President-elect’s trade policies are still uncertain, but here are some potential pros and cons
By Ed Yardeni and Eric Wallerstein
Last Updated: Nov. 16, 2024 at 11:41 a.m. ET
First Published: Nov. 13, 2024 at 7:40 a.m. ET
It’s unlikely that tariffs can raise a meaningful amount of revenues that somehow shrink the federal deficit — that would have to come from spending cuts.
Are tariffs a solution or a risky gambit? The new trade tariffs likely under “Trump 2.0” could be the means to great ends for the U.S. by increasing the U.S.’s trade negotiating leverage — or they could backfire and cause a trade war that curtails global economic growth, which we don’t expect.
Tariffs are meant to raise revenue and protect the competitiveness of domestic industries. In U.S. President-elect Donald Trump’s ideal scenario, tariffs offset lower tax revenues and prevent the U.S. federal deficit from widening, while also providing him with leverage to negotiate more favorable bilateral deals. Tariffs can backfire as a means to these ends, however, as retaliation from trading partners can decrease total imports and exports, dragging on government revenues and hurting domestic exporters.
One of the major risks to our “Roaring 2020s” outlook is a trade war that reduces global economic growth. That is not a likely scenario, but it could have large impacts if it happened. What Trump’s final trade policies will look like is uncertain at this point, but it’s never too early to consider the potential pros and cons:
- Revenues: Tariffs raised $84 billion in customs duties for the U.S. over the 12 months ended in September, representing 1.6% of total federal receipts. That’s a fraction of what taxes on individual income ($4.9 trillion, 49% of total), payrolls ($1.7 trillion, 34%) and corporations ($530 billion, 11%) bring in.
A blended 60% tariff rate on China and 20% tariff on the rest of the world comes out to a roughly 26% tariff rate. That would bring in around $1.1 trillion of revenue to the U.S.
- Proposed tariffs: Trump’s proposed 60% tariff on all Chinese imports and 20% on the rest of the world are likely intended to be used as bargaining chips rather than revenue raisers. The leverage may be used, for example, to prevent Chinese goods from circumventing tariffs through other nations.
The tariff rate on Chinese imports (and China’s rate on U.S. exports) was roughly 20% last year, according to the Peterson Institute for International Economics, before President Joe Biden raised tariffs again in September.
Assuming the rate is now 30%, Trump’s most hawkish proposal only doubles the status quo. Here’s some back-of-the-envelope math: Imports from China were just $438 billion over the 12 months ending in September. Adding back the $100 billion or so that comes through other countries’ borders, and assuming no loss in trade volumes, a 60% tariff would raise $323 billion. That’s just 6.6% of total federal receipts.
A blended 60% tariff rate on China and a 20% tariff on the rest of the world comes out to a roughly 26% tariff rate. That would bring in around $1.1 trillion of revenue, based on current import volumes. This would offset lowering the corporate tax rate to 15% from 21%. But for context, it would just about equal the government’s net interest expense, leaving the primary budget deficit unaffected.
- Economic impacts: We’re less worried about the inflationary impact of tariffs than about the deflationary impact that would result from a slowdown in global growth. The global economy slowed before the COVID-19 pandemic as Trump’s first trade war kicked off in 2018. That’s when our Global Growth Barometer, which is based on an index of raw industrials prices and the price of oil, peaked and started to fall. Global industrial production growth also had turned negative before the pandemic hit.
The hope is that tariffs will be used as a tool to negotiate better deals and to protect key industries with national security and economic importance like semiconductors. It’s unlikely that tariffs can raise a meaningful amount of revenues that somehow shrink the federal deficit — that would have to come from spending cuts.
Read: Yardeni Sees S&P 500 at 10,000. ‘Animal spirits are back’ after Trump win.
The Tax Foundation’s June 2024 Tariff Tracker reviews the tariffs imposed by both the first Trump and Biden administrations, illustrating their profound global impacts on output for a wide range of manufacturing industries as well as prices paid by U.S. households for consumer goods.
The first Trump administration initiated tariffs on goods such as steel, aluminum, washing machines, solar panels and various Chinese imports. Most of these remained in force under Biden, with adjustments that lowered impacts on imports from Europe and raised them on those from China.
Drawing a line at the Mexican border
Our biggest fear is that a trade war slows the global economy — although we don’t think that’s likely.
“Donald Trump is poised to smash Mexico with tariffs,” was the title of a Nov. 7 article in The Economist. Although Trump’s Mexican tariff threats are easy to dismiss as bluster, the implications for Mexico are real. Even partial implementation of his policies could have lasting effects on trade and migration across North America.
Here’s more:
- Trump’s Mexican agenda: If Mexico does not curb illegal migration into the U.S., Trump has said that he will immediately impose a 25% tariff on all Mexican imports. At a rally on Nov. 4, Trump said that his first phone call as president would be to Mexican President Claudia Sheinbaum. Said Trump: “I will impose tariffs if [Mexico doesn’t] stop this onslaught of criminals and drugs coming into our country.”
- Mexican fallout: Mexico heavily benefits from trade with the U.S., which accounts for 83% of its exports — roughly one-third of its GDP. A 25% tariff on its goods would hit hard, raising prices in the U.S. and risking a recession in Mexico. During Trump’s first term, Mexico thrived under tariffs imposed on China, attracting American companies looking for alternatives. Now those same companies are pausing their investments in Mexico, fearing the potential consequences of further U.S. protectionism.
- USMCA concerns: Even if Mexico avoids the blanket tariffs, the U.S.-Mexico-Canada Agreement (USMCA) — a deal Trump himself negotiated — could be in jeopardy. Trump has hinted that as president he would revisit the agreement in 2026, particularly due to frustration over Chinese “backdooring” in Mexico. Recent changes to Mexico’s judicial system could also breach the USMCA, putting it at risk.
- Migrant demands: Trump demands that Mexico accept “safe third country” status for migrants, a stance Mexico has firmly rejected. This, along with the potential for U.S. action against Mexican gangs involved in drug trafficking, could force Mexico into a corner.
Looking ahead, our biggest fear is that a trade war slows the global economy — although we don’t think that’s likely. Still, that prospect is included in a scenario to which we ascribe a 20% subjective probability, namely a geopolitical and/or domestic debt crisis. More likely in our view: 55% odds of our Roaring 2020s scenario and 25% odds of a 1990s-style meltup of the U.S. stock market.
Ed Yardeni is president of Yardeni Research Inc., a provider of global investment strategy and asset-allocation analyses and recommendations. Eric Wallerstein is Yardeni Research’s chief markets strategist. This article is excerpted from Yardeni Research’s “Morning Briefing” for Nov. 13, 2024 — “Trump Tariffs 1.0 & 2.0.” Individual investors can read Yardeni Research reports here. Follow Yardeni on LinkedIn and his blog.
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About the Author
Ed Yardeni is a contributor to MarketWatch and president of Yardeni Research, a provider of global investment strategy.
Eric Wallerstein