President Donald Trump’s tariff bonanza on Wednesday included 17% tariffs on Israeli products, one of many indications that the new tariff regime is not “reciprocal” in the traditional sense of matching tariffs levied by another country. On Tuesday, Israeli Finance Minister Bezalel Smotrich zeroed out all Israeli tariffs on U.S. goods, in the (apparently disappointed) hope of avoiding the anticipated American duties.

“Fully eliminating tariffs on imports from the U.S. is an important step to safeguard the Israeli economy during a sensitive period and to strengthen the economic relationship with our most important ally,” said Smotrich. “We will continue to act decisively to protect Israeli exports and preserve the competitive advantages of Israel in the international arena.”

The next day, Israel was surprised to find that their products did not even face the minimum tariff of 10%, but an even higher figure. Israeli leaders will likely negotiate, seeking a reduced tariff of 10%, or even exemption from the tariff altogether.

White House Announcement

The confusion stems from the discrepancy between the White House’s framing of Wednesday’s tariff announcements and the way that the Office of the U.S. Trade Representative (USTR) actually calculated the rates.

On Wednesday, Trump held up a prepared chart that showed the size of the tariff the U.S. would levy against each country. For each country, one column showed the “Tariffs Charged to the U.S.A.” — which added, in smaller print, “including currency manipulation and trade barriers” — and another column showed the “U.S.A. Discounted Reciprocal Tariffs” that Trump proposed to levy, which usually amounted to half the percentage shown in the first column. (The frequent exception to this rule is that the smallest percentage shown in either column was 10%; the full list is accessible here.)

For reasons explored below, I believe Trump was poorly served by the aides who prepared this chart, as the information displayed does not exactly match the headline.

Nor were the American people, or even tariff proponents, well-served by the misrepresentation. Taking the chart at its word, tariff advocate Spencer Morrison argued Thursday on “Washington Watch,” “What President Trump has done with his Liberation Day tariff push is he’s taken the sort of average tariff rate in each country, and then cut it in half, and then he says, ‘Look, that’s what we’re going to charge.’”

“They’re not entirely reciprocal. If they were reciprocal, they’d be double what they currently are. But the reason he’s done this, I believe, is to promote — it’s like an olive branch,” Morrison continued. “There [are] really two options for foreign nations to respond to these tariffs. They could respond by raising tariffs of their own,” but “what I expect is that a lot of countries are going to open up their markets to American goods.”

This explanation is straightforward and plausible. But it does not explain cases like Israel’s. America’s best ally in the Middle East lowered its average tariff rate to 0%, and half of that is also 0%. Yet, somehow, Israel faces a 17% tariff.

Tariff Rate Calculation

Israel is not the only nation whose assigned tariff rate does not fit the pattern. “It’s immediately clear that the ‘tariffs charged’ are not actually tariffs charged, because even countries with which the U.S. has free-trade agreements are listed as having very high tariff rates,” argued National Review’s Dominic Pino. “It says South Korea, for example, charges 50% tariffs on U.S. imports, when in reality, nearly all trade between South Korea and the U.S. is duty-free.”

“Enterprising folks on X figured out how the White House got these numbers,” Pino proceeded. “It turns out that they don’t have anything to do with tariff rates.”

“The administration simply took the U.S. trade deficit in goods with each country, and then divided it by the amount of imported goods the U.S. buys from that country. The U.S. tariff rate is then ‘discounted’ by dividing that result in half,” he explained. “Ryan Petersen, the CEO of logistics firm Flexport, posted that this methodology predicts the tariff rates just about perfectly for every country (the only differences are for rounding).”

After Xers sleuthed out the formula, the USTR Office published an official explanation of “Reciprocal Tariff Calculations,” which essentially admitted that the internet sleuths were right.

The USTR tariff calculation was not at all based on the actual tariffs levied by other countries. Instead, they chose to “conceptualize reciprocal tariffs” as “the tariff rates that would drive bilateral trade deficits to zero.” They calculated this rate using a formula that looks more complicated than it really is:

In this formula, ?τ_i is the change in the tariff rate with a given country, x_i is exports to that country, and m_i are imports from that country (thus, x_i – m_i simply calculates the trade deficit). As for the denominator of this fraction, the USTR office explained, “Parameter values for ε and φ were selected. The price elasticity of import demand, ε, was set at 4. … The elasticity of import prices with respect to tariffs, φ, is 0.25.” These fixed values therefore simply: 4 * 0.25 = 1, making the denominator equal to m_i, or imports.

The sleuths correctly deduced USTR’s formula. The percentages contained in the White House chart under the heading, “Tariffs Charged to the U.S.A.” were not based on the actual tariffs charged by other countries. Instead, those numbers were calculated by dividing the U.S. trade deficit by the total value of goods imported from a given country.

