The impossible trinity at the heart of US tariffs

If you’ve spent hopeless hours searching for coherence in the White House’s trade strategy set to be unveiled April 2 — a date President Donald Trump is calling “Liberation Day” — don’t fret because there is none to be found.

To date, Trump has put forward three primary objectives of the levies. The first is raising tax revenue to help close the federal budget deficit and pay for an extension of the Tax Cuts and Jobs Act of 2017 that is due to expire at the end of the year. The second is to bring back to the US manufacturing that have migrated overseas, igniting a new “Golden Age” of America. The third is to achieve foreign policy goals.

Each one of those objectives would be hard enough to achieve on their own, but all at the same time as Trump suggests? Inconceivable would be an understatement. “The impossible trinity of tariff objectives” is how the economists at Morgan Stanley put it in a research report. “Tariffs would have to be much higher, and more persistent” than what the White House has floated to be a “significant source” of tax revenue, they concluded. And that’s taking into account the notion that the US tariff rate will rise to an average of somewhere between 10% to 15%, the highest since the 1940s and up from around 2.2% currently.

Indeed, the Budget Lab at Yale has done extensive work on the impact of tariffs. It estimates that based on what has been proposed, tariffs on imported goods would raise around $3.52 trillion between 2026 and 2035 (paid for by US importers and, ultimately, consumers and not the exporting countries).

A big number, but far short of the $4.6 trillion deficit expansion through 2034 that the Congressional Budget Office projected would come from extending the TCJA, Trump’s signature piece of legislation in his first administration. Nor will tariff revenue put a dent in a budget shortfall that was $1.8 trillion in fiscal 2024 alone and which the CBO estimates will total $21.8 trillion through 2035 (and that’s without any changes to prevailing tax laws).

Even if tariffs were set high enough to raise a significant amount of revenue, it would mean failing on the other objectives, according to the Morgan Stanley economists.

For one, broadly higher tariffs would imply higher prices for US consumers and potentially lower profit margins for companies. Neither would be conducive to increased tax revenue, as consumers already weary from an extended period of elevated prices would likely pull back on spending. Here, the Budget Lab estimates that inflation rates would rise by 1.7 percentage points in the short-term if other countries don’t retaliate and by 2.1 percentage points if they do (assuming the Federal Reserve does not respond to the effect of tariffs). The Budget Lab says this is equivalent to $2,700 to $3,400 per household on average in 2024 dollars. And it could be much more. The American Economic Review found that Trump’s tariffs on South Korean and Chinese washing machines in 2018 led to almost as large an increase in the price of washing machines sold in the US. In addition, the price of dryers rose even though they weren’t subject to tariffs in a sort of “knock on” effect.

Secondly, companies caught in the middle of a trade war and watching their profits suffer as consumers cut back will have little incentive to onshore manufacturing. And don’t forget that corporate tax revenue is based on profits, which stagnated during Trump’s first term as he waged a tariff war against China, causing the manufacturing industry to fall into a recession as measured by the Institute for Supply Management. And as the Morgan Stanley economists remind, almost all the revenue raised from those tariffs was used to compensate US farmers for lost overseas sales after China retaliated by diverting demand to non-US producers.

So much for objectives 1 and 2. As for the third objective, success in using the threat of tariffs to achieve foreign policy goals such as reducing the flow of migrants or illicit drugs or lowering trade barriers to US products would automatically make raising tax revenue and onshoring production moot. Recall in early February when Trump prepared to impose 25% tariffs on goods coming into the US from Mexico and Canada. Here’s what he wrote in a social media post at the time: “MAKE YOUR PRODUCT IN THE USA AND THERE ARE NO TARIFFS! Why should the United States lose TRILLIONS OF DOLLARS IN SUBSIDIZING OTHER COUNTRIES…”

But then Kevin Hassett, director of the White House’s National Economic Council, said the tariffs weren’t about that at all. “This is not a trade war, this is a drug war,” he told CNBC. Maybe he was right because Mexico and Canada made some token concessions regarding security at their borders with the US and Trump promptly put the tariffs on hold. Talk of tariffs as a revenue generator barely came up in that episode.

Here’s what the Morgan Stanley economists conclude:

“To succeed as a significant source of revenue, tariffs have to fail on almost every other objective listed previously. Relaxing tariffs as part of a successful negotiation reduced revenue. Reducing imports or reshoring production reduces revenue. Creating carve-outs to exempt certain goods reduces revenue. Relief payments to adversely impacted US producers reduce revenue.”

Trump’s trade policies have always been more populist than pragmatic. That may be fine on the campaign trail but are downright reckless when implemented. Economists are already raising the odds of “stagflation,” that pernicious double whammy where economic growth stagnates yet inflation accelerates to elevated levels. Watching the White House attempt to follow through on its tariff threats is like watching the dog that finally caught the bumper — happy to claim victory but not with the consequences.