The interest rate cut relieved Trump's immediate crisis.

Author: Li Hanming

Two major events occurred last week: first, the Federal Reserve cut interest rates by 25 basis points as expected; second, the US-China trade war was halted for another year.

For the current size of the US national debt (principal of $38 trillion, annual interest payments of approximately $1.2 trillion), this rate cut is expected to save $95 billion in national debt interest payments annually. What does $95 billion represent? From 2025 to today (calculated over 10 months), the US government will have collected $195 billion in tariff revenue. In other words, Powell's few words this year (two 25 basis point cuts) have resolved all the tax-related issues that President Trump has been embroiled in since taking office this year (tariffs, Section 301 tonnage tax, and various other matters).

As I mentioned in a previous article, any tax burden has a distinction between the taxpayer (the person directly responsible for fulfilling the obligation to pay) and the tax bearer (the person who actually bears the tax burden after market transactions). For example, the act of levying tariffs involves cross-border goods transactions; the nominal taxpayer is the importer, but the importer can, through price negotiations, more or less pass the tax burden onto the exporter (or, in other words, the importer adds a markup at the retail end, passing the tax burden onto the consumer). Similarly, the act of levying the Section 301 tonnage tax involves transportation; the nominal taxpayer is the shipping company, but similarly, the shipping company can, through negotiations, pass the tax burden onto the cargo owner. Therefore, Trump previously had some room to confuse the public, even including proposing an "External Revenue Service" (or "External Revenue Service") to counter the IRS ("Internal Revenue Service"), claiming that "tariffs are not taxes." However, due to the complexity of actual industries, there is considerable room for maneuver in the collection of these taxes. Let's take the Section 301 tonnage tax as an example. The US says it will impose taxes on ships related to China that dock at US ports. However, no shipowner would dock a Chinese ship at a US port without a reason—it's not cost-effective. In other words, Chinese ships docking at US ports is a means, not an end, of Sino-US trade. Few things can only be accomplished by one means—Sino-US trade is no exception. We've discussed methods for reducing tariffs many times, so I won't elaborate here; regarding the Section 301 tonnage tax alone, shipping companies now generally use ports in Hong Kong, Macau, Taiwan, Japan, South Korea, Vietnam, Canada, Mexico, and other places as transit points for transportation; they can use barges, railways, highways, and many other methods, making it very diverse. If Chinese ships are involved, goods can be transported from mainland China to Vancouver, Canada, or Tijuana, Mexico, and then by rail or barge into the United States. If American ships are involved, goods can be transported from Shenzhen to Hong Kong by truck or barge, and then set sail from Hong Kong. The methods for using ships from countries other than China and the US are even more diverse. This inevitably leads to some compromises in the collection and enforcement of the Section 301 tonnage tax – for every clever plan, there's a countermeasure! At the same time, the collection of taxes will also bring some new problems. In any country with high tariffs, corruption among customs officials is very serious, which is quite obvious – if giving customs officials 10% can solve the problem, why should I give the country 20% or even 30%? Therefore, if tariffs are to be levied, the standards must be clear and transparent to prevent underhanded operations. For example, levying tariffs on bulk commodities is cheaper than levying them on ordinary goods – the prices of bulk commodities are generally relatively open and transparent, and customs officials can simply follow the rules, leaving little room for impropriety. Conversely, the greater the freedom customs officials have to exercise, the easier it is for corruption to breed. In fact, due to the wide variety of goods, the assessment and collection of tariffs are much more difficult than those for personal income tax. This is why the main source of revenue for the United States is personal income tax—it is levied on wages, and wages are one of the most standardized services. The continued postponement of tariffs this time is for the same reason—the US has found that continuing to impose tariffs is not cost-effective. Of course, on the other hand, let's return to the topic of interest rate cuts. Compared to the arduous task of collecting tariffs, which often yields little return, interest rate cuts are clearly much easier in reducing US fiscal spending. For example, in 2021, during a period of low interest rates, the US only needed to pay $352 billion in interest on its national debt; in 2024, this figure will be $881 billion. The $400 billion difference, if levied through tariffs, would require each American to pay $1,200—equivalent to $12,000 worth of imported goods at a 10% tariff rate. Since the US is a deficit-run country, the level of its national debt interest rate directly determines whether its finances can be sustained. As the saying