US Secretary of State Rubio in his recent interview explained that American foreign policy has lost its direction in recent years, as the US has tried to solve every global problem, instead of focusing on its own interests. “The mission of foreign policy is to serve US interests.
"Every country acts in its own interest, and the United States must do the same," he stressed.
He also stressed that alliances are created when countries' interests align, but when there are differences, diplomacy must prevent conflicts. "After the Cold War, the US assumed the role of world government, but this approach is not sustainable."
What he means by unsustainable is the US government budget deficit of $1,8 trillion, the public debt of $36 trillion, and of course the huge trade deficit with many countries that exceeds $900 billion annually. So the US strategy is now focused on actions that:
- They will increase US revenues: imposing import tariffs, attracting investment so that the state can collect taxes from the profits of new investments, etc.
- They will reduce the spending that the US makes abroad to keep global trade free, and free navigation as they understood that they were shouldering this cost with military bases around the world, and aid supplies, but the US is the one that suffers the most, as it has the largest trade deficit in the world.
As part of these strategies, a global tariff war has begun. The value of goods imported by the US from Mexico in 2024 was $466 billion with a 25% tariff, expected to generate $116 billion in revenue. Imports from Canada were $421 billion with a 25% tariff, expected to generate $105 billion in revenue. Imports from China were $427 billion with a 10% tariff, expected to generate $42 billion in revenue.
Expected revenue from tariffs from these 3 countries is 263 billion. This amount does not even cover the trade deficit that the US has with China, which amounts to 280 billion.
These revenues will be realized if the US does not reduce imported quantities.
The value of imports from the EU was $576 billion, if it imposes 10% tariffs it expects to collect $57 billion in revenue. So the total expected revenue from tariffs could amount to $320 billion. The amount is too small to cover the huge $1,8 trillion deficit in the US government budget. For the fiscal year 2024, the US government collected $4,92 trillion in revenue and spent $6,75 trillion. That is, it spent 37% more money than it collected.
Thesoda of the United States come from: 49% from personal income taxes, 35% from social security taxes, 11% from corporate taxes, 5% from smaller percentages coming from customs duties, excise taxes, inheritance and gift taxes, as well as other sources.
The Expenses of the US are distributed as follows: 22% for Social Security, 14% for health care, 13% for debt service, 29% for health care, 13% for defense, 8% for income security, 1% smaller amounts for veterans benefits, education, regional development, and other expenses. Because the United States government consistently spends more than it earns each year, a deficit is created. This deficit is covered by the government borrowing by issuing bonds.
The accumulation of deficits has driven the United States' public debt to unprecedented levels. From $23,2 trillion in 2020, it has reached $36,1 trillion, which corresponds to 1/3 of global GDP and 123% of US GDP, up from the level of 119% reached in 1946. The EU has a public debt of about 85% of GDP. This huge increase in US debt since 2020 by 55% has not created growth and has led to chaotic economic problems. The debt is very small when compared to the value of the assets that the US owns. However, the debt requires the permanent payment of annual interest of 13% of government spending, greater than the amount of defense spending!
To deal with global tariffs, U.S. companies stockpiled huge quantities of products in warehouses with imports from China, Mexico, and Canada before they were imposed. Walmart’s imports from China increased by 33%. Columbia Sportswear’s imports increased by 50% from 2023 to 2024. This strategy relies on buying (frontloading) and storing products in advance to avoid being hit by future tariffs. Companies are trying to protect their budgets, especially for infrastructure projects that are planned 2-3 years in advance. Without frontloading, a 20% cost increase due to tariffs could seriously hurt project budgets.
Although storing products incurs additional costs, this is considered minor compared to the impact of tariffs. The strategy of pre-loading is not viable for all businesses. Smaller and medium-sized importers are the most vulnerable, as they have fewer resources and limited infrastructure.
Despite efforts through frontloading, tariffs ultimately raise prices for U.S. consumers. All supply chain costs, including those associated with frontloading, are typically passed on to consumers. Companies use frontloading to smooth out price increases and prevent sudden, steep increases in consumer costs.
Inequality in tariff management creates unfair competition. Large companies can maintain stable prices through strategic planning. Smaller businesses are more pressured in terms of profit margins and price flexibility. Prices of consumer goods are rising overall, regardless of the size of the business.
Mexico is the largest supplier of goods to the US, surpassing China, with $466 billion in imports. The Port of Laredo in Texas handles 35% of all trade between the US and Mexico. The main sectors that will be affected are:
– The automotive industry: 76% of the 3,5 million vehicles produced in Mexico annually are destined for the US market.
– Agricultural products and consumer goods transported in both directions.
The expected impacts are a possible loss of 400.000 jobs, mainly in US companies operating in Mexico. A reduction in Mexico's GDP by 1,7% over five years. An increase in inflation in Mexico by 2,3% due to the increase in the cost of imports.
How US consumers react will be crucial to the outcome of the tariff battle.
