Trump's tariff strategy: More revenue, but less growth for the USA!

Trump's tariff strategy: More revenue, but less growth for the USA!

The US economy is under pressure, and President Donald Trump's policies are a major contributor. Its tariff policy generates additional revenue in the short term, but has a negative long-term impact on economic growth. The increase in import tariffs not only leads to a higher deficit in the government budget, but also to higher consumer prices, which worries many economists. According to an analysis by the Ifo Institute, the strategy of rebalancing the budget through tariffs is not sustainable. Ifo President Clemens Fuest emphasizes that the negative effects on growth and rising prices will outweigh the hoped-for tax revenues, which calls into question the fiscal successes.

The Peterson Institute for International Economics highlights these concerns in a recent study. This shows that an import tariff of 10 percent leads to higher customs revenue, but also reduces revenue from other tax sources, especially income tax. Net additional revenue of around $160 billion per year is expected. Still, gross domestic product (GDP) could fall by $0.46 for every dollar of additional tax revenue. With tariffs of 20 percent, the decline would be as high as $1.80 per dollar. This dynamic is further exacerbated by rising interest rates on US government bonds, which are further putting pressure on the budget situation.

Rising interest rates and national debt

For example, an increase in interest rates of 0.5 percentage points could mean an additional interest burden of around $150 billion per year for the national budget. In this context, the US national debt of almost $37 trillion, the highest in the world, is also an issue of great importance. According to the International Monetary Fund, the debt ratio could even rise to 124.1 percent by the end of 2025. In comparison, Germany is at 62.1 percent. The U.S.'s reliance on low interest rates to finance this debt is an ongoing challenge.

The background to the current situation is historical turbulence in US government bonds and falling stock markets, which made a shift in Trump's trade policy necessary. Possible reasons for this change include pressure from business leaders like Elon Musk and the recognition of the risks of his previous customs policy. In recent weeks, 10-year U.S. Treasury yields rose to 4.5 percent, while 30-year bonds rose from 4.3 to 5.0 percent. These higher bond yields not only make borrowing more expensive for the U.S. government, but could also harm long-term investor and creditor confidence in the U.S. economy.

Uncertainty among investors

Uncertain trade policy could force companies to hold back investments, which would increase economic headwinds. China, as the U.S.'s second-largest creditor with $760.8 billion in government bonds, could also play a crucial role. Sales of government bonds by China or hedge funds could further destabilize the market situation. Confidence in the U.S. economy is at stake as the government pushes to chart a stable course.

Overall, it shows that Trump's tariff policy can generate short-term revenue, but the long-term negative consequences for the economy cannot be ignored. The challenges, particularly in relation to national debt and interest rates, require a drastic reassessment of current policy. The entire economic system could be further weakened if effective solutions are not found as quickly as possible.

For more information about the impact of Trump's trade policies on the US economy, read Press release and daily news.