The real reason Trump is waging a global trade war

In the middle of Donald Trump’s tornado of tariff announcements, policy analysts have been clinging to a single hope.

There is a perceived wisdom that the US president is using the higher charges primarily as a threat designed to extract concessions from his trading partners. Or in other words, that his bark will be worse than his bite.

Is Donald Trump’s bark worse than his bite? Credit: AP

Trump certainly is using tariffs as a negotiating tactic to bring world leaders to their knees. But optimists are overlooking a second truth: the US president is also desperate for cash.

America’s public finances are shot. The deficit is the highest since at least 1975 outside of a crisis period. Debt is on track to grow at double the rate of the economy in the decades ahead.

And against this backdrop, Trump has promised tax cuts that would cost in the region of $US10 trillion ($15.7 trillion) over the next 10 years.

Experts warn that for Trump, tariffs are not only a means of geopolitical leverage but a key source of funds for his tax-cutting agenda. This means they will be here for the long run.

“He views them as a revenue-raiser, and his team will use them to justify tax cuts,” says Michael Martins, founder of Overton Advisory and a former US embassy political specialist.

“Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens,” Trump said in his inauguration speech.

“It will be massive amounts of money pouring into our Treasury, coming from foreign sources.”

Peter Navarro, his trade adviser, told CNBC in January: “Tariffs are going to be a really important part of the tax-cut discussion.”

Martins suggests that hopes of a return to normal are wildly over-optimistic.

“This isn’t going away. People should not be surprised if President Trump continues to both widen and raise tariffs,” he says.

“I think a lot of world leaders are underestimating President Trump’s fondness for them.”

The US federal deficit in the 2025 fiscal year will be $US1.9 trillion ($2.97 trillion), or 6.2 per cent of GDP, according to the Congressional Budget Office (CBO) – not too far off from double the 3.8 per cent average over the last 50 years.

It is a problem that is not going away. By 2035, the deficit will be $US2.7 trillion, or 6.1 per cent of GDP.

“The starting point is that the US fiscal position is pretty awful,” says James Knightley, chief international economist at ING bank.

Markets around the world are on edge as Trump lays out his plans. Credit: AP

The deficit means borrowing will keep rising. The Government Office of Accountability (GAO) warned in February that the US government faces “an unsustainable fiscal future”.

By 2027, debt will hit an all-time high of 106 per cent of GDP. “If unaddressed, it will grow more than twice as fast as the economy and reach 200 per cent of GDP by 2047,” the GAO said.

These forecasts are based on the assumption that Trump’s 2017 tax cuts, which included cutting almost all personal income tax rates, will expire at the end of 2025.

Trump wants to extend them. Doing so will cost the American public purse $US5.5 trillion in extra borrowing over the following decade.

“That’s the starting point. That is going to cost $US5.5 trillion, and it’s not going to benefit anyone in their pockets because it will basically just keep tax rates unchanged. There will be no fiscal uplift but it deteriorates the long-run fiscal numbers for the US,” Knightley says.

Trump wants to go much further. He is looking at scrapping taxes on overtime pay, a change that Knightley says could cost upwards of $US2 trillion over the next decade.

Meanwhile, Trump’s plans to lift tax on social security benefits would cost between $US1 trillion and $US1.5 trillion over 10 years.

Abolishing taxes on tips will cost $US200 billion to $US500 billion over the same period, while cutting corporation tax from 21 per cent to 15 per cent for firms that base production in the US would cost about $US300 billion, Knightley says.

All in, his tax-cutting agenda would require extra funding, on average, of about $US1 trillion a year.

Not everything will come into effect. Lifting tax on overtime is unlikely to get through Congress when it risks a large potential blow to productivity, Knightley says. But whatever happens, the funding ballpark is a big one.

“President Trump believes in aggression first,” Martins says. “He will push for a cut to corporation tax as deep as he can get. His political brand is as a former businessman.”

Pushing through tax cuts will mean convincing not only Congress but markets, who will need signals they can be paid for.

Although yields on US treasuries have been rising, bond investors have not driven up rates on long-term government debt to a point that signals they expect an imminent fiscal crisis.

But that could change soon, says Robin Brooks, senior fellow at the Brookings Institution.

“All the literature talks about the US having this exorbitant privilege – the ability to finance very large deficits at low interest rates with a strong currency. The truth is that none of us know when this runs out.

“But we know that we’re playing with fire because we know it’s not infinite,” Brooks says. “The fact that markets have not yet priced this does not mean that they won’t price it tomorrow.”

Even Trump will need to kowtow to bond vigilantes.

The president’s other solution to saving the public finances, banking on Elon Musk’s Department of Government Efficiency (DOGE) to make massive savings on government spending, is unlikely to deliver anything close to the scale required.

Two-thirds of US government spending, including social security benefits, income security benefits, Medicaid and Medicare, is mandated by law. It is only the remaining third – that is discretionary – where Musk could feasibly make a dent, Knightley says.

“But again, two-thirds of that discretionary spending is military defence spending,” he adds. “That effectively leaves you with a third of a third that you can really get to grips with.”

Musk himself has admitted the actual savings will be perhaps half of his target. “I think if we try for $US2 trillion [in cuts], we’ve got a good shot at getting one [trillion],” he said at a rally in January.

This is not all to say that tariffs will necessarily be an effective or sufficient revenue raiser for Trump.

“There’s no question that any kind of revenue you can raise from tariffs will fall significantly short of what you need,” Brooks says.

Trump knows there is precedent for using tariffs as a revenue-raiser in the US.

Today, tariffs comprise about 2 per cent of US government revenue. But back in the early 1900s, tariffs made up about half of US government revenue, the Peterson Institute for International Economics (PIIE) reports. There was a time in the 1800s when the share was 100 per cent.

But the US economy is vastly different today.

A PIIE research paper calculated that Trump’s proposals for 10 per cent blanket tariffs on all goods and 60 per cent tariffs on China could bring in $US225 billion a year. However, this does not account for lower economic growth or behavioural change as a result of the tariffs.

‘The starting point is that the US fiscal position is pretty awful.’

James Knightley, chief international economist at ING bank.

“You have a Laffer curve effect,” Brooks says. “If the tariff rate goes up, the quantities involved go down, and you end up not raising much revenue.

“The highest number that I’ve seen that you could possibly raise from tariffs is something like $US100 billion a year. I think it’s really hard to go much above that without really disrupting global markets.”

The cost of tariffs will also be felt keenly by low-income households in America, who spend a larger proportion of their incomes on physical goods and energy, Knightley says.

“That could be a negative for the economy overall. If he goes too hard on tariffs, there is that hit to spending power that could lead to weaker growth.”

But the debt mountain and scale of potential tax cuts combined show just how big Trump’s motivations are to push for as much tariff revenue as he can.

Telegraph, London

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