tariff front, namely the response in the markets. Why has gold continued to skyrocket? What is the bond market telling us, and what is Triffin’s Dilemma? Is the dollar under threat as global reserve currency, and are we experiencing the rise of a new Chinese financial system? I’ll discuss this on Monday.
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Global investors, irritated by uncertainty, will adjust their positioning, but they won’t abandon the dollar.They’ll search for alternatives. The US will continue to benefit from an extraordinary privilege, though one that will erode over time, until it eventually fades. Even the Roman Empire didn’t collapse with a bang; its decline was a slow, inevitable process. The Romans themselves hardly noticed it.