Can tariff revenues of 4 trillion yuan offset tax cuts? US bond traders reassess Trump risk
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U.S. Treasury bond traders are now viewing tariff revenues from the Trump administration as a key support for the nation's public finances. Now, this new fiscal pillar is facing judicial challenges, and investors are focusing on what risks may lie ahead for the U.S. Treasury market.
According to Xinhua News Agency, the U.S. government is scheduled to impose “reciprocal tariffs” on its trading partners starting April 2. Initially, this policy was seen by the markets as a danger signal that could trigger economic shock, and it battered global markets in April. But as time went on, investors began to rely on the trillions of dollars in revenue brought by these tariffs to offset the fiscal gap created by Trump’s tax cuts, thus containing the size of U.S. government borrowing.
However, this new market logic was shaken last Friday. According to CCTV News, on August 29 local time, the U.S. Court of Appeals ruled that most of the global tariff policies implemented by President Trump were illegal.
Although the court stated that the additional tariffs could remain in place until October 14, this ruling was enough to shake market confidence and raise profound doubts about the sustainability of tariff revenues.
Analysts pointed out that concerns about a potential reduction in tariff revenue were the catalyst for the sell-off in U.S. Treasuries last Tuesday and Wednesday. Investors worry that if tariff revenues fall short of expectations, the U.S. Treasury Department will be forced to issue more bonds to cover deficits, resulting in an oversupply in the market and putting pressure on bond prices.
From Trade War Risk to Fiscal “Stabilizer”
The nonpartisan Congressional Budget Office (CBO) previously predicted that Trump’s tariff policy would bring an additional $4 trillion in revenue to the U.S. government over the next decade.
This figure could help pay for the “big beautiful” tax cut legislation, which is expected to add $4.1 trillion in borrowing over the same period.
Andy Brenner, Head of International Fixed Income at NatAlliance Securities, said,
“I think the only way the U.S. government can reduce outstanding debt in the short run is by using tariff revenue. If tariff revenue suddenly disappears, that would be a problem.”
Analysts Warn: “The Bond Market Could Riot”
Although the market has factored tariff revenue into fiscal expectations, the legal foundation for those expectations is becoming less stable.
Last week, the U.S. Federal Appeals Court ruled that most of Trump’s global tariffs were illegal, finding that he had exceeded his authority when imposing them.
This directly ignited investor concerns. For the bond market, the greatest risk now lies in an asymmetric situation: tax cuts remain in place, but the tariff revenues used to offset the cost vanish due to court decisions.
Thierry Wizman, Global Rates Strategist at Macquarie Group, pointed out that if most of Trump’s tariff plans were struck down by the courts, some analysts might cheer, believing this would contain inflation, improve growth, and potentially prompt the Fed to favor a looser monetary policy. But he warned:
“If, at that time, the market’s focus is on debt and deficits, the bond market could riot.”
Wizman added: “The tax cut legislation replacing the tariff policy could become the dominant risk for the U.S. bond market in the coming weeks.”
A Drop in the Bucket? America’s Debt Level Remains a Long-term Worry
Even if tariff revenue continues, some investors are still worried about the sheer size of U.S. government borrowing, believing tariffs are just a stopgap measure.
Des Lawrence, Senior Investment Strategist at State Street Investment Management, said that if tariffs are “halted,” it would “deprive the U.S. of a revenue source,” but he believes “the bigger negative picture is the sheer scale of government spending.”
According to Congressional Budget Office projections, without tariff revenue, by 2029, the U.S. debt-to-GDP ratio would surpass its peak in World War II. Ratings agencies S&P and Fitch have both hinted that tariff revenue was a factor in their decision not to further downgrade the U.S. sovereign credit rating.
Robert Tipp, Global Head of Bonds at PGIM Fixed Income, also said that there is an expectation in the market that “tariff revenue could help control the budget deficit.”
Des Lawrence summarized:
“[Tariff revenue] is helpful in filling the gap, but the U.S. still faces a huge problem in that spending far exceeds revenue.”
Risk Advisory and DisclaimerThe market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account an individual user’s specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investments made based on this are at your own risk. ```