The customs duties data for the United States was recently updated, and we can assess the “success” of Trump 2.0’s tariff policies so far. On an annualised run rate, customs duties were 0.88% of GDP in the second quarter (the latest monthly figure Treasury I saw was around $350 billion annualised versus the $267 billion BEA second quarter figure).
The rise of tariff revenue is rapid, but the magnitude is relatively small so far. As such, it is not entirely surprising that there has not been a massive jump in the CPI — the various climbdowns and exceptions means that the effects of tariffs are hitting only a small subset of the economy. That said, the end of the de minimis exception might blow a hole in logistical chains that relied on just-in-time fulfilment of small orders of specialised equipment, so we might see economic effects out of proportion to the increase in customs duties revenue (since the shipments have stopped dead, there is no revenue).
There is a good reason that the fans of tariffs express revenue in dollar amounts (or even — shudder — 10-year cumulative totals): the revenue amounts are not that large when compared to a $30.5 trillion dollar economy. Furthermore, the Republican Party used to be a fan of the Laffer Curve — the belief that there is a revenue-maximising tax rate. So far, businesses have been able to absorb tariffs on the basis that tariff policy can reverse on a dime. Mangling international trade with tariff barriers would eventually throttle trade volumes at some point.
At the same time, there is a cost to alienating trade partners. It appears that the United States vapourised its soybean exports to China — and there is no other market to absorb the magnitude of the flows. The political sensitivity of the situation means that the United States will have to bail out its farmers (after bailing out Argentina, one of the countries that just ate American soybean market share).
If the Administration reopens its trade wars, they should be able to get tariff revenues up to 2% of GDP. Although that is a decent chunk of change, that is not enough to fulfil the fantasies of those who believe that tariffs can replace the income tax. At the same time, there would be cyclical costs to another round of trade uncertainty, and it is unclear how sustainable the revenue would be if the United States transitions to an autarchic economic model.
Government Shutdown
The U.S. government is once again paralysed by the stupid American tradition of a shutdown. In general, the macro effect of a shutdown is small — the costs are political (and personal to those directly affected). This could change if the shutdown is protracted, but it is not clear to me whether either party has the political stomach for a protracted showdown.
The economy is somewhat vulnerable to bad news, and a shutdown will certainly not help matters. Nevertheless, the economy has enough automatic stabilisation that it might be able to muddle through the uncertainty. Perhaps a panic with regards to so-called “artificial intelligence” capital expenditures could damage animal spirits, but the leaders in the tech sector have a decent tolerance for setting their own capital on fire. It is unclear to me whether there is enough external financing being provided to create a run on the sector (which was what shut down the tech bubble of the 1990s, and the subprime financing of the 2000s).
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(c) Brian Romanchuk 2024