goes, "If the skin is gone, where will the hair attach?" For the Federal Reserve, maintaining a high interest rate that the US government cannot afford for a long time, leading to a "deficit dam" that cannot be paid, will ultimately prevent the government budget from passing, putting the dollar in a very awkward position, and the Federal Reserve itself will lose its bargaining power based on the US and the dollar. The recent surge in gold prices denominated in dollars, especially during the US government shutdown, is a case in point—many investors, fearing the US finances would collapse, opted to retreat, preferring to hold gold for peace of mind. Therefore, the Fed's rate cut is good for everyone—for Trump, it's a lifeline, allowing him to reallocate the reduced interest payments to healthcare and social security, and strive to reach an agreement with the Democrats to reopen the government; for the market, investors also breathed a sigh of relief, and gold prices actually fell. In the most extreme scenario, if the Treasury bond rate remains around 0, the government will actually have very little interest payment each month, and the debt can pile up indefinitely. At this point, the economy would become "Japan-like"—in fact, Japan has maintained low, zero, or even negative interest rates for many years. However, as I mentioned in a previous article, regardless of whether central bank interest rates are high or low, it is difficult for the elderly to obtain unsecured loans—this is because the elderly have no income. Currently, loans for the elderly are essentially asset-backed loans—and the kind that will eventually require the return of the collateral. Meanwhile, due to zero interest rates on deposits, the elderly cannot generate passive income from their savings, and with expected income growth, they have no surplus money to spend. This has led to severe cash flow constraints for the elderly in Japan, forced to tighten their belts and gradually contributing to deflation. This has resulted in severely insufficient domestic demand and a high dependence on exports. Furthermore, with manufacturing shifting to countries like China, modern Japanese society is essentially a "tourist destination," a nation built on service trade exports where "foreigners serve foreigners." It recruits low-wage labor from countries like China, Vietnam, the Philippines, and Nepal (though the number of Chinese laborers has decreased with domestic economic development) to serve tourists and investors from China and Europe. The United States is also gradually aging – statistics for 2024 show that the US has 61.2 million people aged 65 and over, accounting for about 18% of the total population (compared to 15% in China, 22% in the EU, and 30% in Japan). Considering that Trump's immigration restrictions will make it more difficult for young immigrants to come to the US, the aging of the US population is likely to accelerate in the next four years. Following the previous line of thought, when interest rates are rising, Americans can still enjoy life abroad – in 2023, there were 161 million passports in circulation in the US, increasing to 183 million in 2025, with airline first-class cabins, hotel suites, and luxury cruises all performing quite well in these three years; however, with interest rate cuts, this will inevitably gradually fade away. Having discussed aging, let's return to trade itself. Japan's case tells us that an aging society cannot support high tariffs—caring for the elderly occupies a significant portion of the labor force, leaving insufficient labor to produce the products society needs. At this point, the choice is either to import foreign labor or to promote imports of foreign products. If tariffs are increased, businesses will hire more foreign workers to substitute foreign products with domestic ones; if tariffs are reduced, businesses will set up factories overseas and actively import goods. Both approaches can promote domestic production and stabilize prices. Japanese society has effectively adopted both: actively importing labor to maintain the normal operation of small and medium-sized enterprises and export companies, while also reducing tariffs to a low level to reduce the overall burden on consumers. However, Trump's high tariffs and low immigration policies, both of which restrict imports, will in fact overlap, creating a double whammy. As mentioned earlier, increased tariffs on imported goods will correspondingly raise the prices of domestic goods to the same level; however, due to a lack of immigration, domestic companies cannot expand production, ultimately leading to a shortage of goods in the market and the black market (which is also the current situation in the United States). In such a context, it would be strange if there were no inflation. However, since this inflation is not caused by an excess of money supply, raising interest rates to withdraw currency will obviously have limited effect—but will instead significantly increase the government's fiscal pressure. Therefore, either imports or immigration can be reduced, and this must be combined with low interest rates to control the situation. Currently, it seems that Trump is more concerned about immigration than tariffs—after all, dealing with people in his own country is far more complex than dealing with people on the other side of the Pacific.