Trump, customs duties and the three Rs - February 24, 2025
President Donald Trump, in office since January 20, 2025, has become known as the “Tariff Man”. By invoking them at every turn, the US executive is blurring the final objective of this policy and exposing its internal contradictions. Are tariffs a negotiating tool, a means of protecting American industry and jobs, or an instrument of federal state financing? Although Trump would no doubt like to answer “all three at once”, these objectives are partly mutually exclusive.
To understand this, we need to take a step back in history. The issue of tariffs is not new in the history of economic policy. The economist Douglas Irwin distinguishes three objectives of tariffs (the three Rs): Revenue, Restriction and Reciprocity.
Tariffs are a tax on imports and therefore constitute a source of revenue to finance the state. This was their main role in the United States between 1790 and 1860. During this period, customs duties accounted for approximately 90% of the US federal government's revenue (see graph 1).
From 1861 until 1933, government revenue came increasingly from domestic activity. Customs duties then became a tool for protecting the fledgling American industry. This was the context of the presidency of William McKinley, from 1897 until his assassination by an anarchist militant in 1901, the other “Tariff Man” to whom Donald Trump constantly refers. In fact, during his two terms of office, President McKinley successively used customs duties for their revenue, then for their protective effect, and finally to force the opening up of foreign markets.
The Tariff Act of 1930, also known as the Smoot-Hawley Tariff, was the last major across-the-board increase in customs duties in the United States. Its role in worsening the Great Depression and in international contagion is still debated by economists. Finally, from 1934 onwards, customs duties became a lever for trade negotiations, until the creation of the GATT in 1947 and the WTO in 1994 (see graph 2).
The three objectives of customs duties have been invoked successively in American history because they are partly mutually exclusive. The objective of restricting imports is intended to protect domestic industries and is not compatible with their use as a negotiating tool or as a source of revenue. On this last point, if customs duties are high enough to restrict imports, they simultaneously reduce the taxable base (an effect similar to the “Laffer curve”).
Since his inauguration on January 20, 2025, the use of the threat of customs duties as an instrument of coercion seems to dominate. First against Colombia, then against Canada and Mexico, and perhaps tomorrow against Europe. On the other hand, the 25% tariffs on steel and aluminum, decided on February 10, fall more into the protectionist category.
More recently, on February 19, on Fox News, Secretary of Commerce Howard Lutnick declared that the government's objective was the abolition of the Internal Revenue Service (IRS) to replace it with the External Revenue Service, with the promise of “putting tariffs and taxes on foreign countries to enrich our fellow citizens”. It is too early to know if, like his idol from the end of the 19th century, Donald Trump is about to change his narrative on customs duties, but in reverse. We will have the answer before the end of 2025, when the government is due to put to the vote the extension of the tax cuts decided in 2017 (Tax Cuts and Jobs Act).