Customs tariffs: a theoretical perspective in the face of Trump's policy

The markets had learned to be wary of grand gestures, but this one will not fail to make history. With a gesture as assured as it is controversial, Trump has for several weeks been reconnecting with one of his old obsessions: redrawing the rules of world trade, even if it means stirring up embers that are already glowing red.

Before dissecting the reasons for and repercussions of this tariff offensive, a brief detour is in order. Let us review together the rules of the game of customs tariffs and their link with the trade balance.

The customs tariff, what's that?

A centuries-old instrument of international trade, the customs tariff presents itself as a charge imposed on goods crossing an international border (mostly incoming). Yet, calculated as a percentage of the value of the product, it does not merely act as a simple entry duty, it redraws, in its own way, the rules of the global game. A stroke of the pen on a rate, and suddenly, a shoe manufacturer must reconsider the origin of its leather.

Thus, customs tariffs have the power to regulate international trade, protect national industries and generate revenue. But, disguised as a common-sense measure, they also shape the balance of power, sometimes stoking diplomatic tensions.

The link between tariffs, trade balance and GDP

To understand why Trump is a fervent advocate of it, one must first return to a fundamental concept: the trade balance. In a few words, it measures the difference between the value of exports and imports. But, in economics, the trade balance also has a privileged relationship with a country's Gross Domestic Product (GDP), that is the total value of what is produced within the national borders.

It is time for Aunt Agathe to dust off her old macroeconomics textbooks:

"Tariff", the favourite word in Trump's dictionary

Trump is no stranger to this. After targeting aluminium at 10% and concentrating his attacks on China during his first term, he is at it again with even beefier tariffs on imports. True to his explosive unpredictability, one struggles to keep up with him: aluminium climbs to 25%, while all imports coming from Canada and Mexico find themselves tossed about between announcements, withdrawals and reintroductions. The threat of reciprocal customs duties had also been looming for several weeks, but this Wednesday, American trade closes a little further. On this day of liberation, the Trump administration rules: 10% for everyone, 20% for Europe, up to 54% for China.

Behind this protectionism, the stated ambition is clear: "Make America Great Again" by making imports more expensive in order to encourage companies to produce in the United States, all while boosting employment. But tariffs are not only a trade lever, they also serve as a means of pressure, as witnessed by the recent tension with Colombia or the threat to tax French champagne and wine at 200% if Europe did not lift its tariffs on bourbon. Much to the detriment of Europeans, who would have to pay the price twice over.

Is a trade deficit necessarily bad?

On paper, the Trumpist logic seems implacable. But in reality, it comes up against a few economic nuances. Admittedly, a trade surplus can support GDP growth (as seen above), but a deficit is not necessarily a sign of weakness. In the United States, high imports can be a sign that the population is buying a great deal. Moreover, the country attracts massive foreign investment, which strengthens the dollar, thus making imports more affordable.

These foreign investments do not evaporate. They can irrigate the economy in the form of investments in companies, infrastructure and innovation, and therefore constitute a real engine of growth.

What does the tariff increase imply for companies?

In recent weeks, tariffs have shaken the markets because of speculation about their scale and their repercussions on the global economy, inflation and companies. For the latter (especially those dependent on imports) the increase in customs duties translates into a rise in production costs. They therefore find themselves facing an agonising choice: absorb the increase and affect their margins, pass the increase on to customers and risk reducing demand, or rethink their supply chain. Take the case of Agathe&Co U.S., which imports Canadian steel:

Once again, the importance of optimised cash flow management is brought back to the fore, with a situation where cash outflows increase immediately, while inflows can decrease gradually. This imbalance weakens the company's capacity to finance its activity and its investments, jeopardising its financial health.

The increase in tariffs imposed by Trump is part of a protectionist logic aimed at revitalising the American economy by focusing on the trade balance. Yet, as we have seen, a trade deficit is not necessarily an indicator of economic fragility and offers only a truncated view of reality. In addition to impacting the markets and inflation, these measures also redraw the financial landscape of companies, reminding us, if there were any need, that cash flow management remains an essential condition for the resilience of companies, in an environment where the rules of the game change at the mercy of political decisions.

Key points to remember about customs tariffs

-> A trade deficit is not necessarily synonymous with economic weakness.

-> Excessive protectionism can weaken the very companies it claims to defend.

-> The increase in tariffs will put pressure on the liquidity of the companies concerned.

-> In an uncertain environment, agile cash flow management remains essential.

Sources

Cato Institute. (n.d.). U.S. trade deficit and jobs: The real story. Retrieved on 17/03/2025, from https://www.cato.org/free-trade-bulletin/us-trade-deficit-jobs-real-story

CBC News. (2023, 1 December). Trump's trade tariffs: A timeline. Retrieved from https://www.cbc.ca/news/politics/trump-trade-tariffs-timeline-1.7481280

European Commission. (n.d.). Trade balance. Eurostat. Retrieved on 17/03/2025, from https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Glossary:Trade_balance/fr

Samois, O. (2025). Trade war: will the United States apply customs duties of 20% on the EU and up to 54% on China? L'Echo. Retrieved from https://www.lecho.be/economie-politique/international/usa/guerre-commerciale-les-etats-unis-vont-appliquer-des-droits-de-douane-de-20-sur-l-ue-et-jusqu-a-54-sur-la-chine/10600954.html

European Parliament. (2019). Trade and investment barriers: The EU and US in comparison. European Parliamentary Research Service. Retrieved on 17/03/2025, from https://www.europarl.europa.eu/RegData/etudes/ATAG/2019/633187/EPRSATA(2019)633187EN.pdf