Jamie Dettmer is opinion editor at POLITICO Europe.
With United States President Donald Trump poised to turn on Europe, the world is bracing for a high-stakes multi-front trade war between the U.S. and its key trading partners across the globe. And it’s unlikely Trump can be dissuaded, as tariffs — key to his economic thinking — are earmarked to play a major role in his overall tax policy.
Tentative European hopes that the bloc might dodge the tariff bullet already fired at Canada, Mexico and China were quickly dashed on Friday, as the “Tariff Man” himself proclaimed: “We’ll be doing something very substantial with the European Union.” The EU “treated us so terribly.”
On Sunday, Trump doubled down, saying he would “definitely” impose tariffs on goods coming from the EU — and described the bloc’s actions as “an atrocity.”
Much is being made of Trump using tariffs to punish countries for not doing his bidding. For example, he cited the flow of fentanyl and migrants as reasons for imposing steep tariffs on Canada and Mexico. In reality, this was more of a smokescreen to invoke national security as grounds for the emergency authority to impose tariffs.
A matter of principle
For Trump and his MAGA loyalists, there are much more important reasons for introducing high tariffs — they are articles of hard economic faith.
As far as they see it, U.S. trade deficits can only be a bad thing — the fault of malign trading partners taking advantage of the U.S. They dismiss counterarguments that the deficits are consequences of an overly strong dollar and unsustainable government debt. Nor are they ready to consider the possible positives of short-term trading deficits — namely, that they’re a sign of U.S. economic growth reflecting strong domestic demand.
An impulsive mercantilist at heart, Trump believes the U.S. can only boost its wealth by selling more than it buys from other nations. “We were at our richest from 1870 to 1913. That’s when we were a tariff country,” he said last week. And it’s true that virtually every U.S. president from 1789 until the mid-20th century (with Grover Cleveland and Woodrow Wilson being outliers) would agree.
They all subscribed to the view that tariffs protected American manufacturers and farmers, and were also a matter of national security. “I use no porter or cheese in my family, but such as is made in America,” George Washington boasted, adding that both are excellent. “Give us a protective tariff and we will have the greatest nation on earth,” declared Abraham Lincoln.
And all scorned the idea of reciprocal trade deals as being a pie in the sky, arguing they’d never be fair.
But mercantilism isn’t the only reason Trump and his team are wedded to tariffs. They also want to use tariffs to replace the income tax — or at least allow for dramatic tax cuts.
In an interview shortly before Trump’s inauguration, his former strategic adviser-turned-MAGA guru Steve Bannon told POLITICO that “Trump doesn’t look at tariffs the way other people look at them.”
“People look at tariffs as something punitive, or maybe even a way of just bringing jobs and industry back. He has a broader concept. He looks at them as a major revenue generator. He looks at this market in the United States as a premium market. It’d be like premium seating in a theater or in a sports contest. There’s going to be a fee to do that.”
He then added: “Remember, we financed the entire government on external revenues up until 1913. Now, everything’s put on the Internal Revenue Service to get it from taxpayers and from corporations. That’s going to change. It’s going to change dramatically.”
So, the Trump administration doesn’t see tariffs just as a way of reversing trade deficits, they also see it as a means of taxing the world in order to reduce domestic U.S. taxes.
Remember, Trump wants to extend his 2017 Tax Cuts and Jobs Act, which is set to expire this year, and would have resulted in over 60 percent of filers likely seeing tax increases in 2026. He’s also floated other tax-cutting ideas, including exempting various types of income, such as social security pension benefits, tips and overtime pay.
Moreover, it is, indeed, true that in the 19th century, the U.S. federal government was largely funded by tariffs, custom duties and land sales. From 1861 to 1933, the U.S. had one of the world’s highest average tariff rates on manufactured imports, running at around 50 percent. That eventually started to drop from 1934 on, eventually leveling off at 5 percent when the U.S. started to champion regulated free trade and negotiated a slew of reciprocal trade agreements.
What could go wrong?
First, though tariff revenue was sufficient to fund a much smaller government with far fewer functions and a smaller military, it won’t be anywhere near enough to finance the current U.S. government — even a much reduced one. According to the Tax Foundation, the revenue generated by the newly imposed tariffs on goods from China, Mexico and Canada would only bring in the equivalent of around 2 percent of U.S. income tax.
Second, the U.S. will likely lose out. Overall, free trade has benefited the U.S. much more than it has hurt, especially when it comes to bilateral deals.
Admittedly, free trade deals are imperfect: Benefits are sometimes exaggerated, and not all of America’s industrial sectors and income groups prosper as a result. But according to an analysis by the U.S. International Trade Commission, free trade has boosted U.S. economic growth, incomes, exports and job creation.
Not that Trump sees it that way. He’s dismissive of the warnings piling up from economists, foreign leaders and the U.S. business community.
“You see the power of the tariff. No one can compete with us because we have by far the biggest piggy bank,” he bragged last week. But by choosing to impose such high tariffs, Trump risks reducing that piggy bank, and the law of diminishing returns may well kick in. Imports could drop dramatically, reducing the revenue Trump’s counting on to cut income tax. And while Americans may get tax cuts, they’re likely to see higher consumer prices on everything and conclude they’re victims of a two-card monte trick.
Additionally, from behind a high tariff wall, the U.S. risks being relegated to watching the rest of the world get on with signing trade deals, reducing Washington’s opportunity to counterbalance the growing geopolitical influence of rival powers like China.
But by then, not only will the U.S. economy have suffered a severe economic shock — the global economy will have too.