National Bank of Canada's (NBC) Jocelyn Paquet analyzes recent US tariff developments after the Supreme Court overturned tariffs imposed under IEEPA, temporarily cutting the average rate before the Trump administration reinstated higher duties via a universal 15% tariff. The report highlights implications for US fiscal sustainability, net interest payments and bond market sentiment, underscoring tensions between economic benefits of lower tariffs and fiscal needs.

Tariff swings and US fiscal concerns

"Last Friday, the U.S. Supreme Court overturned the tariffs that the Trump administration had imposed last year under the International Emergency Economic Powers Act (IEEPA). This decision temporarily lowered the average tariff on imported goods from 13.6% to 6.4%. Had the reduction been permanent, it would have significantly lowered the tariff burden on businesses and potentially eased price pressures in the goods sector, a growing concern lately."

"However, it would also have contributed to a dramatic decrease in customs duty revenues for the federal government, from approximately $335 billion per year to $155 billion per year. We doubt this would have gone down well with bond traders, who already have good reasons to question the U.S. government's fiscal trajectory."

"As much to reassure the bond market as to stimulate domestic production, the Trump administration responded to the Supreme Court’s ruling by imposing a universal 15% tariff under Section 122 of the Trade Act of 1974. This brought the effective tariff rate back up to 12.0% and increased tariff revenues to around $290 billion per year, with the remaining shortfall potentially to be addressed by a new round of sectoral tariffs."

"While the fiscal endpoint might in the end not be so different from what prevailed last week, the events of the last few days – notably the rush to reassure markets that tariff revenues would not decrease – highlights the policy paradox in which the administration currently finds itself, where any reduction in tariffs is likely to be viewed positively from an economic standpoint but negatively from a fiscal one."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)