“Trump trade policy in 2025 didn’t work as it ignored Economics 101,” written by Professor of Economics Devashish Mitra, was published on Moneycontrol.com. Following is an excerpt:

On April 2nd, 2025, which he called Liberation Day, Trump announced “reciprocal tariffs” on imports from every nation. India was slapped with a 25% “reciprocal tariff,” even though its own overall trade-weighted average tariff was 12%.  But the lack of reciprocity was much starker in the case of Taiwan, with its own tariffs at 2%, being imposed a “reciprocal tariff” of 32%.

Reciprocity here was surprisingly defined in terms of trade balance. The reciprocal tariff rate on each country was one that the Trump administration believed, based on an erroneous formula, would bring the US’s bilateral trade deficit with that nation down to zero.

This reduction in the trade deficit was expected to be mainly through a reduction in US imports, unrealistically assuming exports to remain constant. Actually, the resulting exchange rate movements and rise in the cost of imported inputs were likely to shrink exports and limit reductions in imports.

Additionally, built into their calculations was the unrealistic assumption of 25% pass-through of these tariffs into domestic prices faced by US consumers and import-using producers, in contrast to existing high-quality pass-through estimates of close to 100%.

Also, completely ignored was the basic economics of trade deficits and surpluses, which says that trade balances are governed not really by trade policies but by macroeconomic conditions and policies.

And, finally, there has been no attention to the basic accounting identity that a current account (trade) deficit is always accompanied by a capital account surplus of the same magnitude. Thus, the attractiveness of American financial assets can drive a capital account surplus, and, thereby, a trade deficit. Therefore, it is shocking that the Trump administration, on the one hand, expresses its concern for trade deficits, and, on the other, brags about all the unenforceable promises of large investments by countries with whom the US has negotiated trade deals.