17 hours Ago By Bloomberg Opinion
By Mihir SharmaIf there’s one thing that the White House wants us to know about the new tariffs that promise to upend the global economy, it’s that they’re “reciprocal.”We now know that they aren’t reciprocal at all. In fact, they bear no connection whatsoever to any levies that the target country may impose on US exports.
They are simply designed to be proportional to that country’s trade deficit with the US, adjusted for the size of their bilateral trade.This isn’t a formula that anyone expected — for good reason, since no economic or moral logic justifies it. In retrospect, however, it appears a natural consequence of how President Donald Trump erroneously conceives of global trade.
Tragically, Trump’s misconceptions also mean that his policy choices will be way worse for US consumers, investors and partners. Suppose you, like Trump, want to reduce America’s overall trade deficit with the world to zero. Forcing your bilateral trade deficit with each country down to zero — the ultimate aim of this tariff formula — is an absurdly inefficient way to go about it.
In fact, tariffs proportional to a country’s trade deficit with the US actually seem designed to maximize the pain to US consumers. The very countries that have retooled their economies to serve Americans’ needs have been rendered disproportionately uncompetitive. The tariffs on them are higher.
They will falsely appear less efficient than other economies that have spent decades failing to produce things Americans want at prices they would pay..Explained | Trump tariffs against India.
Let’s look at a specific example: Bangladesh and India. The former has long been dependent on the export of clothing to the West. Since a tragic fire in one of its factories a decade ago, it has worked hard to upgrade labor standards; its hundreds of efficient textile mills have painstakingly learned how to produce clothes that fit any given quarter’s trends, are of acceptable quality, and cost less than if they were made anywhere else.
Therefore, Americans buy more Bangladeshi-made clothes than from the latter’s factories. India’s sector is relatively inefficient, with smaller factories that can’t fulfil large orders and have fewer experienced workers.The world has been turned upside down: Thanks to their failure to attract American buyers, Indian-made garments will be tariffed at 26% — 11 percentage points lower than the Trump tariff on Bangladesh, of 37%.
In this industry, a couple of percentage points of margin is sufficient for contracts to shift. With an 11-point buffer, inefficient Indian garment factories should now outcompete Bangladesh — and Vietnam, and Cambodia — without even trying. This is great news for Indians — and exactly the sort of mad irrationality that many policymakers in New Delhi were hoping for from the New Washington Consensus.
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Indian-made garments may now be cheaper than those from Bangladesh, but US-based factories are still uncompetitive with both of them. The cost difference in bulk orders between India and Bangladesh might be 10%, an unbridgeable chasm in this business. But the cost difference between Bangladesh and the US is an order of magnitude greater.
US-based shirts can be two or three times as expensive to produce. Forget about fairness for a moment. Yes, Vietnam may have taken a generations-long bet on friendship and integration with a country that was within living memory bombing its villages.
And yes, that bet may have been shown, in the course of a single afternoon, to be a grave national mistake. Nobody in the White House will care about that.Trump has deliberately targeted his own voters with these tariffs.
A flat duty would reduce consumer welfare, raising prices for everyone. But it would have, for a while, retained the supply chains developed over decades to serve America.And if you believe, like Trump, in a manufacturing renaissance behind tariff walls, a flat tariff is the only thing that could work.
A constant duty of 20% would give a clear target for possible investors in US garments: Get bulk costs to within 20% of Bangladesh, and you’re set. And till the moment US manufacturing hits that target and begins substituting the most efficient foreign producer, Americans continue to benefit from that country’s existing competence and expertise.Instead, these proportional — not reciprocal — tariffs will ensure that US consumers are deliberately forced to buy inferior goods from abroad, not just more expensive ones.
Poorer quality, pricier goods from India or Colombia (10% tariffs, 27 percentage points lower than Bangladesh) will suddenly turn up in US shops.No jobs will be created. Even under optimistic scenarios, investment can’t crowd back into US garment factories now.
Trump has ensured that the price target that new American manufacturing must now hit to make a profit has become both high and unpredictable. Gone is the simple ask: Beat Bangladesh’s cost plus tariffs, since the market has proved they do T-shirts best, and so if you beat them you beat everyone..
If Bangladesh faces a higher unit cost than all its competitors, investors can’t rely on the historical wisdom of the market. Instead, they now need to imagine exactly how much hypothetical Indian-made T-shirts, currently priced out by Bangladeshi factories, would cost if production shifted there from Bangladesh. They would have to repeat this for every possible competitor, and revisit it every year depending on which country attracts productivity-enhancing investment in the post-proportional tariff world.
If that sounds like a nightmare, you’re not wrong. In fact, the Trump tariffs are designed to maximize uncertainty. Many hoped that they would constitute a single hit to prices, and any inflationary bump would be “transitory.
” But this tariff formula almost guarantees that uncertainty is ongoing, and inflation will be sustained.That’s because these trade restrictions don’t just fight economic theory. They are designed to battle 20 years of cumulative market wisdom — the wisdom that decided not just that Vietnam was cheaper than the US, but also that it was more efficient than Indonesia.
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