During his presidential campaign, Donald Trump promised to
spark an economic boom and rekindle faith in the American dream. Such a goal
sounds more than admirable for the country and the markets. Indeed, the S&P 500 and
other indexes initially rallied, hoping this vision would become a reality. The
U.S. dollar index also
began the year strong, trading above the 110 level, marking its highest point
since November 2022. But the closer we got to its execution, the clearer it
became that it would not be so simple.
As part of the measures being taken, on April 2, the U.S.
president imposed tariffs on goods from 211 countries and territories. In some
cases, the tariffs were as high as 50%, and if additional measures against
China are implemented, that figure could rise even higher. Trump framed the
move as a way to rebuild the U.S. economy, calling it a “declaration of
economic independence.”
At least in theory, tariffs are supposed to bring factories
back to the U.S. and draw in new investment. However, any meaningful impact
would take time, and there’s no guarantee that companies will be eager to set
up shop in the U.S. — especially with figures like Macron
urging EU firms to freeze their investments in
America. In the meantime, primarily U.S. consumers will end up shouldering the
extra costs tied to imports.
As for why, the logic is simple: when an imported product
enters the U.S., the U.S. importer pays a tax to the government based on the
product’s country of origin. That cost is passed directly on to the final price
of the product. So, in the end, it is the buyer — often a U.S. citizen — who
foots the bill.
And if the overall objective is to alleviate the federal
budget deficit, the math still doesn’t add up. Estimates suggest the new
tariffs could bring in between $400 billion and $600 billion. But last year’s
budget deficit reached $1.9 trillion. Let’s imagine that Trump also follows
through with his proposed
tax cuts.
His government has proposed eliminating the income tax for
those earning less than $150,000 a year. That single measure could cost the
federal budget about $10 trillion by 2035. If payroll taxes are also
eliminated, the total could rise to $15 trillion. That’s between $1 trillion
and $1.5 trillion annually, enough to significantly increase the national debt.
So, instead of boosting the economy or tackling the debt,
we might end up with the opposite. The administration seems to understand this,
which is why there’s still hope that at least some of the tariff policies will
be rolled back or reworked (50+ countries are already in talks with the
U.S.)
