Trump misses the mark: More than $36 trillion in US debt won't be wiped out with tariffs

LondonOne of President Donald Trump's many explanations to justify their trade war is that, in addition to the hypothetical reindustrialization of the country—a short-term pipe dream, and we'll have to see what happens in the medium and long term—it would generate enough tax revenue to reduce the federal debt. After the supposed shower of money it would receive from abroad—in practice, from impoverished American taxpayers—it could extend the tax cuts it touted during the 2024 campaign, which would be a continuation of those in 2017. But those cuts, contrary to what Trump said, added 1.

Furthermore, are tariffs effective in reducing the deficit, as the president claims, or as he said until Wednesday? The Tax Policy Center—one think tank from the Urban Institute and the Brookings Institution, prestigious political and economic think tanks in Washington—estimates that tariffs would only raise about $2.8 trillion over a decade. These figures are ridiculous given the magnitude of the current deficit and debt. What exactly are they?

According to the US debt clock –not including so-called off-balance sheet liabilities, which some economists have estimated at $70 trillion–, the US government's obligations through April total $36.7 trillion. Strictly official sources suggest a somewhat lower figure: $36.2 trillion. In both cases, these are astronomical figures. In one-hundred-dollar bills, they would cover the size of the Camp Nou pitch, refurbished more than 228,000 times. The average interest rate for servicing this debt is currently 3.2%, the highest since 2010. But this week, pressure on US debt is growing. And $9.2 trillion must be refinanced or liquidated by June.

Debt often becomes a political issue in Washington. Periodically, some US congressmen threaten to bankrupt the government because they do not want to raise the debt ceiling. The figure doesn't automatically spell economic trouble, although it could if, as Federal Reserve Chairman Jerome Powell has repeatedly pointed out, the upward trend in the red becomes unbearable because "it's growing faster than the economy."

This is precisely what's happening and what official projections indicate. Last year's deficit as a percentage of GDP was 6.4%. A total of $1.8 trillion. And the latest report on U.S. public finances, published by the Secretary of the Treasury on January 16, four days before Trump's inauguration, noted that "the debt-to-GDP ratio was approximately 98% at the end of fiscal year 2024." It added: "Under current policy, based on the assumptions in this report, it is projected to reach 535% by 2099. The continued rise in the debt-to-GDP ratio indicates that current policy is not sustainable."

That $36 trillion-plus debt reflects the annual budget deficits the federal government has run historically, virtually continuously since 1931. Prior to that point, surpluses were more common, apart from the years following the Civil War. A testament to the current situation: In the first six months of this fiscal year alone (October 1 to September 30 in the United States), the gap between revenue and expenditure is $1.15 trillion. It's stretching things further than they should be.

What happened in 2017, the increase in debt despite tax cuts, could happen again now. Last Thursday, Congress approved the budget bill that provides for another $5 trillion and, according to Reuters calculations, will also add $5.7 trillion to the US government's financial obligations over the next decade. The possibility of further debt growth led several Republican congressmen to initially oppose the bill and demand even deeper spending cuts.

However, for it to become law, the House and Senate bills must converge, and new legislation will be necessary to enact the deeper tax cuts Trump seeks. Democratic Congressman Greg Landsman of Ohio has denounced, on the X network, that Trump could "cut almost a trillion dollars from healthcare." And he wondered, "What's that money going to? The vast majority of it goes to tax breaks for the country's richest."

A very uninspiring plan.

Despite the great Trump's setback and the 90-day pause in the application of tariffs, with the exception of the punishment in Beijing, the uncertainty will continue in the coming weeks and months. The proof is the fall of Wall Street on Thursday, the rise in US bond yields, the depreciation of the dollar and the appreciation of gold as a safe haven. All of this paralyzes investment and spreads a negativity that is difficult to dispel until there are new rules of the game that do not change overnight with a whim expressed in a tweet.

What is especially important about what has happened in the last week is that Trump's 180-degree turn, disguised as a brilliant plan on his part and that of his followers, It has not been wanted, but forced. Not so much because of the stock market shudders, but also because of the aforementioned and worrying increase in the profitability of 10- and 30-year US Treasury bonds, accentuated since the ""Liberation Day" (April 3).

On April 1, the 10-year bond was paying 4.17%. On April 10, it was 4.40%. As an example of the extra cost, suffice it to say that refinancing $1 trillion at the higher rate will mean paying another $19.856 billion over the ten years, or 2% of the refinanced debt. This means more interest to pay on the debt, fewer prospects for tax cuts, and a tarnishing of the golden age Trump promised the MAGA electorate. And likely rising inflation. Since January, however, it has dropped from 3% to 2.39%, according to data released last Thursday.

