President Trump has promised to generate a “massive” amount of revenue with tariffs on foreign products, an amount so big that the president said he would create a new agency — the External Revenue Service — to handle collecting the money.
“Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens,” Mr. Trump said on Monday in his inaugural address, where he reiterated a promise to create the agency. “It will be massive amounts of money pouring into our Treasury coming from foreign sources.”
Much about the new agency remains unclear, including how it would differ from the government’s current operations. Trade experts said that, despite the name “external,” the bulk of tariff revenue would continue to be collected from U.S. businesses that import products.
Here’s what you need to know about what Mr. Trump has proposed.
The U.S. has an established system for collecting tariffs.
Tariff revenue is currently collected by U.S. Customs and Border Protection, which monitors the goods and the people that come into the United States through hundreds of airports and land crossings.
This has been the case nearly since the country’s inception. Congress established the Customs Service in 1789 as part of the Treasury Department, and for roughly a century tariffs were the primary source of government revenue, counted in stately customs houses that still stand in most major cities throughout the United States, said John Foote, a customs lawyer at Kelley, Drye and Warren.
With the creation of the income tax in 1913, tariffs became a minor source of government revenue, and after the Sept. 11 attacks, the customs bureau was moved from the Treasury Department to the Department of Homeland Security.
Customs officials today collect tariff revenue, but also monitor food safety, enforce intellectual property rights, inspect crops for pests and screen imports for goods made with forced labor, Mr. Foote said.
Creating a new agency is the provenance of Congress, not of the president, so it is not clear how the administration might go about establishing the new unit.
In an executive order issued on Monday evening, the president directed the leaders of Treasury, Commerce and Homeland Security to “investigate the feasibility of establishing and recommend the best methods for designing, building, and implementing an External Revenue Service (ERS) to collect tariffs, duties, and other foreign trade-related revenues.”
Tariff revenue rose in Trump’s first term and could grow
The money that the United States collected from tariffs grew significantly as Mr. Trump imposed levies on foreign metals, solar panels and thousands of goods from China in 2018 and 2019. The government collected $111.8 billion in trade duties, taxes and fees in 2022, up from $41.6 billion in 2018, according to Customs data.
That number could increase by multiples if Mr. Trump follows through on his promises to tax all American imports, and impose even higher levies on products from China. On Monday evening, Mr. Trump said that he planned to move forward with a 25 percent tariff on Canada and Mexico on Feb. 1, and was considering a universal tariff on all foreign products.
Mr. Trump and other Republicans are eagerly looking to tariff revenue to help to finance tax cuts. Still, tariffs are likely to earn just a tiny slice of what the United States takes in through income taxes. Economists say revenue from even very substantial tariffs would likely max out in the hundreds of billions of dollars, while the United States took in $4.2 trillion in income and payroll taxes last fiscal year. Tariffs would also decrease U.S. deficits, lower growth and raise consumer prices, the Congressional Budget Office calculated last month.
Tariffs are paid by importers
Mr. Trump insists that foreign countries pay the tariffs but it’s actually so-called importers of record — the companies responsible for bringing products into the United States — who pay tariffs to the government. Most importers sign up for a government electronic payment system, and the tariff fees are automatically deducted from their bank accounts as they bring products into the country.
Importers of record can be of any nationality: U.S. companies, U.S.-based divisions or branches of foreign companies, or foreign companies directly importing, without a business presence within the United States, Mr. Foote said.
But Richard Mojica, a customs lawyer at Miller & Chevalier, said U.S. importers “are usually U.S. companies.” He said that Mr. Trump had created confusion by saying that the External Revenue Service “would collect duties and tariffs ‘that come from foreign sources’ — a term that nobody understands.”
“I don’t see how the E.R.S. could collect tariff payments from a foreign manufacturer who is not also the U.S. importer of record,” Mr. Mojica added.
The question of who pays the tariff to the government is somewhat distinct from the issue of who ultimately bears the tariff’s costs. The importer can pass the cost of the tariff on to American consumers in the form of higher prices, or it could try to force its foreign factories to sell its goods more cheaply.
Every case is different, but several economic studies have found that American consumers mostly bore the brunt of Mr. Trump’s previous tariffs on China.
Some trade analysts say that the name “External Revenue Service” is an effort to disguise who really pays for tariffs.
Scott Lincicome, the vice president of economics and trade at the Cato Institute, which supports free trade, called the agency’s name “more branding than substance — and misleading branding at that.”
“Trump could call it the ‘Foreigners Pay the Tariffs Agency,’ and it still wouldn’t change the fact that Americans really are,” he said.