Trump begins tariff rollout

President Donald Trump last week imposed 10% additional ad valorem tariffs on Chinese imports, effective on Feb. 1, while imposing and then suspending for one month 25% tariffs on Canadian and Mexican products. The moves represent just the beginning of what could grow into much broader tariff action in the months to come, with important implications for tax policy.

The Chinese tariffs were instituted at 12:01 a.m. on Feb. 4, retroactive to 12:01 a.m. on Feb. 1, and imposed in addition to existing Chinese tariffs, which were already elevated for many products following tariffs Trump imposed during his first term. The Chinese government responded with 15% on U.S. coal and liquefied natural gas and 10% on U.S. crude oil, farm equipment, and some automobiles, as well as restrictions on rare earth minerals. Trump also suspended a de minimis exception of $800 or less on imports for Chinese products. Due to concerns over compliance, the U.S. Postal Service announced a temporary pause in shipments from China and Hong Kong to the U.S., only to reverse that decision within 24 hours. A Feb. 5 amendment to the executive order paused that de minimis suspension until the Commerce Department can “fully and expediently process and collect tariff revenue.”

Trump also issued orders for 25% tariffs on Canadian and Mexican products on Feb. 1 but agreed to suspend them until March 1 after last-minute talks with Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheinbaum. Discussions to halt Chinese tariffs are also possible. Reporting a day before the orders suggested that March 1 was Trump’s tariff target date for those countries, further fueling speculation he could revisit those import taxes.

The president also promised additional tariffs on EU countries, and “reciprocal” tariffs on other countries with duties on U.S. exports, in public remarks on Jan. 31 and Feb. 7, respectively. As of publication actual presidential orders, or details around what those tariffs might look like, were yet to be made public. 

For the China, Canada, and Mexico tariffs, Trump invoked the International Emergency Economic Powers Act (IEEPA) to impose (and threaten) the tariffs. The law, more commonly used for sanctions, has never before been used to impose tariffs and could lead to legal challenges. But Trump also laid the groundwork for broader tariffs in executive orders issued on his first day back in office, which he can implement using different laws, albeit under a less immediate process. He has promised tariffs on EU products later this month, hinted at broader tariffs on imported electronics and metal imports, and pledged across-the-board 10%–20% tariffs (and higher on China) during the 2024 presidential campaign. Trump’s ability to raise or lower tariffs under existing laws, and possibly legal challenges to some tariffs, makes the situation highly fluid.

While Trump may leverage tariffs as a negotiating tool with foreign governments, he and members of his administration have repeatedly suggested supplanting domestic tax revenue with increased tariffs, which function as a consumption tax similar to a sales tax, paid by whomever imports foreign products into the U.S,  These tariffs are part of a broad restructuring of the U.S. economy alongside this year’s tax and fiscal legislative effort and the administration’s immigration policies.

“If President Trump succeeds like he wants to succeed, we are going to structurally shift the American economy from one over-reliant on income taxes and the Internal Revenue Service to one which is also reliant on tariff revenue and the External Revenue Service,” said Peter Navarro, the senior trade adviser to Trump in the White House, in a public interview on Feb. 4.

So far, congressional Republicans have deferred to Trump on tariff policy and could seek to indirectly count the revenue toward offsetting the cost of the major tax and fiscal policy package expected this year. They have limited options to stop Trump’s tariff actions, other than voicing opposition or passing a concurrent resolution to undo his tariffs. Through several laws passed over multiple decades, the presidency has expansive unilateral authority over tariffs. Trump’s trade-related orders issued on Jan. 20 mandate an April 1 deadline for trade-related reports that could preface more tariff announcements, as well as the formal restructuring of tariff collection around a new External Revenue Service.

Comments from his senior adviser, Navarro, similar proposals from political ally Steve Bannon, as well as Trump’s public fascination with tariff powers and the tariff-based revenue regime under President William McKinley all suggest that tariffs will be a part of the overall fiscal and economic rebalancing debate this year. Trump ran on a 10%–20% across-the-board tariff on all imports and 60% or higher tariffs on Chinese products, though tariff levels on imports from the country remain below that threshold even after the Feb. 4 imposition of tariffs.

A preliminary estimate provided by the Congressional Budget Office in December estimates those tariffs would raise approximately $2.9 trillion over 10 years, though the budgetary scorekeeper, which plays an important official role in the tax and fiscal legislative process, emphasized negative economic growth and inflationary consequences from the policies. The agency also expressed uncertainty around its revenue estimate due to possible retaliatory actions, the possibility of tariffs being undone since they can be reversed by presidential order and the fact that the U.S. has not imposed tariffs of this size in decades.

Congressional Republicans have begun to quietly push back on Trump’s tariff threats, though it’s unclear how far that resistance may go. House Ways and Means Trade Subcommittee Chair Adrian Smith, R-Neb., said that he did not want the U.S. to become “dependent on tariff revenue, because that speaks to the fact that it’s just another tax.”

During a Feb. 6 Senate Finance Committee confirmation hearing for Jamieson Greer, Trump’s nominee to become U.S. Trade Representative, the lead governmental trade negotiator, multiple Republicans cast doubt on using tariff revenues to supplant traditional taxes.

Among them was Sen. Ron Johnson, R-Wis., a Finance Committee member and outspoken ally of Trump’s.

“I’ve heard figures of almost a trillion dollars in revenue replacing the income tax, and I’m just not seeing it,” said the Wisconsin Republican. “Even a 10% across-the-board tariff would raise about $310 billion in tariff revenue — that’s not even close to replacing the income tax.”

Greer said tariffs “could be one component” to fund the federal government but would not commit to how much revenue Trump hopes to raise from tariffs.

“I’m not giving you a number because I don’t have a number on this, but I think these are important issues to chase down,” the USTR nominee said. 

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