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The economic reality haunting Trump's tariff war

Published: 04 Feb. 2025, 00:03

Kang Nam-kyu

The author is a senior economic reporter at the JoongAng Ilbo.

U.S. President Donald Trump has finally pulled the trigger on a tariff war. He has decided to impose a 25 percent tariff on Canada and Mexico and an additional 10 percent tariff on China.

History shows that tariff offensives often lead to retaliatory strikes, and this time is no exception. Canada and other affected nations have swiftly announced countermeasures. While China has long been regarded as America's virtual adversary, Canada and Mexico are partners in the North American Free Trade Agreement (NAFTA), a symbol of globalization. Even these longstanding allies are now falling prey to Trump’s economic aggression — a stark sign that an era is coming to an end.

Trump's Treasury: Drowning in debt
The rhetoric of political leaders is often layered, and their stated justifications do not always align with their true intentions. Behind Trump's tariff war lurks a stark economic reality: The U.S. Treasury is drowning in debt.

When Trump took office on Jan. 20, he inherited a national debt of approximately $36 trillion. The sheer scale of this debt is astronomical, and even more alarming is the breakneck speed at which it continues to grow.

The United States crossed the $35 trillion debt mark on Jul. 26 last year, and in just six months, the figure surged by over $1 trillion.

At first glance, one might assume that a robust economy would naturally lower the debt-to-GDP ratio. The U.S. economy grew at an annual rate of 2.3 percent in the fourth quarter of last year, which was a slight dip from the 3.1 percent growth in the previous quarter, but was still relatively strong compared to Europe.

Yet, the reality is different. The debt-to-GDP ratio, which had briefly declined to 115 percent, rebounded by the end of last year, surpassing 120 percent once again.

In search of a new revenue stream
The U.S. government's interest payment burden is becoming unsustainable.

Currently, the U.S. government issues Treasury bonds with an average interest rate of 3.3 percent — a drop from the peak of the Federal Reserve’s aggressive rate hikes, but still significantly higher than the near-zero interest rates of 2021, when the average rate was just 1.5 percent.

As a result, annual interest payments on the national debt have ballooned to $1.18 trillion, surpassing last year’s defense budget of $842 billion. A staggering 36.3 percent of the federal government’s revenue is now spent on interest payments alone.

When factoring in principal repayments, the total debt-service ratio (DSR) exceeds 40 percent of government revenue. In Korea, a household with a DSR above 40 percent would struggle to even qualify for a mortgage, yet this is the financial reality of the world’s largest economy.

Despite this, Trump has doubled down on his campaign promise to extend tax cuts. The tax reductions initiated in 2017 during his first term are set to expire this year, and Trump has vowed to keep them in place.

According to the Congressional Budget Office (CBO), extending these tax cuts would shrink annual federal tax revenue by $300 billion to $400 billion.

With soaring debt and dwindling tax revenue, the U.S. Treasury is heading toward a fiscal crisis. In response, Trump has unveiled his alternative revenue stream: tariffs. His strategy? Slash domestic taxes while making up for the shortfall through tariffs.

A full-scale trade war on the horizon
Last year, U.S. tariff revenue stood at approximately $100 billion.

With Trump’s new tariffs on Canada and Mexico, that figure is expected to rise. However, retaliatory tariffs from trade partners will dampen overall trade volume, potentially slowing economic growth even further.

Simply taxing Canada and Mexico will not be enough to fill the budget gap left by tax cuts.

This is why Trump may escalate the conflict further — targeting all trading partners, including Korea, through the introduction of a “universal tariff.” In other words, his tariff war could turn into an all-out global trade war.

Implementing a universal tariff would require legislative amendments, which typically take around 11 months to pass through both the House and Senate. If Trump’s proposal clears the legislative process, tariff revenues could rise substantially.

According to Washington-based think tank the Tax Foundation, implementing a universal tariff would boost tariff revenues to $300 billion next year, with further annual increases reaching $450 billion by 2035.

The CBO’s projections align closely with these estimates, predicting an increase of approximately $2.5 trillion in tariff revenue over the next decade (2026–2035), or roughly $250 billion per year.

At first glance, Trump’s plan to offset tax revenue losses with tariffs may not seem entirely far-fetched. This is why experts believe Trump will escalate his tariff war into a full-scale trade conflict that includes Korea and other major trading partners.

The American people won’t be the winners
Yet, economic calculations are rarely that simple.

A tariff war inevitably leads to higher prices, which means a decline in real income for American households.

The Tax Foundation estimates that the latest tariffs on Canada and Mexico will reduce household real income by approximately $800 per year. While the exact benefits of Trump’s tax cuts remain uncertain, it is unlikely they will fully compensate for the income losses caused by tariffs.

If Trump implements a universal tariff, the CBO projects that the GDP contraction will be 30 percent larger than the economic gains generated by tax cuts.

In short, the real loser in this tariff war will not be America's trading partners — it will be the American people themselves.

But the final reckoning won’t come until after Trump leaves office.

Until then, he will likely continue playing his high-stakes game of tariff brinkmanship — calculating solely by his own political arithmetic.

Translated using generative AI and edited by Korea JoongAng Daily staff.