Trump’s next tariff fight: Keeping the money – Politico

Donald Trump's potential return to the presidency brings with it a renewed focus on his protectionist trade agenda, specifically the novel concept of "keeping" tariff revenues for designated domestic projects. This proposal, discussed extensively in recent political discourse and campaign rallies, marks a significant departure from traditional U.S. federal finance and trade policy, promising profound economic, legal, and international implications should it be implemented.

Background: The Evolution of Trump’s Tariff Strategy

The use of tariffs as a tool of U.S. economic and foreign policy has a long and varied history, but Donald Trump's approach during his first term, and his proposed future strategy, represent a significant modern reinterpretation. Historically, tariffs served as a primary source of government revenue in the early days of the republic, a role that diminished significantly with the advent of income taxation in the early 20th century. By the late 20th and early 21st centuries, tariffs were primarily viewed as instruments of trade policy: either to protect nascent domestic industries, to retaliate against unfair trade practices, or to gain leverage in international negotiations.

A History of Tariffs as a Policy Tool

From the Tariff of Abominations in 1828 to the Smoot-Hawley Tariff Act of 1930, tariffs frequently sparked intense domestic debate and international economic repercussions. Following World War II, the global consensus shifted towards reducing trade barriers through multilateral agreements like the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO). The U.S. largely embraced this liberalization, seeing tariffs primarily as a negotiating chip rather than a core revenue stream. Federal tariff revenues, while collected by U.S. Customs and Border Protection (CBP), have consistently flowed into the U.S. Treasury's General Fund, commingled with other tax receipts, and subject to congressional appropriation. This established system reflects the constitutional principle that Congress holds the power of the purse, dictating how federal funds are raised and spent.

Trump’s First Term: Tariffs as Leverage and Punishment

During his 2016 presidential campaign, Donald Trump frequently expressed skepticism about existing trade agreements and advocated for a more aggressive use of tariffs to protect American industries and jobs. Upon taking office, his administration initiated several high-profile tariff actions.

One significant set of actions involved Section 232 of the Trade Expansion Act of 1962, which allows the president to impose tariffs on imports deemed a threat to national security. In March 2018, the Trump administration imposed 25% tariffs on steel imports and 10% tariffs on aluminum imports, citing national security concerns. These tariffs affected a wide range of countries, including traditional allies like Canada, Mexico, and the European Union, leading to retaliatory tariffs on U.S. goods. The revenue generated from these tariffs, like all federal receipts, was deposited into the General Fund of the Treasury.

A more extensive use of tariffs came under Section 301 of the Trade Act of 1974, targeting what the administration characterized as China's unfair trade practices, including intellectual property theft and forced technology transfer. Beginning in July 2018, the U.S. imposed tariffs on hundreds of billions of dollars worth of Chinese goods, escalating in several tranches. These tariffs ranged from 7.5% to 25% on various products. China responded with its own retaliatory tariffs on U.S. agricultural products, manufactured goods, and other imports. The trade war with China generated substantial tariff revenue, estimated to be tens of billions of dollars annually at its peak. This money also went directly into the General Fund.

Throughout his first term, Trump often stated that these tariffs were being "paid by China" or other countries, and that the revenue was a benefit to the U.S. Treasury. Economists, however, largely concluded that the tariffs were primarily borne by U.S. importers and, ultimately, by American consumers and businesses through higher prices and reduced purchasing power. While the revenue did flow to the Treasury, it was not directly earmarked for specific projects. Instead, it contributed to the overall federal budget, which continued to run significant deficits. The administration did, however, create a program to provide aid to American farmers affected by retaliatory tariffs, effectively using general federal funds (not directly the tariff revenue) to mitigate the negative impacts of its own trade policies.

The Genesis of “Keeping the Money” Concept

The idea of using tariff revenue for specific purposes, rather than it simply flowing into the general coffers, began to emerge during Trump's first term. Early in his presidency, as he campaigned for funding for a wall along the U.S.-Mexico border, Trump sometimes suggested that tariffs on Mexican goods could finance its construction. While such tariffs were threatened, they were never widely implemented for that explicit purpose, and the legal mechanisms for directly diverting tariff revenue to a specific project without congressional appropriation were not pursued.

This concept gained more prominence as the trade war with China intensified. Trump frequently highlighted the billions of dollars in tariff revenue collected, often implying that this money was a net gain for the U.S. and could be used to directly fund various initiatives. The shift in rhetoric suggested a move from tariffs purely as a negotiating tool or punitive measure to a more explicit role as a dedicated revenue stream for specific domestic policy objectives. This evolution laid the groundwork for his current proposals, where "keeping the money" is not just an incidental benefit, but a central tenet of his tariff strategy, aiming to bypass the traditional appropriations process and directly link trade policy to domestic spending priorities.

