In today’s Finshots, we tell you why Donald Trump, the next US president, is such a fan of tariffs.

Before we begin, if you’re someone who loves to keep tabs on what’s happening in the world of business and finance, then hit subscribe if you haven’t already. We strip stories off the jargon and deliver crisp financial insights straight to your inbox. Just one mail every morning. Promise!

If you’re already a subscriber or you’re reading this on the app, you can just go ahead and read the story.

The Story

“To me, the most beautiful word in the dictionary is ‘tariff.’ It’s my favorite word.”

You’ve probably come across this quote making the rounds in the news. And it’s not hard to guess who said it, right? But just in case, it was Donald Trump, the soon-to-be President of the United States, in a recent interview with Bloomberg.

And now that he’s won a second term, Trump’s fondness for tariffs — basically, extra taxes on goods countries export to the US, has people nervous, especially in India.

Think about it. If Indian goods face higher taxes in the US, they’ll cost more for Americans. And when prices go up, people tend to buy less, which means demand often falls. So, Americans might choose to buy more US-made products instead, which would hurt India’s exports. This could slow down manufacturing of goods for exports and hit economic growth back home.

So, it’s no wonder that there’s some worry. The recent dips in the Indian stock market are a pretty big hint.¹

But have you ever wondered why Trump loves tariffs so much?

Actually, it might seem like Trump is all about tariffs. But he doesn’t really have a choice. He needs to love them because here’s the thing.

During his campaign, Trump promised a lot to the working class. He vowed to keep the tax cuts from the Tax Cuts and Jobs Act (TCJA). This law gave the middle class some temporary tax relief, but most of the perks actually went to big companies and the wealthy. But since these benefits are set to expire by the end of 2025, Trump wants to keep them around.

On top of that, Trump has grand plans for more tax cuts. He wants to give breaks to around 93 million Americans by eliminating income tax on things like tips, overtime pay and Social Security benefits. He’s also pushing for special exemptions for firefighters, police officers, military personnel and veterans. And his biggest promise of all? To eliminate federal income tax completely.²

But such heavy tax cuts could mean less money coming in, leading to a bigger deficit or a situation where the government spends more money than the country earns. So how does Trump plan to close this gap?

You guessed it ― Tariffs!

And that’s exactly why Donald Trump loves tariffs. His idea is simple ― get other countries to “pay back” America for everything it’s done over the years by slapping a 10-20% tariff on anything and everything imported into the US. And if the goods are from China or Mexico, he’s thinking of going as high as 60% or even 100%.³ The plan is to use this money to make up for the lower taxes and keep his promise of making America “great” yet again.

But will it work, you ask?

Well, sadly, it might not. To see why, you could look at a simple Laffer Curve analysis from the Peterson Institute of International Economics (PIIE).⁴ If you’re wondering what that is, it’s a theory by economist Arthur Laffer that shows how government revenue changes at different tax rates. The goal is to find that “sweet spot” or the tax rate that brings in the most revenue for the government.

So, when PIIE applied the Laffer Curve to Trump’s tariff plan, the findings weren’t so promising.

You see, in 2023, tariffs on imported goods brought in around $160 billion.⁵ On the other hand, income and corporate taxes (the ones people and businesses pay on their earnings) brought in about $2 trillion. Now, if Trump wanted to replace all these taxes with tariffs, he’d have to pull in a huge amount of money from the much smaller pool of imported goods. To reach $2 trillion, tariffs would need to be set incredibly high.

But there’s a catch. If tariffs get too high, imports drop, making it even harder to hit that target. In fact, the highest revenue they could make with a 50% tariff rate would be around $780 billion. And anything higher than that could backfire. Because when imported goods get too expensive, Americans would buy less, and the negative effects of lower imports would outweigh the extra revenue from higher tariffs.

And it doesn’t stop there. You can probably guess what happens next. If America starts slapping tariffs on other countries, those countries aren’t going to just sit back and relax, right?

Take Europe, for example. If the US imposes tariffs on them, it could deal a blow to the economies of the Eurozone, similar to the hit they took during the energy crisis after Russia’s invasion of Ukraine in 2022. Not exactly a small impact.

And naturally, these countries will hit back with their own tariffs. It’s kind of like what happened with the Smoot-Hawley Tariff Act during the Great Depression.⁶ The US raised tariffs, other countries responded with their own tariffs, and global trade tanked.

And this time around too, Trump’s tariffs could set off a chain reaction, starting a trade war that makes everything more expensive, not just for Americans, but for consumers worldwide including you and me.

So yeah, if anything, Trump’s “favourite word” might not exactly help him fulfil his election promises. If he somehow proves us wrong, though, we’ll all be pretty happy because who wants higher prices, right?

Until then…

Don’t forget to share this story on WhatsApp, LinkedIn and X.

📢 Ready for even more simplified updates? Dive into Finshots TV, our YouTube channel, where we break down the latest in business and finance into easy-to-understand videos — just like our newsletter, but with visuals!

Don’t miss out. Click here to hit that subscribe button and join the Finshots community today!

Sources: Hindustan Times [1], CNN [2] [6], CNBC [3], PIIE [4], US Government Fiscal Data [5]

Your ultimate Health Insurance checklist!

Having the right health insurance is so important. Whether you’re looking for a new plan or want to review your current one, Ditto’s IRDAI-certified advisors are here to help. Click here to book a FREE call today!