The distinction between Gross Value trade balances and Value Added trade balances is crucial, not only to identify the true trade deficit between countries, but also to assess the impact of tariffs. Take the case of China/US imposing 25% tariffs on each others’ goods. While the dollar amount of traded goods covered by the tariffs is roughly the same (around $50 billion), the effects differ. Menzie Chinn points out that US exports to China are closer to 100% value added (when the entire product is produced with US goods and inputs). However, as noted in this post, roughly 50% of the value of US imports from China is foreign sourced. Taken literally, a 25% tariff the gross value of a Chinese export works out to be a 50% tariff on Chinese value added for Chinese exporters. Generally a tariff on gross value translates into a effective higher tariff for the country whose exports have the lower value added.