One of the motivations for Trump's love affair with tariffs was addressing not only the persistent trade deficits but fiscal deficits as well. Federal spending ballooned uncontrollably during Biden presidency, driven by excessive Covid-related expenditures and growing interest rates which made servicing the mountain of debt more expensive.
Tariffs are meant to provide a new source of revenue for the budget, without unduly burdening Americans. It is true, of course, that a large portion of trade levies is shifted onto the final customer, but given that imports account for only 14% of the GDP it is a more sensible move than raising domestic taxes across the board.
The question is: will it work? Can tariffs really bring in revenue that is significant enough to at least partly plug the massive hole in American finances?
Well, we finally have the data for April, when Trump launched his trade war with the world, starting with a blanket baseline tariff of 10% on all nations. Reciprocal tariffs were postponed later in the month, so we can't yet see how they affect things once they are renegotiated.
Promising signs for Trump?
According to the US Department of the Treasury, customs revenue very nearly doubled last month from the usual average of $7-8 billion to over $15 billion, or by 145.36% compared to April 2024.
What's more, the overall Customs & Excise Tax revenue collected on imported goods in May is currently outpacing May 2024 by 118% (the specific breakdown will, however, be only available in June).
It's a promising start, although we have to consider other variables, for instance: was it a result of a much higher volume of trade?
This is a valid concern, since many companies have been trying to ship as many goods as possible to avoid the tariffs, thus paying a lot more in tariffs in the process.
We won't have the exact value figures for April imports until June, but 3rd party sources have reported a 9.1% increase in the quantity of inward container traffic at US ports. It's a meaningful jump but shows a large disparity between quantity and value.
This suggests that either the fairly low but all-encompassing tariffs have already had a meaningful impact or the value of goods shipped was unusually high – although the latter doesn't seem likely to be enough to explain a doubling in receipts.
What's more, given that almost all of the US trade with China was effectively put on hold for most of the month, this has created gap which may be gradually filled, following the agreement signed in Geneva, leading to increased volumes in the next 3 months (at least).
However, Chinese goods will now be charged 30% of their value at the border, which might further elevate tariff revenue or, if it doesn't materialise, show us how badly the volume of trade has been affected.
Nevertheless, such a strong, early, positive result in terms of money collected by US customs suggests that tariffs may, indeed, play a role in filling the big hole in American federal finances.
We won’t know the full impact for many months
The truth is that we won't really know the full consequences of Trump's trade war with everybody until many months after the dust settles and relevant bilateral agreements are signed with the entire world.
Right now trade traffic is still going to be significantly distorted as companies either choose to wait out the turmoil or stock up on products in advance to avoid any future disruptions.
This could create temporary spikes in customs revenue, followed by slumps later on.
What's more, for tariffs to play a meaningful role in addressing fiscal deficit they still need to multiply in value.
The doubling registered in April is a good sign, but they should still double again or, better yet, quadruple to fulfil Trump's goals for the budget.
There's also a lingering question of the impact they might have on other tax revenues, as some suggest that they may end up partly cannibalising existing inflows by hitting household and corporate income.
Finally, we don't know their contribution to inflation and purchasing decisions made by American consumers, which are ultimately tied to everything – from trade deficits, through GDP growth to stock market performance and tax receipts.
That said, Trump's critics have received a first warning that their scorn for the US president may be misplaced and that there is enough space for him to carve out a new revenue stream, sufficient to address some of the most pressing fiscal problems, against both international and domestic attacks he's been a target of.
Financial markets appear to be back on his side again, after the key indices erased all of the losses for the year, even as tariffs remain in play.
