Name: On Off-and-On Again Tariffs, Trade and Debt | CME Group's Market Signals
Uploaded: 2026-02-27T15:44:00Z
Duration: 5 min 31 s
Description: Join us on a tariff roller coaster ride as we assess its impact on trade and budget deficits.

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Join us on a tariff roller coaster ride as we assess its impact on trade and budget deficits.

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On Off-and-On Again Tariffs, Trade and Debt | CME Group's Market Signals

Thank you and welcome to another episode of CME Group's Market Signals. Hello, Erik.

Hi. Thank you for having me back.

It's great to see you again. Lots to talk about as always. So let's get to it. One of the biggest news this week is all about tariffs. We ran a piece of the journal yesterday with a question I will post to you: how much of a wild card for the economy is this latest round of off-and-on-again tariffs?

Well, I don't think it's that much of a wild card because the overall tariff rates on average haven't really changed all that much. Now with the previous round of tariffs, there were different levels of tariffs for different countries. Basically, that got replaced over the weekend by a standard 15% tariff, which means some countries will now have somewhat higher tariffs, other countries somewhat lower tariffs, but it all kind of washes out to be roughly the same. I think the bigger question though is it creates a lot of uncertainty about what happens when the current set of tariffs expire about 150 days from now towards mid to late July.

So Erik, we're talking about two kinds of deficits here, right, these tariffs are targeting: the budget and trade deficits. What was the impact in 2025, and what can we expect this year with these latest developments?

Well, let's start with the budget deficit because that's really easy to measure. Going into last year, customs duties or tariff revenues came to about 0.2% of U.S. GDP. By the end of the year, that was up to around 1%. So it basically shrank the budget deficit by 0.8% of GDP and caused the budget deficits to become a little bit smaller than it would've been otherwise. In terms of trade, it was more complicated. We first saw a gigantic surge in the amount of imports coming into the United States in Q1. Then we saw a tremendous decline in imports in Q2 and Q3, and that lasted through about October. But then imports started ramping up again in November and December, because companies began to burn through all of their pre-tariff inventory. And so this created a lot of volatility into trade numbers and by extension into GDP numbers.

So speaking of deficits, we seem to be in good company. There seems to be a global deficit consensus going on with economies like the U.S., China, France, and the UK running large deficits without meaningful plans to rein them in. What is a tipping point in the debt-to-GDP ratio that will force a fiscal reckoning by the bond markets?

Well, that's a really, really tough question, and the answer seems to vary from one country to another. If you have a gigantic pool of domestic savings like China and Japan have, you can probably have much, much higher levels of leverage than, say, the United States, which has a much smaller deficit. United States, on the other hand, also has the global reserve currency, which gives it special powers that are not the case, for example, for the United Kingdom, which has already triggered a run on the bond market back in 2023 when Liz Truss was the prime minister. And then lastly, you have the case of France as well as the other Eurozone countries. They essentially gave up control of their own monetary policy to a supranational central bank in 1999. And so their level which they could trigger a potential bond market route might be much lower than some of these other countries as they can't rely on the central bank to step in and buy the debt.

Erik, let's bring in Japan. You recently wrote about historic win by Japanese Prime Minister Sanae Takaichi, whose policies are expected to be stimulative and potentially transformative. How will Sanaenomics, in your words, reshape the narrative around the yen, Japanese equities, and government bonds?

Well, that's a really good question. We don't exactly know how investors will react to it over the long term, but what she proposes is basically an enormous fiscal stimulus. It will invest both in domestic industries as well as in the Japanese military, as well as cutting certain taxes like the value added tax on food. And so all of us could stimulate a great deal of economic growth. So on the one hand, that could be potentially positive for equities. It could be positive for the currency, usually currencies like stronger growth. On the other hand, it could also mean much bigger budget deficits, which could potentially push bond yields higher, not only because there'll be more debt issuance, but perhaps also more concern about future inflation.

So finally, Erik, if the 21.3 trillion yen, or approximately $136 billion, in spending boost succeeds in stimulating growth, but then also pushes JGB yields higher, what are the risks of Japan's debt financing?

Well, it could be an enormous risk because Japan has 200% debt to GDP, which is roughly twice what the United States, France, or Britain have. And Japan grew accustomed to a very long period of zero rates. So if they suddenly encounter higher financing rates, that could create a much larger structural budget deficit.

Well, we have to leave it there, Erik. Thank you so much. We'll see you next time.

Thank you for having me.