Donald Trump has promised that he would use tariffs much more broadly and aggressively than his previous administration, both to increase tax revenue and to boost the US industrial base. However, tariffs are an inefficient way to raise money, hurt the economy and hit the finances of the poorest households hardest. A universal tariff of 10% could reduce US GDP by 1% and increase inflation by half a percentage point. Among sectors, durable goods manufacturing activity and employment in the US would suffer the greatest contraction.
There is no doubt that Donald Trump will raise tariffs, perhaps significantly. Although they may make sense in specific cases, his campaign rhetoric has focused on generalized tariffs against all trading partners. Both Trump and some of his close advisers seem to sincerely believe that tariffs can boost the US economy on multiple fronts. In a recent speech, Trump touted tariffs as a major potential source of tax revenue, also arguing that they could rebalance trade, penalize American companies that offshore production, rejuvenate America’s manufacturing base and repair its tax base. However, theory, tests and economic simulations indicate that widespread tariffs would not only fail to achieve these objectivesbut they would probably be counterproductive.
Tariffs are essentially a tax on American purchases of imported goods. When the government imposes a tariff, the importer must pay this tax to the U.S. Treasury, usually as a percentage of the price paid to a foreign exporter. Importers can respond in three ways: passing the tariff on to customers, absorbing it into their profit margins, or renegotiating contracts (and/or seeking cheaper suppliers). Studies on the 2018 tariffs reveal that the cost of these tariffs it was borne almost entirely by American households and businesses rather than foreign exporters.
Simply put, protectionism reduces the benefits of trade, as consumers pay more than necessary for imports and their domestic substitutes, and domestic producers stop focusing solely on those goods in which they have a comparative advantage.
Donald Trump’s latest tariff proposal is an escalation far beyond his previous trade war. A blanket tariff on all imports would multiply the value of goods subject to their previous tariffs tenfold. Universal tariffs would raise the price of all imported goods, including intermediate goods essential to domestic manufacturing, undermining the competitiveness of U.S. exports. Imposing new tariffs would likely provoke retaliation from trading partners, like last time, adding indirect costs and inefficiencies that would extend beyond the direct hit to U.S. exports. According to the Tax Foundation, the impact of tariffs imposed under the first Trump administration, as well as additional ones under Biden, have already depressed long-term GDP by 0.2%. The impact of a universal tariff regime would be a multiple of these estimates.
Model-based analyses, which capture the structure of the economy and the feedback loops of different shocks, can help us put some numbers on it. Economists at the Peterson Institute for International Economics (PIIE) estimate that a 10% blanket tariff, combined with retaliation, would reduce US GDP by 0.9% in 2026, leaving it permanently reduced by a quarter point. Curiously, the PIIE concludes that the manufacturing of durable goods would be the most affected sector, both in terms of production and employment. Production of durable goods would decline in part because the sector is highly exposed to international markets, and tariffs plus a strong dollar would reduce foreign demand. Furthermore, lower aggregate demand would reduce private investment and, therefore, domestic demand for durable goods. The sector is also affected by its dependence on China, Mexico and Canada for intermediate inputs. The manufacturing sector would therefore experience a contraction in demand and a shock to the cost of inputs.
The PIIE also finds that imposing higher tariffs increases the prices of consumer and intermediate goods, contributing to an increase in inflation of 0.6 percentage points above the baseline in 2025. Our own work shows that Inflation could rise by 1.5 percentage points if the US imposes a universal 10% tariff, although our estimate probably overestimates the final impact, since we do not take into account the disinflationary impact of a stronger dollar and relatively more restrictive U.S. policy. Fed.
Beyond the general economic burden, tariffs function as a tax on consumption, which is more regressive and burdensome for households with lower incomes than other taxes, such as individual income. The Center for American Progress estimates that a 10% tariff would mean an annual tax on households equivalent to about $1,500, a larger amount for low-income families than for wealthier ones. As fiscal policy, Trump’s agenda amounts to a regressive tax cut financed by a regressive tax increase.
The exact impact of Trump’s trade policy is very uncertain. For one thing, he has mentioned a wide range of figures during his campaign. However, the general direction is clear. And even if tariffs were used primarily as a negotiating tool, which we do not believe would be the case, the uncertainty associated with this strategy would deter investment and hamper growth. Furthermore, this would also mean that any extension of Trump’s proposed tax cuts would be largely deficit-financed, which would likely push up long-term interest rates.
#Tariffs #ineffective #regressive #counterproductive
