February 09, 2025 at 02:45PM
Does Trump want tariffs to raise revenue or does he want foreign countries to lower barriers? His comments and actions indicate he wants it both ways.
On Friday, the market was concerned about the latest comments from Trump.
“I’ll be announcing that next week — on reciprocal trade — so that we’re
treated evenly with other countries. We don’t want any more or any
less,” Trump told reporters in the Oval Office.
This follows a report saying he would enact reciprocal tariffs, particularly on autos.
Trump has said that he wants US automakers to be treated equally in Europe. Currently the US has a 2.5% tariff on European cars while Europe charges US automakers 10%.
You can sympathize with Americans who want this corrected but there there is a contradiction in White House priorities because Trump and Congress also appear to be planning to use tariffs to raise money to pay for tax cuts.
1) Trump actually wants lower tariffs on US companies
Trump says he wants US companies to be able to compete abroad and this would be a big opportunity for exports. For instance, lowering European tariffs would let US carmakers exports freely.
The problem is, if this tariff is eliminated, then it’s less tariff revenue. That same thinking goes down the line for every tariff that might be put in place.
2) Trump wants a tax cut
If the tax cut is the real priority (I think it is), then Trump needs the tariffs. Now rates can vary based on negotiations but the principle of reciprocity works well if you want your companies to be treated better. If you want to raise revenue via tariffs then I wouldn’t expect negotiations over tariffs to go anywhere.
Now you could argue this is a win-win because it’s either better access or more US revenue and I certainly would agree. But as I game this out, I have a hard time seeing why foreign countries would negotiate if they’re convinced that tariffs are coming to pay for a tax cut anyway. Moreover, I think the most-important thing to know about Trump right now is that he doesn’t have the power to put on tariffs like this (or the ones against Canada and probably not against Mexico).
That means it will almost-certainly be Congress putting tariffs on and that the likely response will be reciprocity or retaliation from others.
This article was written by Adam Button at www.forexlive.com.
