The math seemed simple: charge more for entry, collecting more at the gate. For nearly a year, that logic held. But in the last quarter of 2025, something shifted in the American customs ledger.
Despite tariff rates on key industrial goods hitting their highest levels in decades (averaging nearly 35% on specific strategic imports), total customs duties collected by the Treasury have begun to slide.
It is a phenomenon economists call the Laffer Curve, usually applied to income tax, but now playing out in real-time at the port of Los Angeles and Newark. The premise is straightforward: at a certain tax rate (t*), you discourage the activity so much that the tax base shrinks faster than the rate rises.
We have hit t*.
The Vanishing Revenue
According to preliminary data from the Congressional Budget Office (CBO) and Customs and Border Protection (CBP) dashboards, customs receipts for November 2025 came in at $6.8 billion. This is down from $7.4 billion in October and $8.1 billion in September.
This 16% quarter-over-quarter drop coincides with the implementation of the “Phase 3” strategic tariffs that took effect in August.
The Physics of Trade Destruction
Why is this happening now? The answer lies in the concept of Elasticity of Demand. When you tax something at 10%, companies grumble but absorb the cost. At 25%, they pass it on to consumers. At 40% (the new effective rate for many consumer electronics and EV components implemented in Phase 3), they simply stop importing.
Where is Revenue, is the tax rate, and is the Tax Base as a function of that rate. The problem for the Treasury is that is not linear; it is highly elastic, meaning it reacts violently to price changes.
We are seeing three distinct behaviors destroying the tax base as of December 12th’s data:
- Total Demand Destruction: American factories, unable to afford the 40% lighter-weight chassis components, are slowing production lines. They aren’t buying domestic alternatives (which don’t exist at scale yet); they are simply buying nothing. Activity in the manufacturing sector has contracted for the third straight month (ISM Index at 46.2).
- Transshipping & Evasion: The “Vietnam Loophole” has exploded. Goods are being routed through third-party countries with lower tariff schedules, undergoing minimal “transformation” to change the Country of Origin label. Customs enforcement is overwhelmed, catching perhaps 5% of this leakage.
- Near-Shoring Substitutes: Mexico, exempt under USMCA constraints (though currently strained), is seeing record industrial investment. We are still importing the goods, but we are importing them tariff-free from Monterey instead of tariff-heavy from Shenzhen.
The Sector-by-Sector Breakdown
The aggregate data hides the specific industries that have already fallen off the cliff. The “Flash Report” released this morning by the Commerce Department paints a stark picture of where the revenue has gone.
Consumer Electronics: The First Casualty
High-margin consumer electronics were the first to hit the wall. With tariffs on finished laptops and smartphones rising to 45% under the “National Security” provision, imports dropped 22% year-over-year in November.
- Revenue Impact: A massive hole. This category historically made up 15% of total customs duties.
- Result: Prices for domestic inventory have skyrocketed, but new imports have ceased. The Treasury gets $0 from a laptop that isn’t imported.
Steel and Aluminum: The Zombie Tariff
Steel tariffs have been high for years, but the recent hike to 50% on “non-market economy” steel was the final straw.
- Volume: Down 40% YoY.
- Substitution: Construction firms have switched to alternative composites or halted projects entirely. The “Revenue per Ton” is higher, but the “Total Tons” is so low that net receipts have fallen by $200 million/month.
The Auto Sector: Paradox of Protection
The 100% tariff on Chinese EVs was intended to protect Detroit. It worked—no Chinese EVs are landing. But it also applied to components (Li-ion cells, magnets).
- Outcome: Ford and GM have slowed production due to costs. Import volume of parts plummeted 30% in Q4.
- Tax Base: The Treasury is collecting 100% of zero.
The Consumer Paradox: Inflation and Deflation
Here is the most confusing signal for the Fed: we are seeing simultaneous inflation and deflation.
- Scarcity Inflation: Goods that are no longer being imported (like budget 4K TVs) are seeing massive price spikes in the secondary market.
- Demand Deflation: Because the tariff wall is so high, total aggregate demand is falling. Shipping rates from Shanghai to Los Angeles have collapsed to $1,200 per FEU (Forty-Foot Equivalent Unit), levels not seen since 2019. This indicates a profound slowdown in the movement of stuff.
Prices at the shelf are up, but the volume of commerce is down. This is the worst-case scenario for revenue collection: Stagflationary Trade.
The Geopolitical Response
While the US Treasury counts its shrinking pile of coins, our trading partners are adapting with aggressive speed.
China’s “Fortress Economy”
Beijing’s response has not been to subsidize exports to the US (which would pay the tariff), but to pivot entirely. The “Belt and Road” nations are now the primary destination for Chinese surplus industrial capacity.
- The Shift: Exports to the Global South are up 15%. Exports to the US are down 18%.
- The Loss: The US government effectively “fired” its biggest taxpayer (the US importer of Chinese goods).
The EU’s Targeted Retaliation
Brussels has been smarter. Instead of a blanket wall, they have implemented a “Carbon Border Adjustment Mechanism” (CBAM) that effectively taxes US energy exports. This doesn’t hurt US tariff revenue directly, but it weakens the US dollar, making imports more expensive and further reducing volume.
Historical Parallels: 1930 vs. 2025
The ghost of the Smoot-Hawley Tariff Act of 1930 looms large. Then, as now, the goal was protectionism. The result was a collapse in global trade volume by nearly 66%. While we aren’t at Depression-level collapse, the mechanism is identical.
| Era | Peak Tariff Rate | Trade Volume Impact | Revenue Outcome |
|---|---|---|---|
| 1930 (Smoot-Hawley) | ~60% (Dutiable) | -66% Drop | Collapsed |
| 2018 (Trade War I) | ~19% (Avg) | -0.4% Dip | Increased +$80B |
| 2025 (Trade War II) | ~35% (Strategic) | -12% (Est. Q4) | Decreasing |
The difference between 2018 and 2025 is the elasticity. In 2018, rates were annoying but payable. In 2025, rates are prohibitive. The curve has bent.
[!NOTE] The Laffer Peak: Economists debated where the peak was. Turns out, for the US economy in 2025, the peak revenue rate was likely around 25%. We are now averaging 35%, and we are sliding down the back of the curve.
The Forward Outlook: 2026
What happens next? The Treasury will likely release a revised revenue forecast in January 2026, downgrading expectations. This will force a hard conversation in Congress.
If the goal is Protection, the policy is working (imports are down). If the goal is Revenue (to fund the deficit), the policy is failing catastrophically.
You cannot have both. You cannot ban the product and tax it too. We have reached the point where the contradictory goals of the tariff regime have collided with the mathematical reality of the Laffer Curve.
The revenue is falling. The only question now is how fast it hits the floor.
The Fiscal Cliff
This revenue drop comes at a terrible time. The Federal budget for FY2026 assumed a steady stream of roughly $120 billion in annual customs duties to offset tax cuts elsewhere. If the Laffer effect holds, we might end up with closer to $80 billion. That is a $40 billion hole in the deficit that appears out of thin air.
The irony of the Laffer Curve is that the only way to increase revenue now might be to lower the tariff rate. By dropping the rate back to a pain point businesses can tolerate (say, 20%), volume might recover enough to raise total receipts.
But politically, that is a non-starter. And so, we stay on the wrong side of the curve, charging a toll so high that traffic has simply stopped using the road.
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