The American Enterprise Institute recalculated rates based on correct numbers, and no tariff exceeded 14%

Researchers say the Trump administration’s tariff rates may have been overstated by a factor of four.

The tariff announcement from the White House that led to the biggest weekly drop in the stock market since COVID may have been the result of a simple error.

That’s the argument coming from the American Enterprise Institute, a think tank in Washington that espouses conservative views, which looked into the mathematical formula published by the U.S. Trade Representative to calculate reciprocal tariffs.

As pointed out by MarketWatch earlier, the White House, in addition to looking at each country’s trade deficit and exports to the U.S., also used two additional items to determine tariff rates: the elasticity of import demand with respect to import prices, and the elasticity of import prices with respect to tariffs.

“The idea is that as tariffs rise, the change in the trade deficit will depend on the responsiveness of import demand to tariffs, which depends on how import demand responds to import prices and how import prices respond to tariffs,” AEI senior fellows Kevin Corinth and Stan Veuger pointed out.

The problem is the White House used 0.25 as the elasticity of import prices. Per the research paper the USTR cited in the tariff determination, the elasticity is actually closer to 1, or 0.945 to be precise. The AEI authors say the White House may have used the elasticity of retail prices instead of import prices.

The AEI team went and recalculated tariffs based on using correct numbers — and found no tariff rate would exceed 14%, and most would be at the 10% floor the Trump administration set.

It stands to reason that if the revised calculations were used, the stock-market reaction would have been much different. In fact, when the Wall Street Journal issued a report saying the universal tariff would be 10% — but not the details of the reciprocal tariffs — stock-market futures actually rose on Wednesday afternoon.

The S&P 500 ended up losing 9.1% last week, thebiggest one-week percentage decline since March 20, 2020.

S&P 500 futures were down another 5% on Monday.

Granted, it is also possible that the White House was aware of the correct math and chose not to apply it.

And, remember, there was another factor in the calculation — the price elasticity of import demand was set at 4.

The USTR, in its paper on reciprocal tariff calculations, said there is recent evidence that elasticity is near 2 in the long run. Using the correct elasticity of import prices with different demand assumptions would reduce tariffs, but not by as much as the AEI researchers state.