US President Donald Trump declared April 2 “Liberation Day” and imposed tariffs on all countries doing business with the United States. Every country was assessed 50% of its trade gap with the US, expressed as 50% times (trade gap in goods imported vs. goods exported for that country, divided by total goods imported). Israel, for example, exported $22.2 billion of goods to the US in 2024 versus importing $14.8 billion, so the tariff on Israeli goods would be 50% x ($7.4 billion trade gap/$22.2 billion in goods exported to the US) equals 17% on all Israeli goods to the US. However, no country was assessed less than 10%. Australia, for example, buys more goods from the US than it sells but was still assessed 10%.
Since the program was revealed, it has been denounced as “divisive,” “chaotic,” “recessionary,” and many other pejorative terms. The denouncers have been primarily politicians on the other side of the political spectrum, journalists of the mainstream media, and, of course, many countries in the world which now find themselves having to pay tariffs. After April 2, Trump exempted some consumer items from the tariffs and suspended almost all the tariffs for 90 days in order to negotiate trade deals with countries around the world.
In lieu of the widespread and vehement criticism of the program, we should perhaps ask, “Is there a method to Trump’s madness?” The answer is that Trump has a specific objective he wants to achieve, a specific strategy to achieve that objective, and specific steps which he is now pursuing to implement the strategy and hence achieve the objective. In other words, there is no “method to his madness” because there is no madness. It’s all method.
There is no madness to Trump's tariff method
The US last had a surplus in the trade of goods in 1975. For 50 years, it has been running a deficit. The size of the deficit has been steadily growing, so that in 2024 it stood at $918 billion. In earlier years, a trade deficit, even a large one, mattered less because the US could absorb it. Today, however, the US has an accumulated fiscal deficit of about $36 trillion, equal to 125% of the annual GDP, and the US is paying out more in interest on the debt than it invests in defense. The annual trade deficit adds to this already unsustainable debt burden.
Trump’s specific objective is to dramatically reduce this trade deficit. He has never said he wants to eliminate it entirely or that the US must move into surplus, but he wants to slash the size of the deficit. The great modern historian Niall Ferguson has said that no powerful country in history recovers economically when its payment on interest exceeds its budget on defense. Trump is determined to make the US the exception to that rule. That is his objective.
To achieve the objective, Trump’s strategy is to strongly encourage, or “force” if you will, individual countries to negotiate trade agreements directly with the US. Although he has placed tariffs on all nations of the world, he has very little interest in most of the nations, with the exceptions of the four nations that collectively create 84% of the entire trade deficit of the US. These nations are China with 32% of the deficit, the EU 26%, Mexico 19%, and Canada 7%. If Trump can change the terms of trade with these nations, the deficit will fall dramatically.
Trump does not want the same thing with all nations. From China, for example, he wants to put an end to the discrimination against American goods, an end to targeted government subsidies to favored industries, an end to theft of intellectual property, and wants protection of American firms in Chinese courts. From the EU, Trump wants the Europeans to buy $300 billion in American LNG (liquefied natural gas) every year, to stop discrimination against top American IT firms (Google, Facebook, X, Amazon, and others), to spend more on defense, and to lower tariffs somewhat. From Mexico, Trump wants an end to smuggling drugs and people, a stop to circumventing American restrictions on other countries by the assembly of pre-manufactured parts in Mexico, and a lowering of tariffs. From Canada, Trump wants an end to the smuggling of drugs and people, the sale of Canadian oil and gas to the US, a totally different pricing on pharmaceuticals, and a lowering of tariffs on American lumber and agricultural products. Trump’s strategy is to negotiate his way to a reduction of the deficit.
What are the steps Trump is using to implement his strategy? In addition to his public and repeated preference for negotiation over confrontation, there are three specific steps. First, he applied a formula to create a consistent and checkable method for setting the tariff rate for each country. Some economists have complained that the formula is complicated or unrelated to specific products. But to create a formula for each country would have taken months or even years, without necessarily producing better results. Further, rates based solely on tariffs would not account for non-tariff barriers, which can be equally oppressive. Also, one of the truly beautiful aspects of Trump’s program, in terms of logic, is that the tariff rate goes up as the value of the trade gap grows for each country. China, for example, has a huge surplus with the US, equal to 67% of all exports to the US, hence the initial tariff was 34%. Israel, with a 33% trade surplus, has a 17% tariff.
Second, the rates are not fixed. They have been suspended for 90 days for all but one country, and it may be anticipated that the ultimate rates will be lower. The exception, of course, is China. When that country retaliated with much higher tariffs on American products, Trump did the same, and everyone understands he will raise the tariff for any country that goes to trade war against the US.
Third, although 12 major countries have a trade deficit with the US, meaning the US sells more to them than it buys, nevertheless those countries are still subject to the minimum 10% tariff. Why this minimum? In 2024, the US imported $3.4 trillion of goods. A 10% tariff would yield a maximum $340 billion in revenue to reduce the effect of the deficit. The actual collection would almost surely be less, due to trade deals and elasticities of demand for various products; but still, this minimum would likely yield $100 billion to $200 billion in revenue for the US. It is not a “tax,” but it does function as a tax, and will likely be offset by reduced income taxes for Americans.
That’s Trump’s objective, strategy, and steps. Will Trump succeed? We’ll only know in three to six months, but the odds are very high that he will achieve much of what he wants, but very likely not all. The EU, Mexico, and Canada are all negotiating with the Trump administration right now, not to mention other countries like Japan and Vietnam, which also run huge trade surpluses against the US.
The main unknown is China, which has responded so far with a firm no, with high tariffs against US goods, and with cancellations of some Sino-American contracts. Can China continue this opposition indefinitely? That is very hard to see. The country lives on exports. In 2024, about 12% of its exports, $439 billion, went to the US. If those are cut off, where would China go? A few days ago, Ursula von der Leyen, president of the European Commission, said: “We cannot absorb global overcapacity nor will we accept dumping on our market.” In fact, Europe already receives close to $600 billion in Chinese goods but does not want to go to $1 trillion. However, there is no other region that could absorb an additional $400 billion in Chinese goods. It’s likely that in the end, the Chinese and the Americans will find a formula that allows both sides to save face and to keep trading with each other. Trump will get much of what he wants, but not all.
What about Israel in all this? Frankly, we don’t matter. Israel produces less than 1% of the US trade deficit in goods. Trump will not do anything to indicate bias or favor for Israel because he is concerned about the other countries. When the final deal comes down, likely this summer, Israel might face a 10% tariff, with a maximum impact of about $2 billion per year, but more likely on the order of $1 billion to $1.5 billion. Israel has an expected GDP of perhaps $560 billion in 2025, and we can deal with this tariff.
Despite all the calumny and all the charges levied against Trump and his tariff program, he is doing this in order to allow the US to continue as the most powerful country in the world. He is likely to succeed, not totally but in large part. Israel will suffer financial damage, but nothing that we cannot handle.■