Trump's tariff loopholes and false visions

Zhu Changzheng

Trump dared to raise the tariff stick against more than 180 countries and regions, and was willing to abandon the international economic and trade rules that the United States has maintained since World War II, which led to panic selling in the stock and bond markets and violent turbulence in the financial markets. We still have to investigate the ideological source of his tariff war.

After understanding the essence of Trump's "reciprocal tariffs", many economists believe that this is a continuation of the April Fool's Day project, which is "using the wrong tool to solve a non-existent problem." It was withdrawn 14 hours after it came into effect, adding to the farce of this explosive policy. However, Trump dared to raise the tariff stick against more than 180 countries and regions, and was willing to abandon the international economic and trade rules that the United States has maintained since World War II, which led to panic selling in the stock and bond markets and violent turbulence in the financial markets. We still have to investigate the ideological source of his tariff war.
Tariffs are both a means and an end

Most people will admit that Trump's attacks on all trading partners and even uninhabited islands show that he regards tariffs as the most convenient bargaining chip and diplomatic means, from forcing Colombia to accept the repatriated illegal immigrants at the beginning of the year to threatening Russia last month to reach a ceasefire agreement as soon as possible, and raising tariffs on China, a major trade surplus country that dares to retaliate, to a rare level.
In order to enhance the persuasiveness and rationality of "reciprocal tariffs" and their calculation formula, Trump's trade adviser Navarro and Treasury Secretary Bessant recently stated that the imposition of different tariffs on various countries not only considers the gap in bilateral tariff rates, but also incorporates trade barriers such as currency (exchange rate) manipulation, intellectual property protection, and market access. The vision they envision to American voters is that tariff measures will prompt the return of manufacturing to the United States, and at the same time it will bring a large amount of treasury revenue.
It can be seen from this that Trump’s calling himself Tariff Man is not just self-deprecating, but he is serious—he and his staff believe that raising tariffs will bring a steady stream of revenue to the federal government, that is, tariffs (not just a means) are the end itself.
Not only did he say that “tariff” is the most beautiful word in the dictionary, but he also signed an executive order on his first day in office, requiring the establishment of an “External Revenue Service” to collect tariffs and other revenue related to foreign trade (the Department of Commerce and the U.S. Customs and Border Protection already exist within the federal government). In the eyes of Trump’s staff, tariffs are a panacea for solving the U.S. trade deficit, and can be used to “avoid foreign exploitation”; when exercising this presidential power can also intimidate external profiteers and have other benefits, Trump is even more convinced of its power.
Trump’s obsession with the role of tariff revenue has its roots. The early U.S. tariffs, such as the Tariff Act of 1789, one of the first bills passed by the first Congress, were intended to (1) promote trade, (2) increase revenue for the federal government, and (3) protect emerging U.S. manufacturing. The background at that time was that the government, which lacked a source of revenue, was eager to impose tariffs on imported products immediately when the bill was still in the draft stage. Although legislators respected the free trade system, they believed that it could make way for fiscal revenue when necessary.
Douglas Irwin, an American economic historian and professor at Dartmouth University, found that for more than 200 years, the US trade policy has always been aimed at three goals: increasing government revenue by imposing tariffs on imported products; restricting imports and protecting domestic producers from foreign competition; and reaching reciprocal agreements to reduce trade barriers, namely the "3R" goals (tax, revenue; restriction, restriction; reciprocity). The difference in policies in different periods lies in which goal is the first.

Unreliable income

Before and after the "reciprocal tariff" measure was introduced, Trump and others talked about the gains of the treasury. Navarro said in an interview earlier this month that the United States is estimated to raise about $600 billion to $700 billion a year through tariffs. When Trump signed an executive order at the White House on March 26 to impose a 25% tariff on imported cars, he said in front of many reporters that the reciprocal tariffs would increase the United States' revenue by $700 billion to $1 trillion in two years. Bessant, who has experience in fund investment, is relatively conservative. He believes that it will bring in $300 billion to $600 billion a year, and this is a dynamic process. At the beginning, there may be more tariff revenue, and as the manufacturing industry increases, income tax revenue will increase, and tariff revenue will decrease accordingly.
Moody's Chief Economist Mark Zandi believes that it is impossible to earn hundreds of billions of dollars a year, and it would be lucky to have one or two hundred billion. Phillip Swagel, director of the Congressional Budget Office (CBO), has a similar estimate: tariffs may bring an additional $800 billion to the US economy in the next 10 years. This is a lot less than Trump's estimate, and it is without considering the counterattacks from other countries.
The tariff revenue plan has not only encountered counterattacks from China, the European Union and Canada in reality, but also has theoretical assumption loopholes. Wei Shangjin, a visiting academic professor at the School of International Finance of Fudan University, pointed out that the countermeasures of trading partners will naturally reduce the future exports of the United States. Moreover, even if trading partners do not take countermeasures, according to the "Lerner Symmetry Theorem" of international trade, under the protection of the new tariffs, if enterprises that currently lack international competitiveness expand production, they will inevitably compete with other competitive enterprises (such as export enterprises) for human and financial resources. The result is that while US imports decrease, exports will also shrink simultaneously. This will not help alleviate the US trade deficit problem.
The reality of the evolution of US government revenue may also break Trump's vision.
From the beginning of independence to 1860, import tariffs became the main source of revenue for the US federal government in the agricultural planting economy period, accounting for up to 90%; from 1860 to 1913, with the introduction of other taxes, tariff revenue fell to about half of government revenue; after the birth of income tax in 1913, the proportion of tariff revenue continued to decline to a very small proportion.
Today, 230 years later, according to data from the U.S. Treasury Department, of the total revenue of $4.92 trillion collected by the federal government in fiscal year 2024, personal income tax and social security tax accounted for the absolute majority, accounting for 49.3% and nearly 36% respectively, while the tariff revenue of $76.4 billion accounted for only 1.6%.
If the tariff war leads to an economic recession, Trump's tariff revenue will not only be lost, but the simultaneous decline of personal income tax, social security tax, corporate income tax, etc. will have a more negative leverage effect.
An example from history is that in 1930, the highly protectionist Smoot-Hawley Tariff Act was implemented amid doubts (more than 1,000 economists issued a joint statement opposing high tariffs). Although the bill did not raise tariffs excessively, the average tariff rate was only less than 6 percentage points higher than a few years ago, it appeared at the wrong time - in a recession. Tariffs exacerbated trade contraction and, together with deflation, pushed the U.S. economy into a great depression. Canada and other countries reacted strongly to high tariffs, and finally about 40 countries launched retaliatory actions. This legislation was meant to protect American farmers, but it did the opposite.

