A significant calculation error in the Trump administration’s recent tariff policy has led to inflated rates that could potentially trigger severe economic consequences, according to a new analysis by the American Enterprise Institute.
The error stems from the White House’s use of an incorrect elasticity figure of 0.25 for import prices, substantially lower than the actual value of approximately 0.945. This miscalculation has resulted in tariff rates being set much higher than economically justified.
“Our analysis shows that using the correct elasticity measurements, no tariff would exceed 14%, and most would remain at the 10% floor set by the administration,” said Claude Barfield, senior fellow at the American Enterprise Institute.
The market’s reaction to the incorrect tariff announcement was swift and severe, with the S&P 500 dropping 9.1% in a week, marking the largest decline since March 2020. This dramatic response has raised concerns among economic experts about the potential long-term implications.
Hedge fund manager Bill Ackman, traditionally a Trump supporter, has called for immediate action to prevent what he terms an “economic nuclear winter.” Ackman advocates for a 90-day pause to revise the tariff calculations and prevent a potential recession.
“The current tariff structure, based on flawed calculations, threatens to create a self-induced economic crisis that could severely impact business investment and consumer spending,” Ackman stated in a recent analysis.
The miscalculation’s impact extends beyond immediate market reactions. The AEI’s detailed report suggests that the error has led to overestimated tariff rates that could unnecessarily strain international trade relationships and domestic economic growth.
Economic experts are particularly concerned about the potential ripple effects on global trade. With the correct elasticity figures, most tariffs would be significantly lower, potentially avoiding unnecessary trade tensions and economic disruption.
“These miscalculated tariffs could lead to retaliatory measures from trading partners and create unnecessary barriers to international commerce,” noted Derek Scissors, resident scholar at the American Enterprise Institute.
As discussions continue about potential revisions to the tariff calculations, economists emphasize the importance of accurate economic modeling in policy decisions. The current situation serves as a reminder of how technical errors in economic calculations can have far-reaching consequences for global markets and trade relationships.