Key Developments: The “Keeping the Money” Proposal Takes Shape

The concept of "keeping the money" from tariffs has evolved from a nascent idea during Trump's first term into a more defined, albeit still legally ambiguous, policy proposal for a potential second administration. This evolution centers on the notion of a universal tariff and the mechanisms through which the resulting revenue would be sequestered for specific purposes, challenging established fiscal and constitutional norms.

The Universal Tariff Concept

A cornerstone of Donald Trump's current trade policy platform is the proposal for a universal tariff. Unlike the targeted tariffs of his first term, which focused on specific countries (e.g., China under Section 301) or specific products (e.g., steel and aluminum under Section 232), the new proposal generally calls for a baseline tariff on all imported goods. While the exact percentage has varied in his public statements, a frequently cited figure is a 10% universal tariff on all imports.

This blanket approach would dramatically alter the landscape of U.S. trade. In 2023, the U.S. imported approximately $3.8 trillion in goods and services. A 10% tariff on this volume of imports could theoretically generate hundreds of billions of dollars in annual revenue, potentially exceeding $300 billion, depending on import elasticity and exclusions. The rationale behind a universal tariff, as articulated by its proponents, includes simplifying the trade regime, reducing the incentive for companies to shift production to avoid targeted tariffs, and creating a broad revenue stream.

However, the economic implications of such a sweeping tariff would be profound. It would apply to goods from all trading partners, including close allies like Canada, Mexico, the European Union, Japan, and South Korea, potentially triggering widespread international retaliation and significantly disrupting global supply chains. Economists generally predict that the cost of such tariffs would largely be borne by American consumers and businesses through higher prices and reduced purchasing power, acting as a broad-based tax on imports.

Mechanisms for “Keeping” Tariff Revenue

The most contentious aspect of Trump's proposal is not just the imposition of tariffs, but the explicit intention to "keep" the revenue for specific purposes, bypassing the traditional federal appropriations process.

Current System:

Under existing U.S. law and practice, all federal revenues, including customs duties (tariffs), are deposited into the General Fund of the U.S. Treasury. This fund is effectively a giant ledger where all government income is pooled. Congress, through its power of the purse, then authorizes expenditures from this General Fund through annual appropriations bills. No federal agency or executive branch entity can spend money from the General Fund without specific congressional authorization. This system ensures congressional oversight and control over federal spending, as mandated by the Appropriations Clause of the U.S. Constitution (Article I, Section 9, Clause 7), which states that "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law."

Hypothecation:

The concept of "keeping" tariff revenue for specific purposes is known as hypothecation or earmarking. While some federal revenues are earmarked for specific trust funds (e.g., Social Security and Medicare payroll taxes, Highway Trust Fund gasoline taxes), these are established by specific acts of Congress. Directing general revenue streams like tariffs to specific projects without congressional authorization would represent a significant departure from this norm.

Proposed Methods and Legal Challenges:

For a president to "keep" tariff revenue for specific projects like a border wall or debt reduction, several legal and practical hurdles would need to be overcome:

1. Executive Action: A president could attempt to direct the Treasury Department to create a special fund for tariff revenues via executive order. However, such an action would almost certainly face immediate legal challenges. Courts would likely rule that the president lacks the constitutional authority to unilaterally appropriate funds, as this power is explicitly vested in Congress. Past attempts by presidents to reallocate funds without congressional approval have often been struck down or required congressional acquiescence. For example, during his first term, Trump declared a national emergency to reallocate defense funds for border wall construction, which faced extensive legal challenges and required specific statutory authorities related to emergencies. Diverting tariff revenue, which is a general revenue stream, would be an even more direct challenge to congressional authority.

2. Congressional Legislation: The most constitutionally sound method for "keeping" tariff revenue would be for Congress to pass legislation specifically earmarking the funds. This would involve creating a new trust fund or a special account within the Treasury, and then enacting a law that directs customs duties, or a portion thereof, to be deposited into this specific fund, along with explicit appropriations for how that fund's money can be spent. Such legislation would require bipartisan support, or at least a majority in both chambers aligned with the president's objectives. Given the current political climate and likely opposition from Democrats and potentially some Republicans to both tariffs and executive overreach, passing such a law could be challenging.

3. Creation of a Dedicated Fund or Trust: If Congress were to legislate the earmarking, it would likely involve creating a new "Tariff Revenue Trust Fund" or similar mechanism. This fund would operate much like the Highway Trust Fund, with dedicated income streams and specific allowable expenditures. This would provide the necessary legal framework and transparency.