Another kind of prosperity in the Gilded Age

Trump’s fascination with tariffs also stems from his misguided admiration for the 25th President of the United States, William McKinley (in office from March 1897 to September 1901).
Trump called McKinley the “tariff king” and praised him in his inaugural address for using “tariffs and financial wisdom” to make the United States rich and strong. When people ask what period in history “Make America Great Again” (MAGA) refers to, he points to the McKinley era, which some people call the “Gilded Age.” Trump regards the period from 1870 to 1913 as the richest period in the United States, believing that high tariffs protected American businesses and brought economic prosperity.
The first point that Trump overlooked is that the Gilded Age did bring great wealth to a small number of people, while most Americans were actually still poor. The Associated Press once quoted an economic historian as saying that Trump idealized an era full of government and corporate corruption, social unrest and inequality, and that living standards at that time did not improve if measured by life expectancy and other factors. In the late 19th century, during the United States' transition from agriculture to industrialization, large conglomerates in industries such as steel, oil, and railways emerged one after another. New tycoons such as John Rockefeller and J.P. Morgan had great influence on politicians, and politicians often helped the former expand their business and financial empires.
Another hidden secret is that the economic recovery at that time was due to factors other than tariffs. In 1890, McKinley, then chairman of the House Ways and Means Committee, promoted the formulation and passage of the tariff bill named after him, which significantly increased tariffs; after an economic recession, in 1897, soon after McKinley took office as president, he urged Congress to pass the Dingley Tariff Act to restart high tariffs, and the average tariff rate rose from the previous 42% to 52% in 1899. At the same time, the global gold supply increased rapidly, monetary conditions became looser, and the world economy recovered strongly, and commodity prices began to rise. The US economy also improved greatly, with more jobs and workers' income, earning McKinley the nickname "the pioneer of prosperity". However, it is a big misunderstanding to think that his tariff bill brought about the economic recovery.
Similarly, the surge in US exports of manufactured goods such as steel and copper at the turn of the century, which grabbed a large share of the international market, had little to do with tariff policies or even the support of the US government; the economy also benefited from the rapid increase in the US population and urban expansion during that period.
Another point is that McKinley was not as completely isolationist and protectionist as Trump and his staff imagined.
Initially, McKinley was indeed a staunch trade protectionist. He believed that the leading advantages that the United States had established in agriculture, mining and manufacturing at that time were the spoils of the previous implementation of protective tariffs. But during his presidency, in order to take into account the interests of different industries, he also set up a special department in the State Department to negotiate reciprocal agreements with European and Central American countries (although most agreements were blocked in the Senate). In September 1901, McKinley gave a speech at the Pan-American Exposition in Buffalo, even proposing a reversal of trade policy.
He made it clear that the era of exclusivism was a thing of the past. How to promote the expansion of American trade was an urgent problem to be solved. Trade wars do more harm than good.
Unfortunately, McKinley died a few days after being assassinated during the exposition, and he did not complete the policy adjustment.
Just over a decade later, the introduction of income tax completely changed the source and structure of the federal government's revenue. Another 20 years later, the Reciprocal Trade Agreements Act (RTAA, 1934) of the Franklin Roosevelt administration replaced the short-lived Smoot-Hawley Tariff Act, and reciprocal arrangements to reduce tariffs and non-tariff barriers became the main theme of the new era.
At present, Trump's tariff measures are reminiscent of the scene in the 1930s, when the United States was ready to abandon its trading partners, return to unilateralism, and dismantle the global trade system that had been maintained for decades. The profound impact it brought had already crushed his assumptions about the benefits of tariffs and his vision of economic prosperity.