Free Trade

No, We Aren't Going to Pay Off the National Debt With Tariff Revenue

Tariffs will generate $21 billion this year-just .01 percent of the national debt. And aren't these tariffs supposed to be about national security?


Officially, the Trump administration's position is that tariffs on aluminum and steel are a national security issue.

Unofficially, President Donald Trump has trotted out just about every imaginable justification for new taxes on imports, claiming that the tariffs are needed to create leverage for renegotiating trade deals, that they are meant to punish China for stealing American companies' intellectual property, even that they're a retaliation for Canada's decision to charge high import duties on American milk—as if that were something that would justify a potentially destructive trade war.

In a weekend tweetstorm, Trump raised the bar yet again in his race to offer the most ludicrous justification for his tariffs. Now he says they'll help the United States pay off the $21 trillion national debt.

It's amazing thing just how many falsehoods Trump manages to pack into roughly 500 characters.

No, the tariffs are not "working big time." If they were, the White House wouldn't be planning to spend $12 billion bailing out farmers who have been hurt by the trade war. Nor would thousands of companies be lining up at the Commerce Department to ask for exemptions from those tariffs. Indeed, the fact that Trump keeps flailing around for new arguments to justify his policy is a sign that his protectionist scheme is unraveling, both intellectually and diplomatically.

No, the tariffs are not paid by foreigners. Trump says he wants "every country on earth" to be taxed when they come to America to do business. But this is exactly the opposite of how tariffs work. When steel or aluminum is imported into America, the tariff inflates the product's price for whomever is buying it. That means the higher price is paid by American businesses purchasing the imported steel and aluminum to make nails, beer kegs, and lots of other things. Because tariffs are really just taxes, those higher costs are passed along to the consumer. If foreigners were paying those costs, why would American businesses seek those exemptions?

No, the tariffs do not mean "jobs and great wealth." Even protectionist think tanks like the Coalition for a Prosperous America say Trump's steel and aluminum tariffs will, on net, cost American jobs. The White House's own report on the tariffs, released in early June, showed that they would raise prices and slow economic growth. Businesses both large and small are already feeling the pain. Higher taxes are not a recipe for wealth creation and, again, tariffs are just taxes.

And now we get to the real whopper. No, we aren't going to pay down the national debt with tariffs. Not even close.

Before getting into the debt numbers, let's think for one more minute about how tariffs work. By increasing the price of imported goods, they are supposed to boost domestic manufacturing by reducing the imported competition. Trump wants to limit the amount of steel and aluminum into the country—supposedly for national security reasons—but he also wants to rely on steel and aluminum imports to pay off the debt?

Even if this made sense intellectually, it doesn't add up mathematically. The current tariffs on steel, aluminum, and some Chinese-made goods will generate an estimated $21 billion this year, according to the Tax Foundation, a nonpartisan think tank. That's roughly 0.1 percent of the $21 trillion national debt.

Every little bit helps, of course, but there's no reason to believe the Trump administration is going to spend every red penny of tariff revenue on debt reduction. For one thing, there's already that $12 billion pledged to farmers injured by the trade war. If other industries successfully lobby for similar bailouts—and already that talk is beginning—the price tag would be $39 billion, according to an analysis that the U.S. Chamber of Commerce published last week. As a revenue question, that would put the tariffs in the red even before you take into consideration how they could reduce future growth.

That growth will be critical to any realistic shot at balancing the budget. Current projections, assuming generous rates of future growth with no slowdowns caused by tariffs or anything else, show $1 trillion annual deficits into the next decade. You can't begin paying off the national debt until you stop adding to it.

The national debt is an important topic—and, unlike imported metals, it actually is a threat to America's national security in the long term—so it's good to see an occupant of the White House talking about addressing it. But what he said isn't a serious suggestion, and surely even Trump realizes as much. It's just another half-baked attempt to retcon a justification for a trade war that will leave America poorer, less competitive, and less able to pay off the overdue bills on the national credit card.