Trump’s trade policy: Unclear goals, rising costs, and economic risks
Kumar Shivam | Feb 08, 2025, 00:03 IST
( Image credit : TOIGLOBAL )
The Trump administration’s trade policy lacks a clear goal. Tariffs on Mexico and Canada raise costs for U.S. consumers and risk worsening debt and deficits. Trade deficits help fund U.S. borrowing, but tariffs could disrupt global capital flows. While addressing fiscal issues is essential, trade wars threaten economic stability rather than providing a solution.
This week, we learned that defining the Trump administration’s trade policy goal is challenging because there doesn’t seem to be a coherent one. Is it about reducing the U.S. trade deficit? Generating revenue to fund an extension of the Tax Cuts and Jobs Act of 2017, set to expire later this year? Or is it about gaining diplomatic leverage in broader negotiations like border security?
Regardless of the objective, the policy is unlikely to benefit U.S. debt, deficits, or the bond market.
As he prepared to impose 25% tariffs on goods from Mexico and Canada this past Tuesday at midnight, President Donald Trump posted on social media: “MAKE YOUR PRODUCT IN THE USA AND THERE ARE NO TARIFFS! Why should the United States lose TRILLIONS OF DOLLARS IN SUBSIDIZING OTHER COUNTRIES…” (Trump has a penchant for using capital letters in his posts.)
Clearly, the tariffs aim to address perceived trade imbalances with the U.S.’s two largest trading partners. However, Kevin Hassett, director of the White House’s National Economic Council, contradicted this view, stating on CNBC, “This is not a trade war, this is a drug war.” Perhaps he had a point—Mexico and Canada made minor border security concessions on Monday, and Trump promptly suspended the tariffs. Notably, the discussion of tariffs as a revenue generator was almost absent.
Two key takeaways emerge. First, White House trade advisers must recognize the contradictory nature of Trump’s tariff rhetoric and advise him accordingly. Trump has claimed that tariffs on foreign goods—ultimately paid by U.S. consumers—could fund the extension of the TCJA, which the Congressional Budget Office estimates would cost $4.6 trillion over the next decade.
Second, tariffs increase the cost of imported goods. On Monday, Associated Wholesale Grocers Inc., a major U.S. grocery wholesaler, warned its 1,100 retail customers to expect a 25% price hike on goods from Mexico and Canada. The cost of an average car could rise by around $3,000. Given consumer frustration over high prices amid post-pandemic inflation, this could push them to cut spending or seek cheaper alternatives—unless foreign exchange rate adjustments offset some price increases.
If consumers cut back, tariffs will generate far less revenue than Trump envisions for extending the TCJA. This would exacerbate U.S. debt and budget deficits at a time when borrowing already exceeds $36 trillion, and government spending outpaces revenue by $1.8 trillion annually—roughly 6.4% of GDP.
David Kelly, chief global strategist at JPMorgan Asset Management, highlighted this in a recent note to clients:
Based on data through November, total U.S. goods imports last year were approximately $3.3 trillion, implying a crude estimate of $330 billion in annual revenue from a 10% universal tariff. However, this figure would be significantly reduced due to lower import volumes, retaliatory tariffs on U.S. exports, inflationary pressures raising interest rates, and potential government compensation to affected exporters, as seen during Trump’s first term.
If that doesn’t concern bond investors, Trump’s adversarial stance toward key trade partners should. Nations worldwide are already seeking ways to reduce reliance on the U.S. Canada, for example, is exploring ways to shift its oil exports to Asia. The European Union, another likely tariff target, recently formed one of the world’s largest trading blocs with four South American countries.
Additionally, exporters to the U.S. will likely find ways to bypass tariffs, as they did during Trump’s first term. Bloomberg Economics noted that Trump’s approach is more about negotiating leverage than raising fiscal revenue, allowing imports to be rerouted to evade duties.
One overlooked issue is trade’s critical role in enabling the U.S. to sustain its high debt and deficits. Trump portrays trade deficits as subsidies to other economies, but the reality is the opposite. As Nobel laureate Paul Krugman explains, the U.S. benefits from cheap foreign goods, while its trading partners hold U.S. Treasury securities in return. In essence, foreign nations subsidize the U.S. through affordable imports and lower borrowing costs.
Steven Blitz, chief U.S. economist at TS Lombard, underscored this in a Feb. 4 research note: “Trump’s tariffs are about generating revenue at the risk of disrupting global capital flows essential to funding the U.S. economy.”
Krugman further points out that running both trade surpluses and attracting vast foreign capital inflows is mathematically impossible since a nation’s trade balance and net capital inflows always sum to zero—the balance of payments must balance. Moreover, no evidence suggests that trade deficits hinder economic growth. From the mid-1990s to 2005, the trade deficit widened significantly, yet GDP growth averaged a strong 3.4%, even including the post-dot-com recession.
