Trade tariffs introduced (although, at the moment, partially frozen for 90 days) by the Trump administration are expected to produce inflation in the domestic market by leading to a major loss of purchasing power for U.S. citizens. Tariffs are also expected to produce a recessionary effect on the economy thus leading to a contraction of the overall tax base and reducing the effective tax surplus of import taxes. While generating new “customs” revenue, in other words, these would end up having a marginal net impact on the federal budget with total benefits perhaps less than the macroeconomic costs. This is claimed by a Yale University study published in recent weeks.
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Heaviest tariffs in 116 years
Announced on April 2nd, the tariff plan prepared by the White House – which is likely to evolve – includes a minimum 10 percent tariff on imports from almost every country in the world plus new, higher impositions on some 60 countries and additional previously introduced tariffs. The analysis, conducted by researchers at Yale’s Budget Lab in collaboration with S&P Global and released the same day, presents all the data associated with two scenarios. Namely:
“(1) The fiscal and economic effects of both the April 2nd policy, without considering the other tariffs that have gone into effect so far this year or international retaliation, and, 2) all US tariffs that have gone into effect in 2025 (to date, ed.)”
What is certain is that the size of the measure may already be described as historically resounding. “The April 2nd action is the equivalent of a rise in the effective US tariff rate of 11 ½ percentage points,” the authors explain. “The average effective US tariff rate after incorporating all 2025 tariffs is now 22 ½%, the highest since 1909.”
Impact on the economy
The risk of a boomerang effect, the study suggests, is real. Just the latest measure will lead to a contraction in real GDP growth (minus 0.5 percentage points in 2025, minus 0.1 next year) and a sharp decline in exports in the long run: -10 percent. The recessionary effect on U.S. real GDP, the authors explain, will stabilize between now and 2035 at an average loss of 0.4 percent. Which, on the size of the U.S. economy, is equivalent to $100 billion (real value 2024) less per year.
Considering all the tariffs in place the situation worsens. The impact on 2025 GDP is worth almost a full percentage point less (-0.9 percent). Finally, the long-term impact amounts to six-tenths of a point. That is an average annual loss of $180 billion in real terms per year for the next ten years.
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Less damage for China, expansive effect in UK and EU
Globally, the repercussions will not be uniform. Some countries will benefit indirectly from U.S. protectionist choices while others – especially those more trade-integrated – will suffer collateral damage.
Taking into account all the 2025 tariffs (April 2nd and others already in place), for example, an average loss on GDP of 2.1 percentage points is estimated in the long run for Canada.
Other major partners, however, will even experience positive effects: this is the case for the United Kingdom and the European Union, which will even register modest additional growth of 0.2 and 0.1 percent, respectively, in the long run. China, on the other hand, will suffer a negative impact of 0.2 percent of GDP. A damage, in relative terms, less than the one that will be experienced by the U.S. (the aforementioned -0.4 percent average).
More inflation, less purchasing power
The recessionary impact on GDP is a key issue challenging, at least in part, the main argument in support of the tariffs: tax revenues. At present, the tariffs in place are expected to generate total revenue of $3.1 trillion in 10 years. But the negative effect on GDP and the resulting decline in the tax base requires adjusting the figure by subtracting nearly $600 billion.
On balance, in short, that would leave about 2.5 trillion. But every trade war, as we know, generates inflation. Making everyone a little less rich.
In the long run, the current U.S. tariffs and the announced response of the affected countries, researchers explain, imply an average price hike of 2.3 percent. That means “a loss of purchasing power of $3,800 per household on average in 2024 dollars.”
The poor pay more
But there is more: the tariffs, in fact, disproportionately affect low-income families, who, while “paying” less in absolute value, suffer the highest damage in relation to their economic availability. Considering all tariffs (April 2 and earlier) the richest 10 percent of Americans suffer in the long run a loss of purchasing power of more than $8,000. That is 1.6 percent of their income.
At the same time, for people in the second decile (the richest 10% of the population and the poorest 10% of the remaining 80%) the loss on a 10-year basis is worth $1,700. Or 4% of their income. With a loss, in relative terms, 2.5 times greater than that suffered by the richest decile.
