Donald Trump has promised that he will use tariffs much more broadly and aggressively than his previous administration, both to raise tax revenues and to strengthen America’s industrial base. However, tariffs are an inefficient way to raise funds, harm the economy and hit the finances of poorer households hardest. A universal rate 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 United States would suffer the largest contraction.
There is no doubt that Donald Trump will increase tariffs, perhaps significantly. Although they may make sense in specific cases, his campaign rhetoric has focused on across-the-board tariffs against all trading partners. Trump and some of his close advisers seem to sincerely believe that tariffs can boost the U.S. economy on several fronts. In a recent speech, Trump touted the tariffs as a major potential source of tax revenue, also saying they could rebalance trade, penalize U.S. companies that move production offshore, rejuvenate America’s manufacturing base and repair its tax base. . However, economic theory, testing and simulations indicate that generalized tariffs would not only fail to achieve these objectivesbut they would probably be counterproductive.
Tariffs are essentially a tax on U.S. purchases of imported goods. When the government imposes a customs duty, the importer must pay that tax to the U.S. Treasury, usually as a percentage of the price paid to a foreign exporter. Importers can respond in three ways: pass on tariffs to customers, absorb them into their profit margins, or renegotiate contracts (and/or seek cheaper suppliers). Studies on 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 only on goods in which they have a comparative advantage .
Donald Trump’s latest tariff proposal constitutes an escalation well beyond his previous trade war. A blanket tariff on all imports would increase 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, thereby 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 others under Biden, have already lowered 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 a number on this. Economists at the Peterson Institute for International Economics (PIIE) estimate that a 10 percent global tariff, combined with retaliation, would reduce U.S. GDP by 0.9 percent in 2026, leaving it permanently reduced by one quarter point. Interestingly, 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 heavily exposed to international markets, and tariffs and a strong dollar would reduce foreign demand. Furthermore, weaker 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 the imposition of higher customs duties increases the prices of consumer and intermediate goods, contributing to an increase in inflation of 0.6 percentage points above the baseline level in 2025. Our own work shows that inflation could increase by 1.5 percentage points if the United States imposed a tax. a universal tariff of 10%, 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 US policy.
Beyond the general economic burden, customs duties function as a consumption tax, more regressive and heavier on lower-income households than other taxes, such as personal income. The Center for American Progress estimates that a 10 percent tariff would mean an annual tax on households equivalent to about $1,500, a higher amount for lower-income families than for wealthier families. When it comes to fiscal policy, Trump’s agenda boils down to a regressive tax cut financed by a regressive tax increase.
The exact impact of Trump’s trade policy is highly uncertain. On the one hand, he 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 believe would not be the case, the uncertainty associated with this strategy would deter investment and dampen growth. Furthermore, it would also mean that any extension of Trump’s proposed tax cuts would be largely deficit-financed, which would likely lead to higher long-term interest rates.
