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Musk breaks with Trump amid market plunge, economists scrutinize 'reciprocal tariffs' formula

Amanda Liang, Taipei; Elaine Chen, DIGITIMES Asia 0

Credit: AFP

In the global market turmoil, economists, analysts, and even figures from within Donald Trump's camp, including Elon Musk, have openly criticized the US president's new "reciprocal tariff" formula for global trade partners. Many have called for the creation of a "zero-tariff zone" between Europe and North America.

Although Peter Navarro, the senior counselor for trade and manufacturing, has yet to confirm whether he is the architect of the reciprocal tariff formula, he told CNBC that the tariffs are based on extremely complex analysis from decades of trade literature.

However, this explanation has been rejected by most economists.

As Trump's decision to impose reciprocal tariffs on 180 countries triggered a global stock market plunge and retaliatory measures from US trade partners, Musk, a close advisor to Trump, remained unusually silent for two days. On April 5, 2025, however, he broke his silence with a series of critical comments.

Musk sharply criticized Navarro and, according to Bloomberg, voiced his support for a zero-tariff free trade agreement between the US and Europe during a video appearance at a political rally in Italy.

Navarro defends policy amid market turmoil

Meanwhile, CNN reported that Navarro, in an interview, downplayed the market turmoil triggered by Trump's aggressive tariffs and vowed that the Dow Jones Industrial Average would reach 50,000 points during Trump's presidency. Navarro emphasized that the tariff policy could generate US$6 trillion in revenue for the US over the next decade.

According to Politico, following Trump's announcement on April 2, 2025, dubbed Liberation Day, where he imposed 10% to 50% tariffs on global trade partners, Navarro appeared on several US TV news outlets to defend the tariff plan. He also gained some support from users on the social media platform X.

However, when a user on X defended the controversial Navarro on April 4, 2025, citing his Harvard Economics Ph.D. as proof of his expertise, Musk immediately disagreed in a tweet on the morning of April 5, 2025.

Musk responded, stating: "A PhD in Econ from Harvard is a bad thing, not a good thing," implying that such credentials may lead to arrogance and a lack of wisdom. Soon after, another X user came to Navarro's defense, claiming his stance on trade was correct, only for Musk to reply that he had not accomplished anything.

Musk advocates for zero-tariff approach

Interestingly, later that same day, Musk appeared at the Italian political event via video, calling for the dismantling of trade barriers, which starkly contrasts with Trump's policy of building tariff walls.

Musk argued: "At the end of the day, I hope it is agreed that both Europe and the United States should move ideally in my view to a zero-tariff situation, effectively creating a free-trade zone." The White House has yet to respond to Musk's comments.

Economists challenge tariff formula

Despite Peter Navarro being one of the primary proponents of Trump's tariff plan and defending its formula by citing complex economic analysis, critics have raised concerns. According to the Times of San Diego, two economists from a US think tank have publicly challenged Navarro's claims.

Kevin Corinth and Stan Veuger, economists at the American Enterprise Institute, detailed the flaws in the tariff calculation formula on the think tank's website. They argued that the formula, unveiled on April 2, 2025, has little to do with the reciprocal tariffs Trump promised. Instead, it simply divides the trade deficit with a country by the imports from that country, then divides the result in two.

Corinth and Veuger wrote: "The formula for the tariffs, originally credited to the Council of Economic Advisers and published by the Office of the United States Trade Representative, does not make economic sense."

They further added that the formula lacked any foundation in economic theory or trade law. Worse, the Trump administration reinforced its error by canceling out two figures used to measure elasticity (the impact of price changes on quantity), rendering the tariff's effect null.

Market impact and ongoing defense

As a result, the reciprocal tariff formula has led to exorbitant tariffs, causing a historic US$6 trillion market loss in the US stock market on April 3 and 4, 2025, with further losses expected when markets open on April 7, 2025, potentially marking a Black Monday.

Navarro has continued to appear frequently on US television news to defend Trump's tariff strategy, claiming that the tariffs will bring in an annual US$600 billion in new revenue. Trump himself has referred to the tariffs as an "economic revolution," suggesting that large corporations will ultimately benefit from the upcoming tax cuts.

Article edited by Jerry Chen