Trump's tariff plan would shave as much as $325 billion off US gross domestic product
Per Bloomberg:
Like all economic policies, tariffs involve trade-offs. In a recent analysis at The Budget Lab at Yale University, a nonpartisan fiscal research center, I’ve used economic modeling and data to quantify some of these trade-offs. In short, while proposed tariffs may generate some revenue, they come at a steep cost to the economy.
While some policymakers and economists argue that high tariffs had merit in the early 19th century when domestic industry was still developing, newer research questions the relevance of this reasoning today. There may be non-economic justifications for specific tariffs, such as national security, but these come with economic downsides.
Recently, Trump has outlined plans to return tariffs to historically high levels, proposing broad tariffs of 10% to 20% on imports from all trading partners, a potential 60% tariff on all Chinese imports, and a possible 200% tariff on Mexican imports. At The Budget Lab, we modeled 12 scenarios combining these rates and considered cases with and without retaliation from the targeted countries.
Tariffs are fundamentally a tax, and Trump’s proposals would indeed raise significant revenue that could help reduce the federal budget deficit, which was $1.8 trillion for fiscal year 2024. Under a 10% tariff on all imports and a 60% tariff on Chinese imports, the U.S. could raise $2.6 trillion over 10 years if other countries do not retaliate. Raising tariffs to 20% on non-Chinese imports would bring in $4.4 trillion.
However, several caveats limit tariffs as a revenue source. First, other countries would likely retaliate quickly, as China did in response to Trump’s 2018 Section 301 tariffs. Retaliation would reduce U.S. tariff revenue by 12% to 26% per proposal, meaning the 10%/60% scenario would raise just $2.2 trillion, while the 20%/60% proposal would generate $3.4 trillion.
Second, these estimates assume the economy’s size remains constant. In reality, past data and our modeling indicate that tariffs would likely shrink the economy. Any benefits from reshoring would likely be outweighed by rising input costs, decreased investment, and reduced consumer spending and real incomes. Depending on the scenario, real GDP could decline by 0.5% to 1.4% in the medium term, translating to an economic loss of $120 billion to $325 billion today. A smaller economy also means less tax revenue—resulting in $400 billion to $1 trillion less revenue than conventional estimates.
Finally, tariffs would raise prices and reduce real household incomes. Imports account for about 10% of all consumer spending, with a quarter of consumer goods being imported, so tariffs would hit households hard. Consumers would see price increases of 1.2% to 5.1%, which is equivalent to between seven months and 2.5 years of normal inflation. This would cut the average household’s purchasing power by $1,900 to $7,600 in 2023 dollars. Since tariffs disproportionately affect lower-income families, the financial strain would be especially tough for those who can least afford it.