It's not really only about tariffs. It's about the net effect on all barriers of trade, such as currency manipulation, subsidies, regulations, etc. The formula (trade deficit / (imports * 2)) means that countries actually have to address the root of the problem and prove it before the US reduces their tariffs.
Having a trade surplus doesn’t mean you’re cheating.
If I make products better/cheaper than you, I’m going to sell more to you than you are to me.
Ditto if I have some valuable resource you need that represents a large share of my economy. The fact that you need my germanium more than I do doesn’t mean I’m ripping you off.
I agree that a deficit could be healthy and fine and doesn't mean that the other country is cheating. The problem is how some countries have ruined it for everyone else by exploiting the current system. For example, after the first round of Trump tariffs, Chinese companies began moving factories to Mexico in order to take advantage of USMCA.
A thought experiment. Imagine a small poor country far from the US, of 1 million people, where the average income is $3000 annually ($3 billion total household income). Imagine a factory in that country that produces shoes beloved in America.
Those shoes are so popular in America that Americans buy $1 billion of those shoes every year. In order to address the problem as stated, this hypothetical country would have to spend a third of its household income purchasing products produced in some of the highest-cost conditions in the world. To do so, they would have to shut out their local trading partners from whom they currently buy goods at prices they can afford. This would have the effect of making them even poorer.
If you make an exception for this hypothetical country, then countries such as China would come in and build factories there and bypass their own tariffs. You're back to playing whack-a-mole.
I’m not talking about making an exception. I’m suggesting that a trade deficit can arise for reasons that have nothing to do with manipulation.
Also, the administration created the loophole about which you worry by creating a 24% tariff gap between China and the new 10% baseline for most countries.
Except that because the rule is clear, China will anticipate that doing this in another country will result in eventual increased tariffs. They will be able to see ahead that it's not worth making a big investment for that purpose. The optimal strategy changes to do more business with the US and/or build factories in the US.