A trade surplus may seem like a sign of economic strength, but the balance of payments equation complicates this assumption. For instance, when southern European countries experienced a debt crisis over a decade ago, they shifted from trade deficits to surpluses—not due to increased exports, but because capital inflows dried up, forcing drastic import cuts.
Ultimately, the U.S. depends on foreign capital to finance its rising debt and deficits. While these issues must be addressed, trade wars aren’t the solution. Framing trade as inherently good or bad based on whether the U.S. runs a surplus or deficit risks turning an already fragile fiscal situation into a full-blown crisis.
Regardless of the objective, the policy is unlikely to benefit U.S. debt, deficits, or the bond market.
As he prepared to impose 25% tariffs on goods from Mexico and Canada this past Tuesday at midnight, President Donald Trump posted on social media: “MAKE YOUR PRODUCT IN THE USA AND THERE ARE NO TARIFFS! Why should the United States lose TRILLIONS OF DOLLARS IN SUBSIDIZING OTHER COUNTRIES…” (Trump has a penchant for using capital letters in his posts.)
Clearly, the tariffs aim to address perceived trade imbalances with the U.S.’s two largest trading partners. However, Kevin Hassett, director of the White House’s National Economic Council, contradicted this view, stating on CNBC, “This is not a trade war, this is a drug war.” Perhaps he had a point—Mexico and Canada made minor border security concessions on Monday, and Trump promptly suspended the tariffs. Notably, the discussion of tariffs as a revenue generator was almost absent.
Two key takeaways emerge. First, White House trade advisers must recognize the contradictory nature of Trump’s tariff rhetoric and advise him accordingly. Trump has claimed that tariffs on foreign goods—ultimately paid by U.S. consumers—could fund the extension of the TCJA, which the Congressional Budget Office estimates would cost $4.6 trillion over the next decade.
Second, tariffs increase the cost of imported goods. On Monday, Associated Wholesale Grocers Inc., a major U.S. grocery wholesaler, warned its 1,100 retail customers to expect a 25% price hike on goods from Mexico and Canada. The cost of an average car could rise by around $3,000. Given consumer frustration over high prices amid post-pandemic inflation, this could push them to cut spending or seek cheaper alternatives—unless foreign exchange rate adjustments offset some price increases.
If consumers cut back, tariffs will generate far less revenue than Trump envisions for extending the TCJA. This would exacerbate U.S. debt and budget deficits at a time when borrowing already exceeds $36 trillion, and government spending outpaces revenue by $1.8 trillion annually—roughly 6.4% of GDP.
David Kelly, chief global strategist at JPMorgan Asset Management, highlighted this in a recent note to clients:
Based on data through November, total U.S. goods imports last year were approximately $3.3 trillion, implying a crude estimate of $330 billion in annual revenue from a 10% universal tariff. However, this figure would be significantly reduced due to lower import volumes, retaliatory tariffs on U.S. exports, inflationary pressures raising interest rates, and potential government compensation to affected exporters, as seen during Trump’s first term.
If that doesn’t concern bond investors, Trump’s adversarial stance toward key trade partners should. Nations worldwide are already seeking ways to reduce reliance on the U.S. Canada, for example, is exploring ways to shift its oil exports to Asia. The European Union, another likely tariff target, recently formed one of the world’s largest trading blocs with four South American countries.
Additionally, exporters to the U.S. will likely find ways to bypass tariffs, as they did during Trump’s first term. Bloomberg Economics noted that Trump’s approach is more about negotiating leverage than raising fiscal revenue, allowing imports to be rerouted to evade duties.
One overlooked issue is trade’s critical role in enabling the U.S. to sustain its high debt and deficits. Trump portrays trade deficits as subsidies to other economies, but the reality is the opposite. As Nobel laureate Paul Krugman explains, the U.S. benefits from cheap foreign goods, while its trading partners hold U.S. Treasury securities in return. In essence, foreign nations subsidize the U.S. through affordable imports and lower borrowing costs.
Steven Blitz, chief U.S. economist at TS Lombard, underscored this in a Feb. 4 research note: “Trump’s tariffs are about generating revenue at the risk of disrupting global capital flows essential to funding the U.S. economy.”
Krugman further points out that running both trade surpluses and attracting vast foreign capital inflows is mathematically impossible since a nation’s trade balance and net capital inflows always sum to zero—the balance of payments must balance. Moreover, no evidence suggests that trade deficits hinder economic growth. From the mid-1990s to 2005, the trade deficit widened significantly, yet GDP growth averaged a strong 3.4%, even including the post-dot-com recession.
A trade surplus may seem like a sign of economic strength, but the balance of payments equation complicates this assumption. For instance, when southern European countries experienced a debt crisis over a decade ago, they shifted from trade deficits to surpluses—not due to increased exports, but because capital inflows dried up, forcing drastic import cuts.
Ultimately, the U.S. depends on foreign capital to finance its rising debt and deficits. While these issues must be addressed, trade wars aren’t the solution. Framing trade as inherently good or bad based on whether the U.S. runs a surplus or deficit risks turning an already fragile fiscal situation into a full-blown crisis.