LOVE him or hate him, there is never a dull moment with President Donald Trump in power. We are nearing his 100th day in White House. He has already started a trade war that started singeing stock markets all over the world. Although stock markets have recovered somewhat when after a few days of nonchalance, Mr. Trump announced a pause of 90 days, no one quite knows what is coming next and there is extreme volatility everywhere. Stock market indices in the USA went down again with the Chairman of the Federal Reserve opining that the announced tariffs might be inflationary and Mr Trump taking offence at his refusal to lower the interest rates and threatening to fire Mr. Powell. After he resiled from the extreme position and indicated that China is willing to negotiate, markets are up again somewhat.

Following his taking office on the 20th January, 2025, Mr Trump had already announced that he would unveil his tariff plan on April the 2nd and not on April 1st such that people take it seriously. So, on that day, in the Rose Garden of the White House with a lot of fanfare, he held up a chart of the so-called reciprocal tariffs that he would impose on all countries who according to him have been ripping off the richest country in the world-the USA. According to Mr. Trump, tariff is the most beautiful word in the dictionary and in his world view tariffs can be the panacea for all the ills afflicting the USA. To be fair to him, he has been quite consistent in this view and had indeed imposed tariffs in his first term albeit in a somewhat restricted manner, and while campaigning for his second term, he promised to impose reciprocal tariffs on countries that according to him have been taking advantage of the USA for far too long.

During his campaign Mr. Trump repeatedly expressed his admiration for President William McKinley, who was the 25th President of the United States for two terms from 1897 till his assassination in 1901. In fact, one of Mr. Trump's first Presidential Acts, was to rename the highest peak of the USA in Alaska, Mount Denali as Mount McKinley. It was indeed unofficially named Mount McKinley by a gold prospector in 1896 but the indigenous people of Alaska wanted the name changed and President Barack Obama announced the name change in 2015. However, Mr. Trump will have none of that and on January 20th through an executive order titled- Restoring Names That Honor American Greatness-renamed the mountain after Mr. McKinley. The relevant part of the order states:

"President William McKinley, the 25th President of the United States, heroically led our Nation to victory in the Spanish-American War. Under his leadership, the United States enjoyed rapid economic growth and prosperity, including an expansion of territorial gains for the Nation. President McKinley championed tariffs to protect U.S. manufacturing, boost domestic production, and drive U.S. industrialization and global reach to new heights. He was tragically assassinated in an attack on our Nation's values and our success, and he should be honored for his steadfast commitment to American greatness.

In 1917, the country officially honored President McKinley through the naming of North America's highest peak. Yet after nearly a century, President Obama's administration, in 2015, stripped the McKinley name from federal nomenclature, an affront to President McKinley's life, his achievements, and his sacrifice.

This order honors President McKinley for giving his life for our great Nation and dutifully recognizes his historic legacy of protecting America's interests and generating enormous wealth for all Americans." (Emphasis added)¹

We may note that it was during McKinley presidency that Spain surrendered the Puerto Rico, Hawaii, Samoa, Guam, and the Philippines, as part of the treaty of 1898 that ended the Spanish-American war. Mr Trump on his part has set his eyes on Greenland, proposed taking over the Panama Canal and wanted to make Canada the 51st State.

Coming back to tariffs, it is no exaggeration to state that tariffs or import duties are intimately connected to the history of the USA, right from its formation to the civil war and the great depression. Both the British and the French had colonies in America and both were pushing westward to expand their spheres of influence. This obviously brought them in conflict with the native Americans and with each other. But wars cost money and the British besides prohibiting expansion beyond a line, also tried various ways to extract money from the colonist Americans. The result was however rampant smuggling. After the failure of the Stamp Act, the British government tried to impose import duties or tariffs, which turned out to be equally unpopular, leading up to the slogan- 'No taxation without representation,' the Boston Tea Party and the birth of the USA.

But having revolted against the import duties, American policymakers in their turn decided to impose tariffs based on the familiar argument of infant industry- the young American industry needed protection from the older European merchants and tariffs were the only reliable source of revenue for the Federal Government.