Trump also changed course for other reasons. Generally speaking, the US dollar reserves of the world's central banks are normally invested in US Treasury bonds, which, in theory, helps reduce the cost of financing, both for public debt and for private investment in the country. But if the rise in bond prices continues, confidence in the dollar will tremble—it's already happening, as markets seek refuge in gold—and its preeminence as a safe haven currency will be threatened, at the very least, at a time when the China and the BRICS would like an alternative currency for trade.. All of this could have caused a financial crisis like the one in 2008. Or worse. And the only person responsible would have been Donald Trump.

Commentators on the friendly Fox network indicated shortly after the change in the relative pause in tariffs ordered by the White House that, contrary to speculation, the sale of US bonds—which had raised their yields—had come from Japan and not China. The White House press secretary herself, Karoline Leavitt, denied this possibility at midday Friday, at the regular press conference, "as far as I know." The two countries mentioned, along with the United Kingdom, are the ones with the most, according to official Treasury data.

At this point, it's worth remembering that of the more than $36 trillion in US debt, $8.6 trillion is held by foreign governments, while the rest is held by US creditors, starting with the Federal Reserve itself. Japan has $1.079 trillion, China $760 billion, and the United Kingdom $740 billion, respectively. The remaining list is very long: Luxembourg, Canada, Belgium, the Cayman Islands, Saudi Arabia, Mexico, Brazil, Ireland, Switzerland, Taiwan, Hong Kong, Singapore, Germany, South Korea, and so on.

But "when other countries hold US federal debt, that has nothing to do with taking advantage of the United States," notes Scott Mahadeo, professor of macroeconomics at the University of Portsmouth. Nor does running a surplus in trade transactions constitute taking advantage, despite Trump's rhetoric.

A first purchase in 2000

China, with which Trump is now engaged in a contest of uncertain outcome, began buying US debt in 2000 ($69 billion). It peaked in November 2013 ($1.317 trillion) and now holds $760 billion. Between 2016 and 2023, it sold some $600 billion. But Robin Brooks, a fellow at the aforementioned Brookings Institution, says the real figure is even higher, probably around $1 trillion, because it would have to take into account the unknown sums Beijing holds in custodial accounts in Europe.

Why is China buying US debt? First, because the world, despite the aforementioned efforts of the BRICS, still has a dollarized economy and, as Mahadeo explains, "the dollar is present in one of the two bands of 88% of all transactions in the foreign exchange market, which moves a daily global volume of 7.5 trillion dollars." And, second, because, nevertheless, Beijing considers it the best place, at least for now, to invest a good part of the 25 billion dollars monthly trade surplus it has with the United States.

The paradox of the entire current war is that, in practice, roughly speaking, China offers credit to the United States so that the United States can continue buying the products it produces and exports in a volume that exceeds $300 billion annually. One win-win Trump doesn't see it that way. On the contrary. And neither does US Vice President JD Vance. In his usual manner, he insulted the Chinese people, saying in an interview on Fox News: "We borrow money from Chinese farmers to buy the things these same Chinese farmers make."

Will China suddenly sell off US Treasury bonds as part of the ongoing struggle? The answer is no. Besides, abruptly and massively flooding the markets with its reserves would be very self-destructive. There's no way to place them. And, besides, if it did, it could collapse the dollar, skyrocket the yield on US Treasury bonds, increase the appreciation of the renminbi—which isn't happening now—and, in the process, shoot itself in the foot by sinking the $3 trillion in assets held by China and its banks.

The sale of Japanese bonds, according to the same Fox commentators, was a reaction to the lack of confidence in their American friend, which has acted as a wake-up call in the White House. "Be careful, we could all do a lot of damage if the dollar destabilizes." Some of Trump's friends and donors, billionaires like investment fund manager Bill Ackman, rightly asked for a 90-day tariff pause.

Trump and your financial team – if you have one – have established a cause-effect relationship between current tariff strategies and the economic prosperity of the Second Industrial Revolution (1870-1914), suggesting that these import taxes were a fundamental tool for creating wealth in the country during that period.

But, no matter how you look at it, the accounts do not quite add up when talking about tariffs. A president like Ronald Reagan – a Republican – warned as early as 1987 of the harmful effects of raising trade barriers, as the Chinese embassy in the United States recalled this week in a post on the X network. Words that, on the other hand, are inscribed at a very specific time, when not many people suspected that the Asian giant It would become the world's second-largest economy and fight for first place in the 21st century. That's what this trade war is all about.