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Former President Donald Trump’s proposed 10 percent tariff would raise taxes on American consumers by more than $300 billion a year—a tax increase rivaling the ones proposed by President Biden. If implemented, the significant trade tax hike would trigger retaliatory tax increases on U.S. exports.
International trade is vital to the United States. Each year, Americans as a whole purchase more goods and services than they produce. By the same token, we save less than needed to fulfill our investment opportunities. International trade bridges the gap. We purchase the additional goods and services from abroad while the rest of the world lends us the money to do so by investing in U.S. bonds and businesses.
Trump’s proposal would deliberately throw a wrench in that process. In 2022, we bought more than $3.2 trillion worth of goods from other countries; imposing a new 10 percent tax on our purchases would raise U.S. taxes by more than $300 billion. It would create what Trump describes as a “ring around the U.S. economy” to discourage foreign companies from selling to U.S. consumers under the unfounded hope of boosting domestic production.
But rather than boost domestic production, the new tax would harm the U.S. economy through various possible channels.
One is through higher prices. Higher input costs for businesses lead to reduced production, and in turn, lower wages and profits. They can also lead to higher consumer prices, which reduce the value of our incomes because we can’t afford to purchase as much.
Another is through currency appreciation. A stronger dollar would help offset the price increases for U.S. consumers, but it would make it harder for exporters to sell their goods abroad. Again, the result is lower incomes for workers and business owners.
Whatever channel the tariffs take, Americans become poorer. In turn, the actual revenue collected by the government would be less than $300 billion because other tax revenues would fall.
Using the Tax Foundation’s general equilibrium model, we estimate a new 10 percent tariff on all imports would reduce the size of the U.S. economy by 0.7 percent and eliminate 505,000 full-time equivalent jobs.
Unfortunately, that would be the tip of the iceberg. Imposing an across-the-board tariff would threaten the entire system of global trade we currently enjoy.
U.S. exports totaled $2.1 trillion in 2022. If the rest of the world responded to the new tariff in kind, it would amount to $200 billion of new taxes for foreign governments. We estimate that would further reduce U.S. GDP by 0.4 percent and eliminate another 322,000 full-time equivalent jobs.
Taken together, we find Trump’s proposal of a 10 percent trade tax matched with in-kind retaliation would shrink the U.S. economy by 1.1 percent and threaten more than 825,000 U.S. jobs.
Indiana University economist Ahmad Lashkaripour estimates a global tariff war would, on average, shrink a country’s GDP by 2.8 percent—he finds the United States would experience a GDP drop of 1.1 percent, while smaller countries more dependent on imports would experience much harsher declines.
We know from decades of experience and evidence that tariffs reduce employment, productivity, and output. The past five years have demonstrated that reality all too well.
During his term, Trump imposed nearly $80 billion of tariffs on steel, aluminum, solar panels, washing machines, and thousands of products from China. President Biden has largely maintained them. The result? They have eliminated U.S. manufacturing jobs, harmed U.S. farmers, raised prices for U.S. consumers, and alienated our allies—all without changing China’s unfair trade policies or reviving protected domestic industries.
It appears the lesson has not been learned. Policymakers should embrace the system whereby U.S. producers can sell their goods and services to consumers across the world and U.S. consumers can access an abundant variety of goods and services produced across the world. Trump’s trade tax proposal threatens to upend this system—and we would all be poorer as a result.
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