After the United States achieved independence in 1776, under the Articles of Confederation, the U.S. federal government could not collect taxes directly but had to request money from each state. The power to levy taxes and tariffs, when proposed by the House of Representatives was granted to the Federal government by the Constitution after it came into effect in 1789. The new government needed a way to collect taxes from all the states that was easy to enforce and had only a nominal cost to the average citizen. In fact, the Tariff Act of 1789 was the second bill signed by President George Washington imposing a tariff of about 5% on nearly all imports, with a few exceptions. The encouragement and protection of manufacturers was its stated purpose.²

Subsequent Presidents including Thomas Jefferson to Abraham Lincoln, all supported the tariff policy. In fact, Lincoln was supposed to have said: "Give us a protective tariff and we will have the greatest nation on earth."

That is not to say that there were no champions of free-trade. In fact, it seems that President McKinley himself changed his views towards tariffs in the beginning of his second term. A CNN article, referring to Douglas Irwin, professor of Economics and an expert on McKinley and his tax policy, asserts that Trump misses several points in the historical record about McKinley – including his contention that tariffs created wealth and made America rich in the late 19th century. According to Prof Irwin, McKinley saw that the USA had a whole lot of excess capacity in manufacturing, and (thought) 'Why don't we use that capacity to send our products to the rest of the world?' So he shifted from protectionism to thinking about reciprocity and opening up foreign markets."

"He gave a famous speech laying this out in September 1901. But he was shot the next day and died several days after that. So we'll never really know what would have happened had he lived and tried to push that through."

Theodore Roosevelt, his vice president and successor, pretty much left tariffs policy in place.³

In his inaugural address, President Trump mentioned:

"President McKinley made our country very rich through tariffs and through talent - he was a natural businessman - and gave Teddy Roosevelt the money for many of the great things he did, including the Panama Canal, which has foolishly been given to the country of Panama after the United States - the United States - I mean, think of this - spent more money than ever spent on a project before and lost 38,000 lives in the building of the Panama Canal.(…)⁴

Thus, although in the nineteenth century, tariffs played an important role, it was not as if there were no opposition to the tariff policy. In fact, one of the reasons of the Civil War could be the disagreement over tariffs. Although the civil war was fought over slavery, the attitude of the northern industrial States differed from the agrarian South over tariffs as well with the northern states favouring protectionism through tariffs while the South largely supported free trade since they relied on export of commodities.⁵

While it is true that tariffs indeed was the major source of revenue till the early 1930s, the economic construct of the USA and indeed of the world has changed over time and with the reintroduction of the Income Tax in 1913 following the sixteenth Amendment of the Constitution, the importance of tariffs reduced and from 1930s onwards, tariffs have yielded only about 2% of total revenue. The entire system built after the world war-II was based on free trade and America was its main proponent.

Now, President Trump wants to go back in time to the glory days of the USA when tariff was the King. In his defence, it can be said that Mr. Trump has been very consistent about the use of tariffs and thinks that it represents "a very powerful weapon that politicians haven't used because they were either dishonest, stupid or paid off in some other form."⁶

The factsheet that accompanied President Trump's action in imposing 25% additional tariffs on imports from Canada and Mexico, 10% additional tariffs on imports from China on the 1st of February, 2025 mentioned:

"Previous Administrations failed to fully leverage America's economic position as a tool to secure our borders against illegal migration and combat the scourge of fentanyl, preferring to let problems fester."⁷

While these trade skirmishes with particular countries continued, as mentioned earlier, on April 2nd designated as the Liberation Day Mr. Trump announced his 'reciprocal tariffs'- 'they do it to us and we do it to them' on about 60 countries and territories including on Heard Islands and McDonald Islands where the only inhabitants are penguins.

President Trump first declared a national emergency and invoked 'his authority under the International Emergency Economic Powers Act of 1977 (IEEPA) to address the national emergency posed by the large and persistent trade deficit that is driven by the absence of reciprocity in our trade relationships and other harmful policies like currency manipulation and exorbitant value-added taxes (VAT) perpetuated by other countries.'⁸

Using his authority assumed under the said IEEPA, President Trump imposed a baseline 10% tariff on all countries, effective April 5, 2025 at 12:01 a.m. EDT and effective April 9, 2025 at 12.01 a.m. EDT, he proposed to impose an individualized reciprocal higher tariff on the countries with which the United States has the largest trade deficits. All other countries will continue to be subject to the original 10% tariff baseline.

