El Ignaciano / Junio 2025

Economic Policies of President Trump’s Administration

Lorenzo L. Pérez¹

This article does a preliminary assessment of the two economic policies of the second President Trump administration that have dominated the public discussion:  fiscal budget and import tariffs.  The sustainability of the fiscal stance is the key issue in fiscal policy (i.e., Is the fiscal deficit in a path that is financeable over the medium term?).  Issues like the fairness of the tax system or whether the tax system promotes investment and growth come into play.  On the spending side, concerns regarding the efficiency of public spending and possible savings, whether the necessary public sector services are being provided and the adequacy of the safety net to cover the basic needs of the vulnerable population have to be considered.

In the area of import tariffs, topics such as whether trade policies are designed to promote production efficiency according to comparative advantage and to ensure that export markets are open need to be analyzed.  Other areas of policy interest are the extent that tariff rates in place are justified and the adequacy of existing measures to compensate domestic losers of international trade.

At the time of this writing (early May 2025), the fiscal and tariff policies of the Trump administration are still being developed but sufficient information is available to make a preliminary assessment about the policy goals and policy stances that are being considered.

Fiscal Policy
Current fiscal trend and outlook for the future

The pressing fiscal policy issue in the United States is the unsustainable path of the federal fiscal deficit. This fiscal trend and its associated risks attempt against the common good and will hurt US residents, particularly the vulnerable population.  In recent years, both political parties have been behaving as though budget deficits, and the size of the federal debt doesn’t matter.  The last time the U.S. federal government had a budget surplus was in 2001.  Federal debt held by the public stood at $3.3 trillion, about 33% of Gross Domestic Product (GDP), and the government was on track to pay it off completely by the end of the decade.  Over the next two decades, the combination of tax cuts, spending increases, costly wars and the fiscal pressure of an aging population reversed this trend.  The federal government debt held by the public was about $28 trillion in 2024 or about 98 percent of GDP. ²

In March 2025, the Congressional Budget Office (CBO), the independent agency in charge of making estimates of the costs of congressional actions, released its annual report on the Long-Term Budget Outlook: 2025 to 2055. Under this baseline scenario as called for under current legislation, the 2017 tax cuts are not contemplated to be renewed after 2025. The federal deficit remains large over the next 30 years, reaching 7.3 percent of GDP in 2055.  That amount results from rising interest payments and sustained primary deficits (the federal balance excluding interest payments).³ Federal spending, which is already high by historical standards, rises over the 2025-2055 period reaching 26.6 percent of GDP in 2055.  Rising interest payments; spending on the major health care programs, particularly Medicare; and spending on Social Security drive that growth.⁴

The federal debt held by the public, boosted by these large deficits, reaches 107 percent of GDP in 2029 under the CBO baseline scenario, exceeding the historical peak it reached immediately after World War II. The debt is projected to continue to grow after 2029, reaching 156 percent of GDP in 2055.  The CBO correctly points out that such large and growing debt would slow economic growth, push interest payments to foreign holders of US debt, and pose significant risks to the fiscal and economic outlook.   The likelihood of a fiscal crisis would increase if federal debt continued to grow faster than GDP, because mounting debt could erode investors’ confidence in the US government fiscal position.

  The CBO notes that such an erosion of confidence would lower the value of Treasury securities and further drive-up interest rates on federal debt as investors demanded higher yield to purchase those securities.  It is difficult to assess the probability of a fiscal crisis and identified the tipping point at which the debt-to-GDP ratio would become so high that it would make a crisis likely or imminent.  But what is clear is that the longer it takes to address the situation, the more constrained the policy choices will be and the harsher the corrective fiscal measures will have to be. In addition, drastic changes in government policies followed by reversals (like those observed regarding tariffs) increase uncertainty for the private sector and the international standing of the US which weakens the dollar, things that increase the likelihood of a fiscal crisis.

