The Economic Effects of President Trump's Tariffs

Summary: Many trade models fail to capture the full harm of tariffs. PWBM projects Trump’s tariffs (April 8, 2025) will reduce long-run GDP by about 6% and wages by 5%. A middle-income household faces a $22K lifetime loss. These losses are twice as large as a revenue-equivalent corporate tax increase from 21% to 36%, an otherwise highly distorting tax.

    Revenue Impact: President Trump’s tariff plan (as of April 8, 2025) is projected to raise significant revenue—over $5.2 trillion over 10 years on a conventional basis (with micro-elastic responses) and $4.5 trillion on a dynamic basis (with economic effects). This revenue could be used to reduce federal debt, thereby encouraging private investment.

    Comparison with a Corporate Tax Increase: Tariffs are estimated to raise about the same amount of revenue as increasing the corporate income tax from 21 to 36 percent, in the absence of these recent tariffs. While raising the corporate tax rate is generally seen as highly economically distorting, tariffs would reduce GDP and wages by more than twice as much. All future households are worse off. The estimated economic declines are likely lower bounds, with actual declines potentially even larger.

    Broader Economic Impact: Many existing trade and macroeconomic models fail to capture the full harm caused by tariffs. Larger tariffs reduce the openness of the economy, including international capital flows. This is especially costly under the nation’s current baseline debt path, which is increasing faster than GDP, that is generally excluded from trade models or treated as neutral (Ricardian). U.S. households would need to purchase more bonds, requiring bond prices to fall (yields increase), domestic capital investment prices to fall (the marginal product of capital increases), or both. Even conservatively assuming only domestic capital investment prices fall, the reduction in economic activity is more than twice as large as a tax increase on capital returns that raises the same amount of revenue.