Say Hello To The ‘External Revenue Service’

Via Rabobank,

After US PPI yesterday surprised weaker and the US NFIB small business survey hit a six-year high, partly on hopes for lower inflation ahead, today is all about US CPI.

The hope was the data would be soft enough to halt the move higher in bond yields, which shrugged off a drop in oil prices yesterday, the rising dollar, falling stocks, and market chatter of a potential Fed hike in 2025… and a small miss for CPI sent yields careening lower…

However, rather than the higher/lower monthly gameshow, let’s look at the structural factors at play.

Few in markets called the last inflation episode.

March 2021 saw US headline CPI go over 2%, where it has still not returned and is trending higher: today’s consensus is another rise to 2.9%. We can’t claim any prizes as such, but in early 

President-elect Trump just announced a new “EXTERNAL REVENUE SERVICE”:

 “For far too long, we have relied on taxing our Great People using the Internal Revenue Service (IRS). Through soft and pathetically weak Trade agreements, the American Economy has delivered growth and prosperity to the World, while taxing ourselves. I am today announcing that I will create the EXTERNAL REVENUE SERVICE [ERS] to collect our Tariffs, Duties, and all Revenue that come from Foreign sources. We will begin charging those who make money off with Trade, and they will start paying, FINALLY, their fair share.” 

Chatter is the ERS may come under the Treasury, where economic statecraft, whereas tariffs are currently collected by the Department of Homeland Security. This is still compatible with what I said yesterday about potential US tariffs T+1 or gradually scaled up, to ensure supply chains shift to the US before prices have to rise.

The historic pattern of US revenues –with a smaller state– is that until WW1 tariffs amounted to around 50%. That dropped sharply post-war as the US tried, and failed, to build a liberal world order to keep it safe and prosperous, and to close to zero after WW2, when it built a partial liberal world order with strong guardrails that won it the Cold War. Today, tariff revenue accounts for very little US revenue, albeit double what it was pre-Trump. Pushing tariff funding back up via the ERS –and domestic taxes down– reshapes the entire US, and global, economy. It means the US returning to its historic pre-WW2 norm of mercantilism. (When I used that term in 2015 nobody understood it. Many still don’t even though it’s now close to being US policy: then again, how many covering China have read Marx, Lenin, or Mao?)

China is already mercantilist, with a $1 trillion 2024 trade surplus. Indeed, as the US puts geopolitical limits on who gets the best AI chipsthe US may have opened the door to actions vs. Chinese ocean carriers (such as Jones Act-style restrictions on their entry into US ports?), in response to a USTR report underlining how Beijing dominates global maritime industry, from shipping containers to shipbuilding to ocean carriers to ports.

Relatedly, US Defence Secretary nominee Hesgeth’s nomination hearing in Congress stressed a primary focus on rebuilding the lethality of the US military and readopting America’s historic Mahan naval-power maritime strategy. (Which would leave many others truly ‘In Deep Ship’.)

Tyler Durden Wed, 01/15/2025 – 10:46

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