Announced policy goals

With this underlying baseline scenario, the announced fiscal objectives of the President Trump second administration are quite worrisome.  The fiscal plans of the administration call for extending permanently all the 2017 tax cuts, lower further the income tax rate of corporations, and eliminate income taxes on Social Security pensions and on tip income. The logic behind this strategy is that the tax cuts will induce additional investments and increase incentives to work that would increase incomes and tax revenues.  However, historical evidence shows that the additional revenue would probably not offset the budgetary cost of the reduction in tax rates.  The Trump administration intentions is that part of the reductions in revenue is expected to be offset by expenditure cuts.  A new department, the Department of Government Efficiency (DOGE), led by business tycoon, Elon Musk, has been working on expenditure cut plans.  At the same time, hundreds of billions of dollars in new spending over the next 10 years is being contemplated on border security, mass deportation campaigns, and national defense.

The CBO was asked in April, 2025 by the Senate for an analysis of projected deficits and debt under an alternative scenario to the CBO’s baseline scenario discussed above which maintains the 2017 tax cuts and does an additional $150 billion reduction in revenue in each year during the 10-year budget window (2025-2034). ⁵ Under this alternative scenario debt would rise to 130 percent of GDP by 2030 and by 2055 it would be 219 % of GDP, 63 percentage points higher than in CBO’s baseline scenario.   

During its first 100 days, the Trump administration has frozen hundreds of billions of dollars in funds Congress appropriated for fiscal year 2025 (which ends on September 30) for foreign aid, medical research, security, infrastructure, disaster relief, farm assistance and more. But many of these cuts are being challenged in courts and it is not clear what cuts will stand.  Mr. Musk, who began his work promising to find $2 trillion in expenditure reductions over the next 10 years (about $200 billion cut per year), is now talking only about a reduction from baseline spending of around $150 billion in FY2026.  On May 2, 2025, the White House released a partial draft budget for FY 2026 which proposes to cut non-defense discretionary spending by $163 billion—about a 23 percent cut.  Included in the cuts are programs such as foreign aid, education, science, housing assistance, and many other items besides the Pentagon and Homeland Security.  It also doesn’t include programs such as Social Security, Medicare and Medicaid.  The White House cut proposal would need to be evaluated versus the proposal to keep the 2017 tax cuts.  At first glance, this partial draft budget for 2026 appears to propose tax cuts for high income level groups at the expense of weakening the safety net for the poor and eliminating most foreign aid.    

Possible fiscal deterioration and corrective fiscal measures

As things stand now, it appears that the envisaged tax cuts in Republican plans could cost $4-$5 trillion over the next 10 years and the expenditure cuts over the same period which are being contemplated would only be $1.5-2.0 trillion.  This would leave a gap of about $2.5-$3 trillion.  Some of the gap could be covered by tariff revenue but tariff revenues are unlikely to be of the magnitude needed to close the gap and there are serious problems with increasing tariffs that are discussed below.  If these policies are implemented, the US is likely to experience a historical explosion of its federal debt.

This situation calls for a major rethink of the fiscal strategy.  It may be possible to make a case for keeping some of the 2017 tax cuts, but these are probably needed to be the exception given the dire fiscal outlook and the need to avoid giving preferences to the interests of the very rich over the needs of the poor.  In addition, the expenditure cuts need to be evaluated and justified as part of the congressional legislative approval process.

There is no lack of sensible fiscal measures that have been proposed in different areas in the past.  On the spending side, some proposals that have been made are: capping the growth of discretionary spending; raising the age of eligibility for a full social security pension and introducing an income means ceiling for social security pensions; closer scrutiny of medical billing, more competitive bidding between providers, and demanding that the same medical costs are basically the same at every facility (currently, hospital charge more than clinics).  A revenue package could include: allowing many of the tax cuts of 2017 to lapse, reducing the subsidies for employment-based-health-insurance, broadening the base upon which the 12.4 percent payroll tax is levied, making the capital gain tax rate equal to the income tax rates, and the introduction of a valued added tax. ⁶

