Are The Trump Tariffs Actually Working?

Sudden budget surplus is a positive sign

According to the US Treasury Department, American taxpayers enjoyed a revenue surplus of $27 billion in June, sharply rising after a $316 billion deficit in May. It was a 13% increase in receipts over the same month in 2024. Jeff Cox explains at CNBC that “with calendar adjustment, the deficit actually edged lower by 1%.” The difference is customs duties, i.e. tariffs. “On an annual basis, tariff collections have totaled $113 billion, or 86% more than a year ago.”

It is the first time US customs duty collections exceeded $100 billion in a fiscal year. “The budget data showed that tariffs are starting to build into a significant revenue contributor for the federal government, with customs duties in June hitting new records,” David Lawdor reports at Reuters. As a result, “tariffs have now grown into the fourth-largest revenue source for the federal government,” roughly doubling in size as a share of that revenue.

As I explained for premium subscribers on Income Tax Day in April, the administration is running an economic experiment to find out whether the US dollar can remain the world’s reserve currency without running up big trade deficits, anymore. We are still a long way from certainty as to whether the experiment will succeed in its full design, but a revenue increase is definitely a strong indicator that it is working.

Another metric of success is a weakening of the dollar, which has indeed lost about 11% of its value since Trump started announcing teriffs in February. A ‘weaker’ dollar promotes American manufacturing and exports. Even assuming that this works, the intended effects will take a longer time to manifest than one fiscal quarter. Such effects will be limited anyway because robots and AI are already replacing humans in manufacturing jobs.

There are 200,000 Chinese citizens making products by hand in Foxconn’s “iPhone City.” The only way Americans will ever make a competitively-priced iPhone in America is with a factory that uses 20 workers and 20,000 robots instead of 200,000 people. So even if the tariff magic works, it can only ever bring a handful of jobs making iPhones back to America.

The tariffs have succeeded so far because Americans simply eat the higher costs. Unlike broader market inflation, which increases costs on everything in the grocery store no matter what the consumer wants to buy, a person or business chooses to pay a higher tariff for Chinese-made goods, and this consumer choice makes all the difference to the political psychology of the tariff.

Americans got mad at Joe Biden when all the groceries got more expensive. They don’t mind so much when they are asked to pay more for Chinese food. Imagine a $1 federal tax on every plate at Chinese buffet restaurants: it would probably not deter you from eating Chinese for lunch, nor would it feel like a more general imposition on your personal economy.

Trump has recently concluded new, bilateral trade deals with Philippines, Japan, Indonesia, and now the European Union. The deal with the EU sets mutual tariff rates at 15%, exempts a number of critical products, gives American companies better access to European markets, and fills the coffers at the Treasury Department, to the relief of the American taxpayer. Trade negotiations with China are taking longer, as predicted, because China is the exceptional nation in Trump’s tariff policy.

Stephen Miran, Trump’s tariff guru, said months ago that the high tariff rate announcements would induce some market shock, but those rates would come down over time, with negotiations, while the market adjusted. Tariffs are only the initial leverage in a larger plan to reinvent the world economic order on American terms through an historic “Mar-a-Lago Accord” that establishes fairer rules of trade for America. There is in fact a plan, I was gratified to learn. Trump is not just making it up as he goes.

American tariffs were in fact historically low, and very low relative to almost every other country in the world, which has reduced their ability to retaliate. Miran argues that in the past, this imbalance was acceptable to presidents who wanted to win the Cold War. Then, after 1991, the United States tried to win friends and influence people by leaving tariff rates low at the expense of American manufacturing. According to Miran, the dollar being the world’s reserve currency prevented currency exchange rates from equalizing the constant trade deficits of the last 46 years.

Recall that when Donald Trump first considered running for president in 2000, it was on the ticket for Ross Perot’s Reform Party, a populist reaction to the offshoring of tens of millions of factory jobs. ‘America First’ and ‘Make America Great Again’ slogans appeal to the sense of loss in the American hinterland. Miran’s monetary theory appealed to Trump because it fit his world-view. If it just happens to also work, then who are we to complain?

A big deficit challenge remains. The Big Beautiful Bill is going to increase the deficit, so tariffs must continue to grow in revenue. While the probability of a recession has declined, we still may have one this year. In fact, since there was a slight drop in GDP during the first quarter, final results for the second quarter may very well establish that we have already been in a mild recession. Yet consumer confidence is actually growing, so we may already be climbing out of any recession now, as I write these words. A stronger economy will produce more revenue, per classical economic theory.

Many variables remain to be resolved and we will not have full information on this experiment until 2026. In the meantime, what information we do have seems slightly favorable. Tariffs have not destroyed the global economy, nor have they deeply damaged American relationships abroad. They may even be working as intended. Who saw that coming? One guy did.