U.S. think tank blasts Trump tariffs as based on error, 'corrects' rate for Korea to 10%

The 25-percent tariff imposed on Korea by the Donald Trump administration "makes no economic sense," U.S. think tank American Enterprise Institute (AEI) said in a report, which recalculated the appropriate tariff rate at 10 percent.

U.S. President Donald Trump's tariffs [JOONGANG ILBO]

The 25-percent tariff imposed on Korea by the Donald Trump administration "makes no economic sense," U.S. think tank American Enterprise Institute (AEI) said in a report, which recalculated the appropriate tariff rate at 10 percent.

The AEI on Friday published a report titled "President Trump’s Tariff Formula Makes No Economic Sense. It’s Also Based on an Error" following the U.S. President's announcement to impose reciprocal tariffs on U.S. trading partners around the world.

Editors Kevin Corinth and Stan Veuger of AEI penned the report.

"President Trump described the tariffs as reciprocal, equal to half of the rate of tariffs and nontariff trade barriers imposed by other countries," read the report. "However, they are nothing of the sort."

According to the report, the U.S. tariffs are equal to the U.S. trade deficit with the country in question divided by the imports from said country, divided by either two or 10 percent — depending on which is higher.

"So even if the United States has no trade deficit [or a trade surplus] with a country, they still receive a minimum tariff of 10 percent," according to the AEI calculations.

The ″President Trump’s Tariff Formula Makes No Economic Sense. It’s Also Based on an Error″ report published by the American Enterprise Institute (AEI) on April 4. [SCREEN CAPTURE]

"But even if one were to take the Trump Administration’s tariff formula seriously, it makes an error that inflates the tariffs assumed to be levied by foreign countries fourfold," continued the report.

The Trump administration's formula includes two additional denominators that cancel out the elasticity of import demand with respect to import prices and the elasticity of import prices with respect to tariffs, according to the report.

"The Trump Administration assumes an elasticity of import demand with respect to import prices of four, and an elasticity of import prices with respect to tariffs of 0.25, the product of which is one and is the reason they cancel out in the Administration’s formula," read the report.

"However, the elasticity of import prices with respect to tariffs should be about one [actually 0.945], not 0.25 as the Trump Administration states. Their mistake is that they base the elasticity on the response of retail prices to tariffs, as opposed to import prices as they should have done."

The recalculated tariff for Korea proposed by the ″President Trump’s Tariff Formula Makes No Economic Sense. It’s Also Based on an Error″ report published by the American Enterprise Institute (AEI) on April 4. [SCREEN CAPTURE]

According to the AEI calculations, the corrected tariff for Korea stood at 10 percent, not 25 percent, along with the vast majority of other countries whose tariffs were also recalculated at 10 percent.

"Now, our view is that the formula the administration relied on has no foundation in either economic theory or trade law," the report said.

"But if we are going to pretend that it is a sound basis for U.S. trade policy, we should at least be allowed to expect that the relevant White House officials do their calculations carefully. Hopefully, they will correct their mistake soon: the resulting trade liberalization would provide a much-needed boost to the economy and may yet help us stave off a recession."

The Korean economy has been in panic mode since the announcement of Trump's declaration.

The main Kospi index plunged below the 2,400 threshold on Monday, prompting the authorities to activate the sidecar mechanism and to place 100 trillion won ($73 billion) in stability funds at the ready.

BY YOON SO-YEON [yoon.soyeon@joongang.co.kr]