Import tariffs
President Trump’s economic history views

President Trump has an unorthodox and strange view of economic history.  He believes that under the rules-based modern world trade system, US trading partners have taken advantage of the United States.  He has claimed that the United States has been “looted, pillaged, raped and plundered by nations near and far”.  He views bilateral trade deficits as losses of income to the trading partners without recognizing that imports benefit consumers by making goods available at prices and qualities that they would not be otherwise available.  Furthermore, he does not acknowledge that these deficits induce capital flows to pay for them or that in many cases they are largely offset by US exports of services.  He points out to the manufacturing plants that have closed in the United States in the last few decades, and that the existence of bilateral trade deficits are proof that trading partners have used unfair practices in their trade with the United States.  The President is a firm believer that higher import tariffs will boost American manufacturing and fund tax costs at little cost to the everyman, with foreigners footing the bill. 

Initial trade actions

President Trump personally announced sharp tariff increases in April 2025 calling them “reciprocal tariffs –tariffs to retaliate for the tariffs and non-tariff barriers imposed on US exports”. The level of tariffs proposed by the President came as a surprise to trading partners and the American public at large.  This is because the performance of the US economy has been the envy of the world during the last few decades under existing trading rules which have been actively promoted by the United States. 

The rules-based system that the Trump administration seems hellbent on demolishing has been based on two important principles that have promoted international trade for the benefit of all participants. ⁷  The first is “non-discrimination”—the same tariff rate should apply to every member of the World Trade Organization.  As Feldman and Hufbauer point out there are exceptions to this rule for things like free trade areas and remedies against market disruption. The other principle is “national treatment”.  Foreign companies should be treated as national companies.  These simple principles embody what most people think of as fairness.  Treat other countries equally, and treat foreign firms like you treat your own.  More than fairness, it is self-interest. A country benefits when foreign nations accord its firms non-discriminatory treatment, just as the benefit when the country in question returns the favor.

The key tariff actions announced by the President Trump administration have been so far: ⁸

February 2025: 
A 10 % tariff on China

March 2025:
A further 10 % on China
25% on Canada and Mexico (on USMCA noncompliant imports) ⁹
25% on steel, aluminum, derivatives

April 2025:       
10% baseline tariff on almost everyone
1% to 115% more on trade surplus countries (“temporarily”)—the reciprocal tariffs, then a 90 day pause except for China.  China would face 145% in tariffs  
Granted reciprocal tariff exceptions for smartphones, laptops, and for goods related to semiconductors.

May 12, 2025:    
 It was announced that for 90 days, the US would lower the tariff on China imports to 30 % (it is not clear whether the 30% is the retaliatory tariff only and whether there still are the other 20 % tariffs introduced in February and March).  In exchange China would lower its tariffs on imports from the US from 125 % to 10% to allow more time for trade negotiations between the two countries.   

These new tariff rates should be compared to US average tariffs on total imports in recent years:  January 2018—1.4% and January 2025: 2.45%.   Mr. Bown estimated that the average tariff was in the range of 15-20% in April. This is a huge increase in the average tariff rate that, if its cost is not passed through to the consumer, will produce a halt in trade in many sectors whose profit margins are considerably lower than 15-20%.  Therefore, it is likely to expect that most of the higher costs induced by tariffs will indeed be shifted to American consumers with an attendant impact on inflation.

Under the existing trade system, China has experienced spectacular economic growth and has become the main world supplier of many manufactured goods.  Some of this spectacular growth is due to the fact that China is not playing by the trade rules completely, something that could be addressed with the existing mechanisms.

President Trump and some of his advisors have repeatedly said that the US is willing to negotiate bilateral deals and that the reciprocal tariff rates announced on April 2 would be lowered as part of those deals.  After a strong turmoil in the stock, bond and foreign exchange markets following the announcement of the reciprocal tariffs of April 2 and the uncertainty created regarding administration policies, President Trump declared a 90-day pause through early July in the implementation of reciprocal tariffs. 

