Like any other presidential candidate, Donald Trump is trying to pander to as many people as he can so he can win the presidential election. He wants to appear pro-business by lowering the corporate tax rate. It is certainly better than Kamala Harris' proposal to hike the corporate tax rate. He is also trying to appease the working class with a tax exemption for tips and a tax break for overtime work, neither of which are good ideas. There is one policy idea where Trump thinks he is protecting domestic industries while simultaneously helping out everyday Americans by keeping their jobs here: high tariffs. Specifically, he wants to impose a 10 percent tariff on all goods and a 60 percent tariff on goods from China. You can read my critiques of the universal tariff and the Chinese-specific tariff for yourself, but I will be repeating some of those arguments here today.
As an analysis published last week from the Brookings Institution illustrates, there are multiple costs to firms. Any firm that sells imported goods will be scrambling to receive an exemption from the government. Unfortunately for small- and medium-sized enterprises, it is the largest enterprises that are best poised to receive the exemptions. Not only that, it is the larger firms that can better absorb the costs of tariffs. Because as much as I hate to burst Trump's bubble, it is not the other country that pays the tariff, but it is the domestic country (in this case, the United States) that pays. It is the consumer of those goods that pay. That can be an everyday worker, but it can also be a business that uses imported goods as an input of their business. On top of the administrative costs, Trump is going to cause greater strain on supply chains.
Because tariffs increase the price of doing business, it means that production is depressed and employment drops, especially for imports from countries that decide to retaliate against the United States with tariffs of their own. How bad would the impact to employment be? According to a Tax Foundation analysis of Trump's tax proposals, it would cost 674,000 jobs. The Tax Foundation found that the tariffs would also reduce the GDP by 0.8 percent in the next decade. If Trump increases the universal tariff from 10 percent to 20 percent, that would decrease the GDP by 1.3 percent.
In addition to jobs, what would it cost the everyday American? Looking at research from the Peterson Institute, the average household would lose $2,600 if Trump implements the tariffs and the permanent tax cuts from the Tax Cuts and Jobs Act (TCJA), which, as you can see below, would hit the poorest households the hardest in terms of percent of after-tax income.
I have been critical of Trump's tariff proposal since before he entered the White House. Why? You can read this primer from the Cato Institute on tariffs if you want, but we saw what happened with Trump's tariffs during his first term: a GDP reduction of 0.21 percent, wage reduction of 0.14 percent, a net loss of 166,000 jobs, and costing the average household $831 a year. To think these were the effects of tariffs that were much smaller. The impact of larger tariffs that would affect nearly 10 times the amount of trade would, as already illustrated, be even more harmful.
If Trump takes his tariff plan seriously and succeeds in implementing it, it will be the worst tariff plan since the Smoot-Hawley Tariff Act during the Great Depression, which not only reduced the GDP by 3 to 5 percent (Bernstein, 2008), but also caused other countries to retaliate and reduce their imports by an average of 28-33 percent (Mitchener et al., 2021) to the point of spiraling the U.S. economy into the Great Depression. So there are geopolitical ramifications in addition to the economic ramifications.
But let us bring it back to the economic aspects. Tariffs cost everyday workers their jobs, decrease their personal income, lower the GDP, and have the cost of the tariff ultimately passed to the consumers by making goods and expensive more for all. Through his "America First" shtick, he will make this country poorer by making it more expensive to do business and burden the everyday consumer. You would think we would have learned are lesson from the Smoot-Hawley Tariff Act or even when Trump implemented his tariffs. I truly hope that lesson sinks in for whoever is in the White House in 2025 because if not, it will be the American people that pay the price.
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