High tariffs' true financial burden starts to reveal itself

In recent times, the implementation of tariffs by the Trump administration has been a topic of significant discussion. Here's a breakdown of the potential effects of these tariffs on the U.S. economy, budget deficit, and trade balances.

The Congressional Budget Office (CBO) has estimated that tariffs, if left in place for the next ten years, could potentially raise $2.7 trillion in revenue, conventionally scored. After accounting for the dynamic effects of slower economic growth, this figure drops to $2.2 trillion. However, these revenues may come at a cost.

The Budget Lab calculates that the tariffs could sustainably reduce the long-run level of U.S. real GDP by 0.4%, primarily through reduced productivity and investment. This means lower investment could lead to slower economic and wage growth in the long run. Slower economic growth, in turn, worsens fiscal sustainability at a time when the government is dealing with record debt and budget deficits.

The weakening dollar is another factor to consider. On average, the dollar is weaker by 3.1% from two years ago. The depreciation of the dollar could potentially modestly lower external deficits in the long run by slowing growth and investment, as well as causing the dollar to depreciate.

The trade deficit expanded to 5.5% of gross domestic product ($138 billion on a non-annualized basis) in March, but recovered to 2.4% of GDP ($60 billion) in June. The new tariffs have boosted government revenue by about $65 billion.

However, it's important to note that aiming for bilateral trade balances with every country does not make sense. An imbalance with a country is usually not a signal of unfairness, but rather a sign of economic specialization and the nature of global supply chains.

The tax and spending bill just passed by Congress will cost $3.4 trillion over the next decade, more than the tariffs are likely to raise in revenue. Against pre-2025 law, the outlook for the budget deficit has gotten worse, not better, in the last eight months.

Expanding the current-account surplus must involve increasing private savings, decreasing the federal budget deficit, and reducing private investment. This could potentially lead to a slower pace of economic growth in the long run.

The Trump administration announced tariffs on goods from China, Canada, and Mexico six months ago. Overall prices on goods are accelerating due to these tariffs, which could put pressure on consumers and businesses.

In conclusion, while tariffs may provide a temporary boost to government revenue, they could potentially have long-term negative effects on the U.S. economy, including slower economic growth, reduced productivity, and decreased investment. To durably reduce trade and current-account deficits, fundamental shifts in the economy may be required.