Negotiations are underway with a few dozen countries and an agreement on a framework to reduce barriers with the United Kingdom was reached in early May.  However, the tariffs applied to the United Kingdom will apparently remain higher than the existing tariffs prior to April.  More importantly are the beginnings of negotiations with China on May 10-11 which resulted in the temporary reduction in the level of retaliatory tariffs mentioned earlier. There is urgency to improve trade relations with China and avoid a decoupling of the two largest economies of the world.  If the reciprocal tariff rates for China were to stay high, this will cause a major disruption to the world economy.

Economic efficiency and the common good

President Trump’s trade policy can be criticized on a number of grounds.  Tariffs introduce distortions in the economy that impede countries from assigning economic resources according to their comparative advantage.  This is not an obscure “wonk” point.  Tariff distortions would require changes in investment and location of production that will raise production costs and the associated higher consumer prices would reduce consumers’ welfare.  As noted by the Fed Chairman Powell, the initial price shock resulting from the tariff increase, if not managed properly, could initiate another inflationary round. The level of tariff rates which are being contemplated amounts to a serious supply shock to many industries with the potential to cause serious damage to the US economy and the economies of its trading partners.

The announced intention of using tariffs to bring manufacturing jobs back into the Unites States seems misguided given that the size of the US manufacturing sector labor force is less than 10 percent of the labor force and that about half of those jobs listed in manufacturing are more really like administrative positions.  In addition, many of the manufacturing job losses in recent years have been due to automation.  It would appear sensible to expect that new manufacturing plants that will be opened in the future will rely on automation extensively and also because historically low levels of unemployment limit the availability of additional workers in these new activities.

Supporters of tariff increases point to the Rust Belt states like Ohio and Michigan where the closing of manufacturing have created real havoc.  These states and others have suffered from foreign competition and the programs in place to help workers (Trade Adjustment ACT) to the new situation have not been adequate or have not been given sufficient resources.  This is an area in the United States that needs to be strengthened but it also has to be recognized that labor displacement has occurred because of automation and that plants similar to the ones closed would continue to be uncompetitive.

Use of bilateral trade deficits as indicators of the benefit of international trade

Bilateral trade balances reflect a combination of factors.  Besides trade barriers, macroeconomic conditions, changing investment patterns, and relative comparative advantages also matter a great deal.  Trade deficits go up and down.  When they rise that may be due to the fact that a country is on an upswing in its business cycle and consumption generally is rising.  When they go down, it very well may be that circumstances are reversed.  Also, it should be noted that these deficits are being financed by capital inflows into deficit countries. Emerging markets run into difficulties when they run large trade deficits and capital inflows dry out because of concerns about its policy stance. The US has the advantage of its prominent role in the world economy and having a reserve currency which contributes to its capacity to attract foreign capital and therefore run trade deficits. 

But countries do not only trade goods.  Services are an important part of international transactions, and the US run large service surpluses with some of its bilateral trading partners (including with China).  Furthermore, services are a much larger share of the American economy, and their rise and fall has an even larger effect on the country’s employment and growth.  So, it is more appropriate to look at the current account balances than to the trade balances to assess the impact in an economy, particularly in the case of the United States.

The current account balance of any country is the difference between domestic savings and investment (both private and public). ¹⁰ It is the outcome of private decisions which are influenced by fiscal and monetary policies in a market economy like the United States, which through decisions on taxes, public spending, and interest rates, affect peoples ’incomes and, in turn, private savings and investment. Trade barriers of a trading partner can affect the export performance of a country but, unless trade protection affects either aggregate domestic savings or investment in the county imposing them, they will not correct current account deficits. 

