What Donald Trump actually wants from tariffs

By David Goldman, CNN

Analysis - President Donald Trump says he believes tariffs are a panacea: a catch-all economic tool that can restore America's manufacturing prowess, bring foreign nations to heel on key disputes, restore the balance of trade and bring in gobs of money that can help pay off the US deficit and reduce Americans' tax burdens.

Trump is correct that tariffs can help fulfil many if not all of those promises.

When used effectively, tariffs can help boost production at home by making foreign goods more expensive. Because America is an enormous and diverse economy that doesn't rely on trade as much as its neighbours, the United States could use tariffs to inflict serious damage on other countries' economies without plunging itself into a recession.

Revenue raised by tariffs could help offset some of its deficits.

But, as the saying goes, if it sounds too good to be true, it usually is.

The problem with Trump's plan is that tariffs can't achieve all of those goals at the same time. That's because Trump's aims are often contradictory.

For example, if tariffs are a pressure campaign, they have to go away once the countries acquiesce - which means there will be no tariffs to restore the trade balance.

If tariffs are designed to promote America's manufacturing sector, they can't also raise revenue to offset deficits - if Americans switch to made-in-the-USA goods, then who pays the tariff on foreign products?

And Trump's tariff plan might do more to damage to America's economy than to help it.

Trump had recently acknowledged that tariffs would cause a "disturbance." And stocks plunged on Monday after Trump declined to predict that America would avoid a recession as a result of his trade policies.

But Trump appears to be a true believer in tariffs.

He frequently praised former President William McKinley, who over 100 years ago imposed hefty tariffs on foreign nations before America had an income tax.

Trump had frequently said tariff was "a beautiful word" that would make American rich again.

Despite frequent delays and retreats, Trump appears determined to impose enormous tariffs on foreign-made products starting on April 2 - for a variety of reasons.

Fentanyl and immigration

Trump had said the 20 percent tariffs he imposed on China and 25 percent tariffs he had imposed - and mostly delayed - on Mexico and Canada were designed to pressure those countries to stop the flow of fentanyl and illegal immigration into the United States.

Commerce secretary Howard Lutnick has said repeatedly the delayed tariffs, now scheduled to go into effect April 2, would remain in place until Trump believed the countries had made significant strides at stemming the entry of fentanyl.

"If fentanyl ends, I think these will come off," Lutnick said on Sunday to NBC's "Meet the Press."

"But if fentanyl does not end or he's uncertain about it, they will stay this way until he is comfortable. This is black and white. You've got to save American lives."

Trump's tariffs on Mexico and Canada were part of "a drug war, not a trade war," National Economic Council director Kevin Hassett echoed on ABC News' "This Week" Sunday.

Raising revenue

Meanwhile, Trump has made astronomical estimates about how much money tariffs can raise.

"We will take in trillions and trillions of dollars and create jobs like we have never seen before," Trump said during his joint address to Congress last week.

"Tariffs are about making America rich again and making America great again."

"We're going to become so rich you're not going to know where to spend all that money," Trump said on Air Force One on Sunday.

The Committee for a Responsible Federal Budget estimated that Trump's tariffs on China, Mexico and Canada would bring in about $120 billion a year and $1.3 trillion over the course of 10 years.

But here's the problem: They're not designed to remain in place that long.

If the Trump administration says they'll "come off" if the fentanyl problem is resolved, we should hope they won't be in place for a decade.

In fact, Hassett said progress on fentanyl was why Trump had twice delayed the tariffs on Canada and Mexico: "As we've watched them make progress on the drug war, then we've relaxed some of the tariffs that we put on them because they're making progress," Hassett said.

Manufacturing jobs

"I'm telling you, you just watch. We're going to have jobs. We're going to have open factories. It's going to be great," Trump said on Air Force One on Sunday.

To accomplish that, Trump has often advocated for lower taxes at home and higher taxes for goods made abroad.

During his joint address to Congress Trump noted one of his key selling-points for tariffs.

"We want to cut taxes on domestic production and all manufacturing," he said. "If you don't make your product in America, however, under the Trump administration, you will pay a tariff and, in some cases, a rather large one."

It's a carrot-and-stick approach to trade policy that Trump said would restore America's manufacturing sector.

"That, along with our other policies, will allow our auto industry to absolutely boom. It's going to boom," Trump said last week.

As Trump routinely reminds companies: If you make products in America, you pay no tariffs. But if companies do as Trump asks, then America can't raise tariff revenue from them.

Paying down debt and reducing taxes

Among Trump's first actions as president at the outset of his second term was to order the Treasury Department to determine if it could establish an "External Revenue Service" to collect tariff revenue to pay down America's debt and reduce taxes.

"Donald Trump announced the External Revenue Service, and his goal is very simple: to abolish the Internal Revenue Service and let all the outsiders pay," Lutnick said on Fox News in late February.

In other words, America will raise so much money from President Donald Trump's tariff plan that Americans will no longer need to pay income taxes.

The problem is America raises about $3 trillion each year from income taxes and also happens to import around $3 trillion worth of goods annually.

So that means tariffs would have to be at least 100 percent on all imported goods for tariffs to replace income taxes - an unreasonable level that could cause a price shock for American consumers.

That almost certainly won't happen. But higher prices could reduce consumer spending, hurting the economy and the manufacturers tariffs are trying to save.

Restoring fairness

"We have been ripped off for decades by nearly every country on Earth and we will not let that happen any longer," Trump said last week during his address.

"Other countries have used tariffs against us for decades, and now it's our turn to start using them against those other countries."

Trump had promised reciprocal tariffs on a number of products starting April 2, matching foreign countries' tariffs dollar for dollar to restore trade fairness.

When America was charged a higher tariff and had a trade imbalance with other countries, Trump had often incorrectly labelled that a "subsidy" or a "loss."

"They are, in effect, receiving subsidies of hundreds of billions of dollars," Trump said during his address.

"The United States will not be doing that any longer."

Economists largely agree that trade deficit are not losses or subsidies. In fact, they can be a reflection of a strong economy.

Tariffs aren't likely to meaningfully narrow the trade gap America has with other countries. If it did, it could be a signal that America's spending power was diminishing.

- CNN