Minimum Viable Product
Keepin' it simplistic
(Please excuse all the many typos. It has been a long week and I’m quite tired.)
Obviously nobody knows anything (TM Alan Beattie) when it comes to what Trump will do.
But I am starting to wonder if there is a useful rule of thumb developing for predicting how he might do it: “in the most simplistic, laziest way possible.”
I say this because, in November last year, I created a hierarchy of countries Trump would want to tariff (mainly so that I could call it the MAGA (Measure of American Goods Advantage) index) in a piece published by FT Alphaville.
To do this, I asked myself, what is the most simplistic and lazy way to create such an index?
This is the equation I landed on:
US trade balance, 2020-2022/total trade*100*-1
This was intended to highlight which countries run persistent trade surpluses with the US and create a number between 100 and -100, where 100 = Trump loves you and -100= Trump hates you.
The MAGA index is ridiculous because it penalises places like the Falklands, which sell lots of fish to the US but don’t buy very much because there are not many people living there, and developing countries that don’t buy very much because they are poor, but do export some commodities.
Annnnnnd … it turns out I overcomplicated things.
Because when the President decided to impose reciprocal tariffs earlier this week, which ostensibly penalise countries for treating US exporters unfairly, he didn’t bother with 3-year averages or the like, he just did the following:
US single-year trade deficit/total imports = deserved tariff.
He then divided this number by two because he’s “kind” to calculate the applied tariff. (Note: anyone with a number below 10 got a 10 per cent tariff.)
And … lol.
But, our top 10 worst offenders lists are not so different:
Anyway, I guess that what I’m saying is that by being simplistic and lazy, I was accidentally one of the more accurate predictors (kinda) of Trump’s tariff hierarchy and levels.
Maybe there’s a lesson here for those countries trying to negotiate a lower tariff.
Given he seems to believe that the extent to which a country sells more to the US than it buys is a valid proxy for determining how unfairly another country treats US exports, what is the most simplistic and laziest way to go about determining whose tariffs goes up and whose goes down?
One approach that would fit the bill:
Every year (quarter? month?), re-run the equation based on the new trade data. If a country’s number goes up, its tariff goes up. If a country’s number goes down, it goes down. (Note: unless a country’s number is below 10, because then you still get a 10 per cent tariff.)
The problem with this is that perhaps the number has only gone down because of the Trump tariff, and if the tariff were to be lowered the number might go up again.
This makes me think that there could be a second criterion: you have to do some sort of deal with Trump, which involves the reduction of tariffs or removal of other irritants. For example, maybe you scrap a digital services tax or two, or remove your tariffs on US exports.
In and of itself, the deal isn’t enough. But if you combine the two (deal plus the equation pumps out a lower number), then … maybe.
And look, no one knows anything. But given this is so simplistic and lazy … it just might work.
(Note: none of this has any bearing on how you might address the other sectoral tariffs on steel/aluminium and cars.)
Things I wrote last week
In a new piece for FT Alphaville I brought my artwork to the unsuspecting masses, and made an argument that will be familiar to readers of this newsletter. (That non-preferential rules of origin are going to become a big deal now that the US is applying country-specific tariffs.
Alongside my Flint colleague, Will Haworth, I wrote a piece for PoliticsHome explaining why there is still quite a bit of uncertainty about how Trump tariffs will apply to exports from Northern Ireland.
Things other people wrote last week
Quite a few people think that other countries should coordinate their response to Trump to ensure maximum leverage and avoid being picked off one by one. I’m not sure that the incentives are quite right to make this work (covered here), but people disagree. Here’s Ignacio Garcia Bercero (Bruegel) arguing that the EU and CPTPP members should launch a coalition of the willing against Trump’s policies and in favour of rules-based trade. Here’s Mona Paulsen (LSE Law) and Dan Ciuriak (C.D. Howe (Senior Fellow)) advocating a “small open economy caucus (SOEC) be formed within the World Trade Organization (WTO)”, which would prioritise a coordinated response to Trump’s trade actions.
One of the other issues arising from the Trump Executive Order on reciprocal tariff is yet another signal that the US’s $800 de minimis threshold — which waives tariffs on imported low-value, business-to-consumer parcels — is not long for this world. Writing for EPC, Anna Jerzewska compares the US and EU efforts to remove their respective de minimis thresholds and explains why these efforts are creating so much uncertainty for businesses.
Marta Bengoa (Non-Resident Fellow at ORF America) write about the outsized impact the reciprocal tariffs will have on developing countries. For example:
Based on 2023 trade figures, the $5.9 billion in goods Cambodia exports to the United States would face $2.9 billion in tariff costs — a staggering 9.5% of its total economic output. For a country where the garment sector employs over 800,000 workers, predominantly women, these tariffs could trigger widespread factory closures and unemployment.
Finally, Peter Ungphakorn has updated his piece, discussing (among other things) the relevance of the so-called Kindleberger spiral to today’s debate.
Chart of the week
From Johannes Fritz and the good folk at Global Trade Alert:
Best wishes,
Sam