Calculation of the trade barriers imposed on the United States by its bilateral trading partners

Prior to the announcement of reciprocal tariffs in April, the Trump administration announced that it was analyzing the trade barriers of trading partners (tariff rates, non-tariff barriers, other actions, etc.) affecting US exports to come up with the overall import tariff protection given in that country.  The idea was that a similar import tariff would be imposed in the trading partner exports to the US.  One would have expected that a careful conclusion on the level of protectionism would have come from this work.  Instead, President Trump announced that the ratio of the bilateral deficit divided by US imports from this country would be used to assess the level of protectionism.  Stephen Miran, the current Chair of the White House Council of Economic Advisors has argued that the trade deficit could be a “proxy for the totality of economic policies that cause persistent trade deficits”. This is not a defensible position.

Tariff Revenues

The Trump administration at times highlights the potential revenue effect of tariffs, while at the same time stressing that imports will fall because of the tariff protection will permit an increase in domestic manufacturing.  But if imports fall after the tariff increases, the revenue effect is likely to be smaller than the estimate of applying the new average tariff rate to the value of imports prior to the tariff increase as some presidential advisors have done.   What happens to imports after a tariff increase depends on the extent that the price increase resulting from the tariff rise is passed through to the final consumers and how large is the response of consumers to the price increase (the price demand elasticity).  There are also second round effects of tariff rate increases as consumers and investors react to changes in relative prices. If a recession is induced there could very well be a decline in total government revenue. Trade retaliation would affect negatively economic activity in the US, which will also reduce revenues. The bottom line is that a careful analysis has to be made to calculate the revenue impact of an increase in tariffs.

Concluding Remarks

One can only hope that during the negotiations between the President and Congress to finalize the fiscal budget for 2025 and 2026 the justification of the proposed measures is openly discussed and justified. The Administration fiscal proposals have the fundamental weakness that a reduction of the federal deficit and an improvement in fiscal trends are not the main objectives.  In addition, some of the spending cuts being contemplated appear arbitrary and eliminate necessary public functions.  The tax proposals will further increase income inequalities because they are biased in favor of the richest segment of the population and make the tax system more unfair.  A protection of the safety net in the US requires a different tax policy.

The announcement of reciprocal tariffs and the public attacks on allied countries has increased uncertainty in the world economy and this uncertainty combined with the distortive impact of tariff increases could trigger a recession in the US and abroad.  A high level of trade protection will harm the US economy.  There is a wide consensus among economists that trade protection harms consumers and results in slower economic growth.  Finally, in an increasing difficult international situation, President Trump has wasted precious geopolitical capital with its tariff policy at a time when the US would benefit from strong alliances with friendly countries which share US values.

¹ Author acknowledges the useful suggestions of his former colleague at the International Monetary Fund, Enzo Croce.
² William A. Galston (Brookings Institution) : A US National Debt Crisis is Coming, The Wall Street Journal, September 17, 2024.
³ Congressional Budget Office:  The Long-Term Budget Outlook, 2025-2055, March 2025.
⁴ CBO, op.cit.
⁵ See the letter of Phillip L. Swagel, Director of the CBO to the Honorable Jeff Merkley, Ranking Member of the Committee on the Budget of the US Senate dated April 10, 2025.
⁶ A detailed discussion of possible fiscal measures is provided in the author’s article “Possible measures to address the Fiscal Problems of the United States under the light of the Social Doctrine of the Church, El Ignaciano, March 2024.
⁷ David H. Feldman (William and Mary University) and Gary Hufbauer (Peterson Institute of International Economics) in RealTime Economics, April 15, 2025.
⁸ Chad Bown :  US Trade Policy Update, Peterson Institute for International Economics, April 15, 2025
⁹ USMCA: United States-Mexico-Canada trade agreement that was negotiated by the first Trump Administration to substitute the existing North American Free Trade Agreement.  The USMCA resulted in little changes to the trade rules in North America.
¹⁰ Saving is equal to income minus consumption.

Lorenzo L. Pérez, PhD. in Economics, Univ. of Pennsylvania, is a retired economist who worked for over 30 years at the IMF, and prior to that worked at the AID and the Treasury Dept. of U.S.A. He is a member of the Editorial Board and nonresident columnist of El Ignaciano.