4. Directing Customs Revenue to Specific Accounts: Even with a dedicated fund, the actual disbursement of money would still require appropriations. Congress would need to authorize specific spending from that fund annually or through multi-year authorizations. The Treasury Department and U.S. Customs and Border Protection (CBP) would be responsible for collecting the duties and directing them to the specified account, but they could not spend the money without explicit appropriations.

The primary legal hurdle is the Appropriations Clause, which is a fundamental tenet of the separation of powers. Any attempt by the executive branch to spend money without congressional authorization, even if that money was generated by executive action (like tariffs), would be a direct challenge to this constitutional principle and would likely be met with legal challenges from Congress, watchdog groups, and potentially even states or private entities affected by the unconstitutional spending.

Stated Objectives for Earmarked Funds

Donald Trump has articulated several key objectives for how the "kept" tariff revenues would be spent, reflecting his long-standing policy priorities:

1. Border Security: A primary stated use is the construction and maintenance of a wall along the U.S.-Mexico border, as well as enhanced border enforcement measures. This aligns with a core promise from his 2016 campaign and continued priority.
2. Debt Reduction: Another objective is to use the funds to pay down the national debt. This would be a significant undertaking, as even hundreds of billions in annual tariff revenue would only make a modest dent in a national debt exceeding $34 trillion.
3. Tax Cuts: Some proposals suggest using tariff revenue to fund further tax cuts, effectively returning the money to American citizens or businesses, though the mechanism for such a "rebate" is unclear. This could be framed as mitigating the economic impact of the tariffs themselves.
4. Infrastructure Spending: Another potential use is to fund large-scale infrastructure projects, an area of bipartisan interest but often hampered by funding challenges.
5. Direct Payments to Citizens or Industries: In his first term, the Trump administration provided aid to farmers affected by retaliatory tariffs. A future iteration of "keeping the money" could involve direct payments to specific industries or even citizens to offset the increased costs of imports, though this would likely require explicit congressional authorization.

The stated objectives highlight the political appeal of linking a perceived "foreign" revenue source to popular domestic spending priorities. However, the feasibility and legality of unilaterally achieving these objectives remain highly questionable without significant congressional cooperation.

Legal and Constitutional Hurdles

The notion of the executive branch unilaterally "keeping" and spending tariff revenues without congressional appropriation directly challenges foundational principles of American governance.

The Appropriations Clause (Article I, Section 9, Clause 7) is explicit: "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." This clause enshrines the principle of Congressional power of the purse, granting Congress exclusive authority over federal spending. The framers intended this to be a critical check on executive power, ensuring that the legislative branch controls how taxpayer money is raised and spent.

Any attempt by a president to create a special fund for tariff revenues and then spend from it without specific congressional authorization would be viewed by many legal scholars as a direct violation of this clause. Even if the president argues that tariffs are an executive action (under trade statutes), the resulting revenue, once collected, becomes federal money subject to the same constitutional rules as any other revenue.

The separation of powers doctrine would be central to any legal challenge. The executive branch's role is to implement laws, not to create its own spending authority. Historically, courts have been cautious in allowing executive actions that encroach on Congress's enumerated powers, especially concerning fiscal matters. Precedents for presidential attempts to reallocate funds, such as the impoundment controversies of the Nixon administration, demonstrate that courts and Congress are likely to resist executive overreach in this domain. While presidents have some flexibility in allocating funds *within* broad appropriations provided by Congress, they cannot create new appropriations or divert funds from the General Fund for purposes not authorized by law.

Potential legal challenges could come from various sources: * Congress: Members of Congress, particularly those in the opposing party or those concerned about institutional prerogatives, could sue the administration, arguing a violation of their constitutional authority.
* States: States might challenge the economic impact of the tariffs or the unconstitutional spending.
* Private Entities: Businesses or individuals directly harmed by the tariffs or the spending decisions could also seek judicial review.

The legal battles would likely center on whether tariff revenues, once collected, are indistinguishable from other federal revenues and thus subject to the Appropriations Clause, or if a president could claim some inherent executive authority to direct their use. The prevailing legal consensus strongly supports the former, suggesting any attempt to unilaterally "keep" and spend tariff revenue would face significant, and likely insurmountable, constitutional obstacles without legislative backing.

Impact: Economic, Political, and International Repercussions

The implementation of a universal tariff and the attempt to "keep" the resulting revenue would unleash a cascade of effects across the U.S. economy, its political landscape, and its relationships with the rest of the world. The scale of these impacts would be unprecedented in modern U.S. trade history.

