BREAKINGVIEWS-US tariff climbdown complicates bleak budget math

By Gabriel Rubin

WASHINGTON, May 12 (Reuters Breakingviews) - A mutual climbdown on tariffs charged between the U.S. and China may give relief to investors. It does little to help Republicans’ broader agenda. The centerpiece of President Donald Trump’s domestic policy — extending and expanding his 2017 tax cuts while boosting spending on the military and border security—is hitting snags as legislators grapple with its impact on a federal deficit that already topped $1.8 trillion in fiscal year 2024. White House promises that tariff revenue will plug the gap look more stretched than ever. The trade picture is improving, but bleak budget math will disappoint bond markets eager for calm.

Trump’s trade barrage targets two irreconcilable goals. Raising revenue requires that importers continue to ship goods; reshoring manufacturing cuts that off. Indeed, a 145% levy imposed on Chinese products threatened to choke the flow of commerce between the two nations. A deal with the People’s Republic announced on Monday, under which the U.S. will lower tariffs to 30% and China to 10%, might enable trade to resume. That promises at least some income – but much less than first envisioned.

The deal is temporary, leaving policy in flux and rendering revenue projections imprecise at best. Still, the administration's loftiest estimates seem out of reach. Trade adviser Peter Navarro claimed that the import duty schedule initially unveiled on “Liberation Day” in April would raise $600 billion each year. Trump has even said that tariffs could replace income taxes.

Others are less sanguine. Already, levies on most countries aside from China had been lowered during a 90-day pause. At a 28% effective global tariff rate—the average burden across all imports before Monday — substitution effects and lower growth mean that money raised would fail to cover eliminating taxes on incomes under $150,000, leaving a $127 billion gap, according to an analysis by the Council on Foreign Relations.

Congressional Republicans are eyeing less drastic measures, but not by much. A mooted $5 trillion in tax cuts and new spending over a decade, coupled with $2 trillion in offsetting cuts, will depend on some optimistic assumptions. Anticipated boosts to growth, an executive order that aims to cut drug prices, and cutbacks to programs like Medicaid try to paper over the red ink. Their plausibility is uncertain.

The mood among investors in the country’s debt, meanwhile, remains febrile. An uptick in yields in the wake of the China deal may indicate happier growth prospects, but the broader steep increase since last year indicates consternation over a fiscal situation that seems poised to get worse.

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CONTEXT NEWS

Trade negotiators for the United States and China on May 12 struck a deal under which most tariffs imposed during the first few months of the Trump administration will be paused for 90 days. Baseline levies on Chinese imports will fall to 30% from 145%, with China lowering its duties on US goods to 10% from 125%.

Republicans in Congress are due to unveil full details this week of tax-cut legislation that would also raise spending on defense and border security.

“We’re going to make a lot of money, and we’re going to cut taxes for the people of this country,” President Donald Trump said on April 27, adding that tariffs may “be enough to cut all of the income tax.