During his presidential campaign, Donald Trump promised to spark an economic boom and rekindle faith in the American dream. Such a goal sounds more than admirable for the country and the markets. Indeed, the S&P 500 and other indexes initially rallied, hoping this vision would become a reality. The U.S. dollar index also began the year strong, trading above the 110 level, marking its highest point since November 2022. But the closer we got to its execution, the clearer it became that it would not be so simple.
As part of the measures being taken, on April 2, the U.S. president imposed tariffs on goods from 211 countries and territories. In some cases, the tariffs were as high as 50%, and if additional measures against China are implemented, that figure could rise even higher. Trump framed the move as a way to rebuild the U.S. economy, calling it a “declaration of economic independence.”
At least in theory, tariffs are supposed to bring factories back to the U.S. and draw in new investment. However, any meaningful impact would take time, and there’s no guarantee that companies will be eager to set up shop in the U.S. — especially with figures like Macron urging EU firms to freeze their investments in America. In the meantime, primarily U.S. consumers will end up shouldering the extra costs tied to imports.
As for why, the logic is simple: when an imported product enters the U.S., the U.S. importer pays a tax to the government based on the product's country of origin. That cost is passed directly on to the final price of the product. So, in the end, it is the buyer — often a U.S. citizen — who foots the bill.
And if the overall objective is to alleviate the federal budget deficit, the math still doesn't add up. Estimates suggest the new tariffs could bring in between $400 billion and $600 billion. But last year's budget deficit reached $1.9 trillion. Let's imagine that Trump also follows through with his proposed tax cuts.
His government has proposed eliminating the income tax for those earning less than $150,000 a year. That single measure could cost the federal budget about $10 trillion by 2035. If payroll taxes are also eliminated, the total could rise to $15 trillion. That's between $1 trillion and $1.5 trillion annually, enough to significantly increase the national debt.
So, instead of boosting the economy or tackling the debt, we might end up with the opposite. The administration seems to understand this, which is why there’s still hope that at least some of the tariff policies will be rolled back or reworked (50+ countries are already in talks with the U.S.). As for the proposal to eliminate taxes for those earning under $150,000, there’s a chance that threshold could be cut by at least half.
This article was written by FL Contributors at www.forexlive.com. Read More Details
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