Economic Consequences for the U.S.

The economic ramifications of a universal tariff, especially one coupled with an unconventional revenue earmarking scheme, would be extensive and complex.

Who Pays: Incidence of the Tariff

A central debate surrounding tariffs is who ultimately bears their cost. While tariffs are collected by U.S. Customs and Border Protection from the importing company, economic analysis consistently shows that the burden is largely passed on.

Importers: U.S. companies that import goods would face immediate higher costs. These include retailers bringing in finished products, manufacturers importing raw materials or intermediate components, and businesses relying on foreign machinery or technology.
* Domestic Consumers: A significant portion of these increased import costs would likely be passed on to American consumers through higher retail prices for a vast array of goods, from electronics and apparel to food items and automobiles. This would effectively act as a broad-based consumption tax.
* Producers Using Imported Inputs: U.S. manufacturers that rely on imported parts or materials would see their input costs rise. This could make their final products less competitive both domestically and internationally, potentially leading to reduced production, job losses, or a shift in sourcing.
* Foreign Exporters: In some cases, foreign exporters might absorb a portion of the tariff by lowering their prices to maintain market share, but this effect is often limited, especially for high-demand or specialized goods.

Studies from the first Trump administration's tariffs on Chinese goods, for instance, largely concluded that U.S. consumers and businesses paid nearly 100% of the tariff costs. A universal tariff would amplify this effect across virtually all sectors of the economy.

Inflationary Pressures

A 10% universal tariff would directly increase the cost of imported goods, which account for a substantial portion of the U.S. consumer basket. This would almost certainly lead to significant inflationary pressures across the economy. Businesses facing higher import costs would likely raise prices, contributing to a general rise in the cost of living. Supply chains, already strained by recent global events, would face renewed disruption as companies scramble to adjust to new cost structures and potential sourcing shifts. This could exacerbate existing inflationary trends or trigger new ones, impacting the purchasing power of American households.

GDP and Growth

Economists widely predict that a universal tariff would have a negative impact on U.S. Gross Domestic Product (GDP) and economic growth. Higher import costs would reduce consumer spending power and business investment. Retaliatory tariffs from trading partners would harm U.S. exporters, further dampening economic activity. The uncertainty created by such a dramatic shift in trade policy could also deter both domestic and foreign investment, leading to slower job creation and potentially an economic contraction. Modeling by various organizations, including the Peterson Institute for International Economics and the Tax Foundation, has consistently shown that broad tariffs reduce GDP, wages, and employment.

Industry-Specific Effects

The impact would not be uniform across all sectors:

Beneficiaries: Some domestic industries that compete directly with imports could see a temporary advantage as foreign goods become more expensive. This could include certain manufacturing sectors, though even these might suffer from higher input costs.
* Detriment:
* Export-Oriented Industries: Industries heavily reliant on exports, such as agriculture (soybeans, corn, pork), aerospace, and certain high-tech sectors, would face severe consequences from retaliatory tariffs imposed by trading partners.
* Industries Reliant on Imports: Retailers, automotive manufacturers, electronics companies, and many other sectors that depend on global supply chains for components or finished goods would see their costs soar, impacting profitability and potentially leading to layoffs or reduced investment.
* Small Businesses: Many small and medium-sized enterprises (SMEs) lack the resources to absorb higher import costs or navigate complex trade disputes, making them particularly vulnerable.

Fiscal Impact and "Keeping the Money"

While a universal tariff could generate hundreds of billions in revenue, the net fiscal impact is less straightforward. The direct revenue would flow into the Treasury, but the economic slowdown and potential job losses could reduce other tax revenues (income tax, corporate tax). The administrative costs of implementing and managing such a complex tariff regime would also be significant.

If the money were successfully "kept" for specific purposes (e.g., border wall, debt reduction), the fiscal impact would depend on the actual spending. For example, using it for debt reduction would be fiscally conservative, while using it for new infrastructure projects would add to government spending, potentially offsetting any perceived fiscal benefit from the tariffs themselves. The economic distortion caused by the tariffs themselves could outweigh any fiscal benefits from the revenue.

Domestic Political Landscape

The political ramifications of such a bold and disruptive trade policy would be profound, creating divisions within parties and intense lobbying efforts.

Congressional Reaction

Republicans: While many Republicans align with Trump's protectionist sentiments and desire for specific spending (like border security), there would likely be significant opposition to a universal tariff from free-trade conservatives and those concerned about the economic impact on their constituents. The attempt to bypass Congress's power of the purse would also spark strong resistance from institutionalists within the Republican party, who would view it as an executive overreach.
* Democrats: Democrats would almost certainly universally oppose a universal tariff, citing its inflationary impact on consumers, harm to businesses, and potential for trade wars. They would also vehemently oppose any attempt by the executive branch to unilaterally spend tariff revenues, seeing it as a constitutional crisis and an assault on congressional authority. Bipartisan opposition to the "keeping the money" mechanism would be highly probable.