"These tariffs will remain in effect until such a time as President Trump determines that the threat posed by the trade deficit and underlying nonreciprocal treatment is satisfied, resolved, or mitigated."⁹

Some goods will not be subject to the Reciprocal Tariff. These include: (1) articles subject to 50 USC 1702(b); (2) steel/aluminium articles and autos/auto parts already subject to Section 232 tariffs; (3) copper, pharmaceuticals, semiconductors, and lumber articles; (4) all articles that may become subject to future Section 232 tariffs; (5) bullion; and (6) energy and other certain minerals that are not available in the United States.

For Canada and Mexico, the existing fentanyl/migration IEEPA orders remain in effect, and are unaffected by this order. This means US-Mexico-Canada (USMCA) compliant goods will continue to see a 0% tariff, non-USMCA compliant goods will see a 25% tariff, and non-USMCA compliant energy and potash will see a 10% tariff. In the event the existing fentanyl/migration IEEPA orders are terminated, USMCA compliant goods would continue to receive preferential treatment, while non-USMCA compliant goods would be subject to a 12% reciprocal tariff.

Mr Trump held up a board showing countrywide calculation of his reciprocal tariffs. The table contained three columns-country, tariff charged to USA and the proposed reciprocal tariffs by the USA. Some of the countries on the list were as follows:

While TV Pundits were wondering how the numbers were arrived at, it soon transpired that the working was given in an annex to the US Trade Representatives website.¹⁰

According to the said document, the reciprocal tariffs were conceptualised as the tariff rates that would drive bilateral trade deficits to zero. It is stated that while models of international trade generally assume that trade will balance itself over time, the United States has run persistent current account deficits for five decades, indicating that the core premise of most trade models is incorrect.

It is stated that the failure of trade deficits to balance has many causes, with tariff and non-tariff economic fundamentals as major contributors. Regulatory barriers to American products, environmental reviews, differences in consumption tax rates, compliance hurdles and costs, currency manipulation and undervaluation all serve to deter American goods and keep trade balances distorted.

As a result, U.S. consumer demand has been siphoned out of the U.S. economy into the global economy, leading to the closure of more than 90,000 American factories since 1997, and a decline in the manufacturing workforce of more than 6.6 million jobs, more than a third from its peak.

It is stated that while individually computing the trade deficit effects of tens of thousands of tariffs, regulatory, tax and other policies in each country is complex, if not impossible, their combined effects can be proxied by computing the tariff level consistent with driving bilateral trade deficits to zero. If trade deficits are persistent because of tariff and non-tariff policies and fundamentals, then the tariff rate consistent with offsetting these policies and fundamentals is reciprocal and fair.

Basic Approach of the calculation as given in the document was as follows: “consider an environment in which the U.S. levies a tariff of rate on country i and reflects the change in the tariff rate. Let represent the passthrough from tariffs to import prices, let represent the passthrough from tariffs to import prices, let represent total imports from country i, and let represent total exports. Then the decrease in imports due to a change in tariffs equals Assuming that offsetting 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 underlying equation was

Surplus ÷ (Imports )

Where: , the assumed elasticity of U.S. import demand , the assumed pass-through rate of tariffs to prices This simplifies mathematically to:

"Reciprocal" Tariff (Percent) = U.S. Trade Deficit with Country ÷ U.S. Imports from Country

To soften the impact, the result is then halved-producing what officials have called a "discounted reciprocal tariff." ¹¹

And the reaction from the academic circle including from relatively conservative organisations have been scathing. Thus, Tax Foundation story headline was:

Trump's Reciprocal Tariff Calculations Are Nonsense, Will Punish Mutually Beneficial Trade ¹²

