Trump’s new tax on South Africa makes no sense

US President Donald Trump announced a new 30% tariff on South African goods entering the world’s largest economy, but the computation used to arrive at the 30% figure is deeply flawed.

This is because they are not based on actual tariff policies of the countries affected but rather on the US trade balance.

In his ‘Liberation Day’ speech on Wednesday, 02 April, Trump announced a 10% global tariff on all imports to the United States.

However, South Africa was on a list of the world’s ‘worst offenders’ when it comes to trade deficits with the US, warranting a higher rate.

The USA has run a trade deficit for several years, something Trump and his team aim to rectify via a series of “reciprocal” tariffs.

During his briefing, the US leader revealed a chart showing that new tariffs will be imposed on a long list of countries, including South Africa, China, the EU, India and South Korea.

These countries would be subject to tariffs higher than the 10% minimum, based on the deficit. Though it would also be discounted by 50%, he said.

For instance, Trump said that while China imposes tariffs of “67%” on the US, the US would charge a “discounted” rate of only 34% on Chinese goods.

Trump claimed that South Africa’s tariffs on the United States amounted to 60%. This would work out to a “discounted” 30% tariff on the country.

This has left analysts scratching their heads, trying to determine how the administration reached these numbers.

Tariff computation is not based on tariffs

Following Trump’s announcement, many have been confused about how the USA calculated the tariffs on US goods.

A tariff is a duty or tax imposed by a country or customs territory on imported goods. Governments often use tariffs to protect industries within a country or as a bargaining tool.

South Africa’s tariffs on imported goods vary. Apparel items attract a 40% tariff, while there is a 25% tariff on light vehicles and a 20% tariff on original equipment components.

Trump’s calculation of 60% tariffs thus seems high for South Africa.

The tariffs for other countries also seemed incredibly high, with China’s tariffs on the USA falling far short of the 67% noted by Trump.

The White House has since detailed how the reciprocal tariffs are calculated.

Notably, the formula does not relate to the actual tariffs charged by the trading partner but rather to the US’s trade with it.

“Reciprocal tariffs are calculated as the tariff rate necessary to balance bilateral trade deficits between the US and each of our trading partners,” the White House said.

“This calculation assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing. Tariffs work through direct reductions of imports.”

“The reciprocal tariff rates range from 0 percent to 99 percent, with unweighted and import-weighted averages of 20 percent and 41 percent.”

The formula that the US government used appears complicated at first, but breaking it down shows that the reciprocal tariff figures are quite easy to identify.

It used the following formula:

• i is the country in the calculation
• ∆τ reflects the change in the tariff rate (the ‘imbalance’)
• ε represents the elasticity of imports concerning import prices
• φ represents the pass-through from tariffs to import prices
• m represents the total imports from country i
• x represents the total exports from country i

If one assumes that offsetting the exchange rate and general equilibrium effects are small enough to be ignored, the reciprocal tariff that results in a bilateral trade balance of zero satisfies the equation.

However, the White House’s selection of the values of ε and φ makes the calculation far easier.

The price elasticity of import demand, ε, was set at 4, while the elasticity of import prices concerning tariffs, φ, is 0.25. Multiplying the two figures together leads to a figure of 1.

This means that the US’s formula for reciprocal tariffs simply works out to: x-m/m or exports from the US minus imports into the US, divided by imports into the US.

Thus, the US government’s calculation does not directly account for the tariffs imposed by that country but simply considers the trade relationship with another country.

The US is effectively taxing South Africa more due to the fact it imports more goods from South Africa than it exports—and not South Africa’s actual tariff policy.

Data from the US Department of Commerce showed that the US’s trade balance with South Africa stood at a deficit of $8.8 billion, as exports totalled $5.8 billion and imports $14.5 billion.

Putting these inputs into the formula gets: ($5.8 billion-$14.5 billion) / $14.5 billion = -60.6%. This is where Trump got his 60% “tariff” figure for South Africa.

Due to Trump’s “kindness”, he halved the trade deficit to create a reciprocal tariff of 30% for South Africa.