Yet running the raw numbers through this formula would not always yield the final result derived by the USTR. The U.S. has a trade surplus with more than 100 countries. This is the same as a negative trade deficit, which, according to this formula, would yield a negative tariff rate. This is obviously absurd; for all countries where the U.S. has a trade surplus, the USTR assigned a 10% tariff. Additionally, whenever the formula would yield a positive tariff rate that was less than 10% (that is, whenever the U.S. had a trade deficit with a nation totaling less than 20% of its imports to the U.S.), the USTR also assigned a 10% tariff.

Pino also noted that the USTR’s formula “only takes into account goods trade, not goods and services. The U.S. has a services trade surplus of nearly $300 billion, but none of that gets counted in the formula, making trade deficits look bigger than they actually are and justifying a higher tariff rate.”

USTR Assumptions

The USTR explained that its calculation “assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing.” This statement reveals the more fundamental assumption that every bilateral trade relationship should and would balance (reach a point with neither a trade deficit nor a trade surplus), without unfair, external intervention.

Pino pronounced this postulate preposterous. “If that were true, it would also mean that the U.S. is engaging in unfair behavior with the 100-plus countries with which the U.S. has a trade surplus, but the goods from those countries get tariffs too, just because.”

“It’s one thing to say total trade should be balanced; it’s another thing to say trade with each and every country should be balanced. Both are wrong, but the second is crazier, since it ignores the possibility that different countries will naturally want to buy different amounts of stuff from each other,” Pino pressed. “Even Oren Cass, a tariff cheerleader who believes the total trade deficit does matter, wrote in his 2018 book “The Once and Future Worker” that trade deficits with specific countries don’t matter. Yet the Trump administration is working off the assumption that they not only matter but are a national emergency requiring presidential usurpation of Congress’s taxing powers.”

Then the USTR added another loaded sentence: “Tariffs work through direct reductions of imports.” It’s worth spelling out what this statement entails; how does tariff (a tax on imports) reduce the number of goods imported? A tariff’s direct effect is to artificially increase a foreign producer’s cost per unit of a good he sells in a domestic market. To still turn a profit, the producer must either raise his prices (if possible) or reduce his costs elsewhere. Raising his prices likely means selling fewer goods because fewer consumers will be willing to buy the good at the higher price. Reducing costs elsewhere will likely involve measures (e.g. cutting a factory’s hours) that reduce production, meaning fewer goods are available to sell.

Thus, for the American consumer, tariffs work by making fewer goods available at higher prices.

Foreign Effects of USTR Tariff Scheme

This is the reasoning that led the USTR to recommend a 17% tariff on Israeli goods, even though Israel has eliminated its tariffs on American goods.

Israel is not the only country thus disproportionately affected. The U.S. has also signed bilateral free-trade agreements with Australia, Singapore, and South Korea in the far East; Bahrain, Jordan, Morocco, and Oman in the Arab world; and Chile, Colombia, Panama, and Peru in the Americas, as well as multilateral free trade agreements with Canada, Mexico, and other Central American/Caribbean nations. Trump applied at least 10% tariffs to all these countries. Japan has an average tariff of 4.3%, according to the U.S. Commerce Department, but the USTR assigned it a tariff rate of 24%.

Days before Trump’s tariffs were unveiled, Vietnam also acted to cut existing tariffs on U.S. liquefied natural gas (from 5% to 2%), automobiles (from 64% to 32%), and ethanol (from 10% to 5%) in half. Yet Vietnam received one of the highest tariff increases that Trump announced — 46%.

If the point of reciprocal tariffs is to prompt other countries to lower their own tariffs, then it makes little sense to inflict heavy tariffs on countries like Israel and Vietnam that recently lowered their tariffs. A more prudent policy would incentivize the behavior from other countries that we want to see. Unfortunately, based as it is on annual export-input statistics, the USTR formula has no mechanism for recognizing a country’s recent policy changes, either favorable or unfavorable.

The 10% tariff applied even to uninhabited, or nearly uninhabited, territories, such as Australia’s Antarctic Heard Island and McDonald Islands (population: zero). Meanwhile, the four countries omitted from the added tariffs were Russia, Belarus, Cuba, and North Korea.

The Trump administration has pitched its tariff scheme as a necessary reciprocal action to push other countries to lower their own trade barriers. But the reality of that scheme has turned out to be far different from what many people expected.

The shock extends even to close American allies like Israel, which explicitly eliminated its tariffs on American goods in hopes of avoiding the punitive economic barriers it now faces. “We knew that this was going to happen,” Israeli Finance Ministry Chief Economist Shmuel Abramzon said on Thursday, “but we are surprised about the scope of the tariff and are still learning the implications.”