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President Donald Trump, who announced several rounds of tariffs last weekend, appears to be trying to use the import taxes for two distinct and entirely incompatible purposes: First, raising revenue to pay for costly tax cuts and new spending and second, as a cudgel to force countries to cooperate with his domestic policy agenda, including immigration curbs.
His problem: If U.S. trading partners capitulate to Trump’s policy demands, and he rewards them by withdrawing the tariffs, much of that hoped-for revenue will dry up. The question then is which does Trump want more: tariff revenue or perceived international policy victories?
Over the weekend, Trump imposed 25% tariffs on most goods imported from Mexico and Canada, and a 10% tariff on China—the nation’s three largest trading partners. Together, they sell almost half of all goods imported by the U.S. On Monday, Trump said he’d delay the tariffs on Mexican and Canadian goods for a month. It appears the tariffs on Chinese imports have taken effect.
Updated Revenue Estimates
The Tax Policy Center estimates that these levies would generate about $1.1 trillion in new revenue over the next decade — $800 billion from Mexican and Canadian imports and $300 billion on Chinese goods. These estimates reflect both tariff revenue and the partially offsetting declines in corporate and individual income taxes and payroll taxes that would result from an economy that slows due to the import taxes. They do not include the impact of retaliatory tariffs and other responses by Canada, Mexico and China.
If Trump’s tariff’s lasted for a decade, which seems highly unlikely, the levies on all three countries would pay for about one-quarter of the cost of extending the individual provisions of the 2017 Tax Cuts and Jobs Act that are due to expire at the end of this year. Trump still would need roughly another $7 trillion to pay for the rest of the TCJA as well as tax cuts he proposed during his campaign, such as tax exemptions for tips, overtime pay, and Social Security benefits.
Candidate Trump proposed even broader tariffs — 25% on worldwide imports and 60% on Chinese goods. TPC estimated those would generate about $4.5 trillion in new revenue over a decade, enough to pay for all of the TCJA extensions, though they’d still fall short of financing Trump’s other tax cuts.
‘Show Us Respect’
But rather than imposing worldwide tariffs, Trump so far has threatened import taxes on individual countries that don’t comply with U.S. demands to curb immigration and smuggling of illegal drugs. In his confirmation hearing, Howard Lutnick, Trump’s nominee to head the Commerce Department and lead administration trade policy, described Trump’s tariff threats against Mexico and Canada this way: “It’s not a tariff per se. It’s an act of domestic policy.” It is, he said, an effort to get those nations to “show us respect.”
Lutnick added that if those nations accept Trump’s terms on immigration and drugs, “there will be no tariffs.”
And therein lies the rub. If Trump backs off his tariff threats when trading partners accede to his political demands, there are no new tariffs, and there will be no new tariff revenue.
Economic Risks
Worse, tariffs could slow U.S. growth and reduce domestic income tax revenues. Turning import taxes on and off adds to business uncertainty, which can further slow investment. And tariffs likely will hurt foreign markets for U.S. products. For example, Canadians already are calling for both boycotts and tariffs on U.S. goods. While Canada would halt its retaliatory tariffs if the U.S. backs down, boycotts of U.S. goods might remain.
By imposing steep tariffs on Canadian and Mexican auto parts, Trump also threatens to break supply chains that have taken decades to build. U.S. automakers would face cost increases and supply constraints that don’t apply to competitors in Germany or Japan, making U.S. firms less competitive and hurting profits and employment.
In addition, Canada and Mexico could choose to respond to Trump’s threats by building and selling autos domestically, putting even more pressure on U.S. auto manufacturing and jobs.
Trump could, of course, return to his campaign promise and impose massive worldwide tariffs without distinguishing among countries. But he’d lose whatever leverage he may have to pursue his domestic agenda through geopolitical pressure. Why would Canada agree to Trump’s immigration demands if he turns around and hits that country with new import taxes as part of a worldwide tariff regime?
Inconsistent Goals
Trump’s tariff agenda is filled with other inconsistencies. Among them:
He can’t achieve his campaign promise of lowering consumer prices by driving up prices on imported goods.
Trump insists tariffs are paid by the countries that export to the U.S. rather than by US firms and consumers. That isn’t the case, but if it were, and U.S. prices on foreign products didn’t increase, there would be no incentive for U.S. consumers to buy American.
Tariffs on Canada and Mexico would violate the terms of the North American trade deal Trump negotiated in his first term. At the time, Trump called the U.S.-Mexico-Canada pact “the most modern, up-to-date, and balanced trade agreement in the history of our country.” Now, he’s violating his own agreement.
These are just some reasons to question Trump’s tariffs. But in fiscal policy terms alone, Trump has built himself a trap. He can use tariffs to raise revenue. Or he can use them as a weapon to pressure foreign governments to support his domestic agenda. He can’t do both.