Explaining the complex equation, the author opined: "there are actually two parameters: f and e, representing the pass-through of tariffs to domestic prices and the elasticity of demand for imports, respectively, but with values of ¼ and 4, respectively, these parameters happen to cancel out perfectly. These parameters are likely difficult to estimate (…), but one point deserves mention: the low value for pass-through is justified with a sentence declaring that "the recent experience with U.S. tariffs on China has demonstrated that tariff passthrough to retail prices was low (Cavallo et al., 2021)." This is not Tax Foundation's overall read of the literature on tariff pass-through to retail prices, and it is not how we would characterize the results of Cavallo et al., which are considerably more nuanced.¹³

As for making bilateral trade deficit as the key parameter, the reaction of Olivier Blanchard of the Pieterson Institute of International Economics is worth noting

"Running bilateral trade surplus[es]/deficits with different countries is the way it should be. Trying to eliminate each one is simply stupid. I have a trade deficit with my grocer, a trade surplus with my employer. I am not sure it would be a great idea for me to work for my grocer. (….)

Same thing with countries. There are reasons why we sell more to one, buy more from another. Different tariff rates across countries imply reshuffling of deficits and surpluses across countries, but no obvious change in the overall trade deficit."

Considering the mayhem that such an announcement caused in the stock markets around the world and even in the Bond market in the USA, Scott Bessent, the Treasury Secretary asked the affected nations to take a deep breath and not to retaliate. Most countries did not immediately respond although European Union announced considering retaliatory measures. But China, announced an immediate retaliatory tariff of 34%. On April 7, Mr. Trump countered China's retaliatory tariff, threatening a 50% tariff in addition to the full 34% reciprocal rate if China did not back off. China did not and so, Mr. Trump hit China with an additional 84% levy across all imports, raising the total to 104%. The same day China announced retaliatory tariffs on all US goods with 84% tariff. In a pique, Mr. Trump then raised tariff to at least 145% on Chinese imports effective immediately. On April 9, Mr Trump announced a 90 day pause on all countries except China. China then increased its reciprocal tariff to 125% ¹⁴

So, what the future holds for us? It is true that many countries are lining up to conclude a deal that will spare them the extreme, but many may just sit out. Besides, opposition is also coming from within the USA. There is an open war between Elon Musk who has substantial interest in China and Peter Navarro, Mr Trump's Counsellor for trade and manufacturing trading insults with each other. Latest news is that 12 states of the USA have joined together to question the President's authority in invoking the emergency and his actions on tariffs. Certainty in such a vital issue such as tariff is unlikely to come anytime soon.

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¹ https://www.whitehouse.gov/presidential-actions/2025/01/restoring-names-that-honor-american-greatness/

² Wikipedia

³ The truth about William McKinley, the 'tariff king' and Trump's idol-https://edition.cnn.com/2025/02/12/business/trump-william-mckinley-tariffs/index.html

⁴ https://www.whitehouse.gov/remarks/2025/01/the-inaugural-address/

⁵ Tariffs Part I: The American Experience; How tariffs helped spark the American Revolution

⁶ Trump says McKinley 'made our country very rich through tariffs'-Will Weissert and The Associated Press- https://fortune.com/2025/03/10/trump-william-mckinley-tariffs-gilded-age/

⁷ https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-imposes-tariffs-on-imports-from-canada-mexico-and-china/

⁸ https://www.whitehouse.gov/fact-sheets/2025/04/fact-sheet-president-donald-j-trump-declares-national-emergency-to-increase-our-competitive-edge-protect-our-sovereignty-and-strengthen-our-national-and-economic-security/

⁹ ibid

¹⁰ https://ustr.gov/sites/default/files/files/Issue_Areas/Presidential%20Tariff%20Action/Reciprocal%20Tariff%20Calculations.pdf

¹¹ "Liberation Day Tariffs Explained-Center for Strategic and International Studies (CSIS)

¹² https://taxfoundation.org/blog/trump-reciprocal-tariffs-calculations/

¹³Trump's Reciprocal Tariff Calculations Are Nonsense, Will Punish Mutually Beneficial Trade https://taxfoundation.org/blog/trump-reciprocal-tariffs-calculations/