Trump is making America’s money problem worse

Donald Trump keeps trying to build his tariff wall, but each time the wall is lower and built on narrower footings.

When Trump announced his “Liberation Day” tariffs in April last year, they were expected to raise somewhere between $US1.5 trillion and $US2 trillion ($2.2 trillion to $2.9 trillion) over the next decade.

Those tariffs, of course, got struck out by the US Supreme Court in February, forcing the Trump administration to come up with a replacement, which it did.

As a temporary measures, using a section of the Trade Act with a ceiling rate of 15 per cent and forced expiry after 150 days, it imposed a 10 per cent duty on all imports that would raise about $US35 billion while it constructed a permanent replacement.

Those interim tariffs expired last Friday morning and were immediately replaced with a tariff of either 10 per cent or 12.5 per cent on 99.4 per cent of all goods imported to the US, other than those the administration explicitly excepted or where there is a different tariff regime in place, like the 50 per cent duty on imports of steel and aluminium.

The latest tariffs have supposedly been imposed because all of America’s trading partners, including Australia, have failed to sufficiently crack down on the use of forced labour. In reality, they are the latest attempt to recreate the revenue stream, and the barrier to imports, ruled illegal by the Supreme Court.

Thanks to the Supreme Court, the revenue that was collected by the Liberation Day tariffs – more than $US160 billion – has to be refunded, although the administration has done what it can to slow the process and reduce the amount it has to return.

It has, however, so far paid back more than $US80 billion of the revenue it collected. Last month, the US government’s revenue from customs duties was negative to the tune of $US25.6 billion, after refunds virtually matched receipts in May.

Those tariffs that were supposed to be the interim measure while the administration developed its new permanent replacement for the one knocked out by the Supreme Court will have raised an estimated $US35 billion.

The US Court of International Trade has, however, deemed those tariffs illegal, too. If that ruling holds up under appeal, that revenue will also have to be refunded.

Some of the small businesses that successfully challenged the Liberation Day tariffs, and the lawyers who represented them, were involved in the action against the interim tariffs and have already filed a lawsuit against the new duty regime imposed last week.

While the section of the Trade Act (Section 301) that the administration is using has been tried and tested and has held up in the courts previously, the sham pretext of inaction against forced labour being used to try to reproduce a global tariff regime to replace the one the Supreme Court declared illegal makes it vulnerable. Under the Constitution, only Congress has the power to apply universal tariffs.

Trump plans to use the same section of the Trade Act to impose even more tariffs, with the administration to argue that they are warranted in response to other nations’ trade measures that it deems discriminatory to American businesses.

Even if the tariffs imposed last week do hold up under court scrutiny they are, as revenue raisers, a poor substitute for the Liberation Day tariffs.

The Committee for a Responsible Federal Budget (CRFB) had a look at the new tariffs last week, along with other country-specific tariffs that Trump announced would be imposed on Canada and Brazil (apparently for their lack of deference to him).

The CRFB estimated that the Supreme Court ruling would cost the US government about $US1.7 trillion of revenue it would otherwise have collected over the next decade.

The new universal tariffs, with a lower average rate and far more exclusions (to try to moderate their inflationary effects on consumer prices) would, it said, raise about $US900 billion over a decade and those on Canada and Brazil more than $US50 billion between them – so about $US950 billion in total.

That’s only about 56 per cent of the revenue foregone as a result of the Supreme Court’s ruling and, in the context of total US government revenues of more than $US5.6 trillion a year (or the “Department of Wars’s $US1.5 trillion budget request) almost immaterial.

Tariff revenues, if they don’t evaporate as a result of the continuing legal actions, aren’t going to solve America’s debt and deficit problems, indeed they are more likely to exacerbate them because they raise the inflation rate and subtract from economic activity.

Whatever Trump and his officials might believe, or at least say, his tariffs are a tax on US businesses and households. The Federal Reserve Bank of New York has calculated that about 90 per cent of their cost is absorbed by domestic businesses and consumers.

The tariffs cost jobs, add up to 70 basis points to the inflation rate and subtract about 0.2 percentage points from US GDP, along with the damage they do to the global economy.

There is a view that, whatever tariff revenue the Supreme Court leaves intact will last beyond the point where Trump departs the White House, with Congress, regardless of the party in control, unlikely to voluntarily abandon a revenue stream albeit one that is a regressive tax on consumers.

That’s because America’s finances are parlous and deteriorating.

Trump added $US7.8 trillion to the national debt in his first term and Joe Biden another $US8 trillion, although both those presidencies were coloured by massive pandemic-driven spending.

So far in this term – without a pandemic – Trump has added another $US3.2 trillion, raising gross federal government debt to $US39.3 trillion, or about 125 per cent of US GDP.

The interest bill on that debt is more than $US1 trillion and is rising sharply, influenced significantly by Trump’s policies.

Whatever Trump and his officials might believe, or at least say, his tariffs are a tax on US businesses and households.

The tariffs, and the war in the Middle East particularly, have pushed up the US inflation rate and have had a marked impact on bond yields.

On February 27, the day before the US and Israel attacked Iran, the US 10-year bond yield was 3.94 per cent. Today it is 4.68 per cent. The two-year yield was 3.38 per cent. Now it is 4.33 per cent.

With the US Treasury, over several administrations, increasingly raising debt of shorter duration because it was the cheapest segment of the yield curve, roughly a third of all existing US government debt on issue has to be refinanced this year.

Those higher yields on its bonds means a government interest bill that already tops a trillion dollars can only increase – relatively minor movement in bond yields can add tens of billions, of not hundreds of billions, to the annual interest bill.

Trump may, perhaps, believe that other countries are paying large amounts of cash into his Treasury’s coffers, but they aren’t and the amounts now involved – assuming he can retain them – aren’t material enough to blunt the impact his profligacy will have on the fiscal legacy he will leave his successors, and US taxpayers.

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