Public Opinion

Public opinion on tariffs is often divided, with some segments supporting protectionist measures to save domestic jobs, while others prioritize lower consumer prices and open trade. A universal tariff, with its broad impact on prices, would likely face significant public scrutiny. The specific messaging around "keeping the money" for popular projects like border security or debt reduction might resonate with certain voters, but this could be offset by widespread concerns about rising costs of living and economic uncertainty. The ability to directly link the tariff revenue to tangible benefits would be crucial for public acceptance.

Business Lobbying

The business community would engage in intense lobbying efforts.
* Retailers and Importers: Groups representing retail, apparel, electronics, and other import-heavy sectors would vehemently oppose the tariffs, arguing they harm consumers and their bottom lines.
* Manufacturers: Domestic manufacturers would be divided. Those competing with imports might support the tariffs, while those relying on imported components or exporting finished goods would likely oppose them.
* Agriculture: The agricultural sector, which bore the brunt of retaliatory tariffs in the first Trump administration, would be a vocal opponent, seeking exemptions or compensation.
* Industry Coalitions: Broad coalitions of businesses would likely form to highlight the negative economic consequences and advocate for a more traditional, open trade policy.

Federal Agencies

Federal agencies like the Treasury Department, U.S. Customs and Border Protection (CBP), the Office of Management and Budget (OMB), and the U.S. Trade Representative (USTR) would face immense challenges.
* CBP: Would need to implement and manage a vastly expanded tariff collection system, dealing with an unprecedented volume of duties.
* Treasury/OMB: Would be at the center of the legal and fiscal debate surrounding the "keeping the money" mechanism, tasked with navigating the constitutional complexities and potential legal challenges.
* USTR: Would be responsible for managing the inevitable trade disputes and retaliatory actions from global partners.

International Relations and Trade Dynamics

The international repercussions of a universal tariff and the "keeping the money" policy would be immediate and far-reaching, fundamentally altering global trade relations and potentially undermining the multilateral trading system.

Retaliation

A universal tariff, impacting all trading partners, would almost certainly trigger widespread and aggressive retaliation.
* Major Trading Partners: The European Union, Canada, Mexico, Japan, South Korea, and China would likely respond with their own tariffs on U.S. goods and services. This would harm American exporters, particularly in agriculture, automotive, and technology sectors.
* Form of Retaliation: Beyond tariffs, countries could employ non-tariff barriers, such as increased regulatory scrutiny, import quotas, or state-sponsored boycotts of U.S. products.
* Impact on Alliances: Imposing tariffs on allies would strain diplomatic relationships, undermine trust, and make cooperation on other critical issues (e.g., security, climate change) more difficult. It could push allies closer to alternative trading blocs or partners.

WTO Challenges

The World Trade Organization (WTO) framework generally prohibits members from imposing tariffs above agreed-upon bound rates without justification or compensation. A universal tariff would almost certainly violate WTO rules.
* Dispute Settlement: Numerous countries would likely initiate dispute settlement cases against the U.S. at the WTO.
* Weakening the WTO: While the WTO's dispute settlement body is currently hampered by the U.S. blockage of appellate body appointments, a universal tariff would further undermine the rules-based multilateral trading system, potentially leading to a more chaotic and fragmented global trade environment. The U.S. itself could face authorized retaliation if found in violation of its commitments.

Global Supply Chain Reconfiguration

The tariffs would accelerate the ongoing reconfiguration of global supply chains. Companies would intensify efforts to:
* Reshoring/Nearshoring: Bring production back to the U.S. or to nearby countries (e.g., Mexico, Canada) to avoid tariffs.
* Diversification: Shift sourcing away from countries subject to tariffs to those that are not (though a universal tariff would make this difficult, pushing companies to domestic sources or to absorb costs).
* Increased Costs: Regardless of the strategy, adapting supply chains is costly and time-consuming, leading to higher prices for consumers and reduced efficiency.

Currency Implications

Large-scale tariff imposition can have significant currency implications. If tariffs reduce U.S. imports more than exports, it could strengthen the dollar, making U.S. exports more expensive and imports cheaper (partially offsetting the tariff effect). However, if tariffs lead to global economic instability or significant trade wars, it could lead to capital flight or other unpredictable currency movements, impacting global financial markets.

In summary