While most economists would welcome a U.S. retreat on trade protectionism, the U.S. government is increasingly reliant on the revenue generated by tariffs to paper over its growing fiscal deficits, says National Bank Financial Inc. (NBF).
In a new report, NBF economists noted that last week’s decision by the U.S. Supreme Court to overturn certain tariffs that were imposed last year temporarily reduced average import tariffs from 13.6% to 6.4% — easing the burden on U.S. businesses, and potentially reducing inflationary pressures.
However, this would also slash the federal government’s revenue from customs duties to about US$155 billion from US$355 billion, it noted.
“We doubt this would have gone down well with bond traders, who already have good reasons to question the U.S. government’s fiscal trajectory,” it said — noting that the latest Congressional Budget Office projections have the U.S. debt-to-GDP ratio rising to record levels, amid large, ongoing fiscal deficits.
Indeed, the report suggests that the decision to introduce a new 15% tariff in the wake of the court’s decision, was made, “As much to reassure the bond market as to stimulate domestic production…”
This new levy takes the effective tariff rate back up to 12%, and projected annual customs revenue back to US$290 billion, NBF said.
And, it also highlights the bind created by current U.S. trade and fiscal policy, “where any reduction in tariffs is likely to be viewed positively from an economic standpoint but negatively from a fiscal one.”
“Damned if you do, damned if you don’t sure seems an apt description of Washington’s policy options when it comes to tariffs,” the report concluded.