Liberation Day Tariffs? More Like Economic Captivity Threatening the U.S.' Economic Future

Since the beginning of his second term, President Trump has aggressively pursued tariffs. He implemented tariffs on Canada, China, and Mexico under the guise of the War on Drugs. There were the 25 percent tariffs on steel and aluminum, as well as the tariffs on automobiles and auto parts. Trump created more tariff turbulence with the so-called "reciprocal" tariffs. Announced on April 2 during what Trump labeled as "Liberation Day," these new tariffs entail a basic universal tariff of 10 percent along with additional tariffs ranging from 10 to 50 percent, depending on the country. Shortly after that announcement, I detailed how a) these tariffs are not truly reciprocal, but based on shoddy math; and b) Trump's rationale for these tariffs, the trade deficit, is baseless. 

Then in May, the U.S. Court of International Trade unanimously ruled that Trump's "Liberation" Day tariffs, along with tariffs adopted under the International Emergency Economic Powers Act of 1977 (e.g., the fentanyl-related tariffs), are unconstitutional. Unfortunately, the Supreme Court decided to not rule on the constitutionality of these tariffs before its last session was over. As such, a number of the country-specific "Liberation" Day tariffs (e.g., Brazil, Canada, India) went into effect last Thursday. The baseline 10 percent tariff from the "Liberation Day" announcement has been in effect since April 5. In 2023, I wrote a piece on what a universal 10 percent tariff would look like. Basically, it it is a regressive tax on U.S. consumers that will raise prices, strain supply chains, and particularly punish small businesses and ordinary households. But more on that in a moment. 

I already wrote about the fentanyl-related tariffs and the "Liberation" Day tariffs would have had a much greater impact on the economy, which is why I am focusing on those tariffs instead. The "Liberation" Day tariffs will constitute the largest tax increase as a percent of GDP since 1982 (Tax Foundation). The economic effects of these "Liberation Day" "reciprocal" tariffs had they been implemented cannot be overstated. Here are some estimates of economic impact from what these "Liberation Day" "reciprocal" tariffs would have cost (unless otherwise specified):

• American Action Forum: In April, the estimated cost to U.S. consumers and businesses was up to $371 billion a year. However, in August, AAF amended that estimate to over $400 billion, which is mainly due to the larger 30-percent tariff imposed on the European Union since the initial "Liberation Day" announcement. 
• JPMorgan: Last month, JPMorgan estimated that the effect of Trump's tariffs would increase the Personal Consumption Expenditures (PCE) index by 0.2-0.3 percentage points. This is to say that these tariffs will have inflationary effects, which will probably give the Federal Reserve pause in lowering interest rates. 
• Tax Foundation: An estimated $3.1 trillion over ten years ($310 per year), with the average household cost amounting to a $2,100 for the average household in 2025 alone.
• Wharton School of Business: Reduce GDP by 8 percent and wages by 7 percent. A middle-income household faces a $58,000 lifetime loss in earnings. These tariffs would be twice as distorting as increasing the corporate tax from 21 percent to 36 percent, which is impressive given how distorting corporate taxes are. 
• Yale University: In April, Yale's Budget Lab estimated the following effects of the "Liberation" Day tariffs: consumer prices to increase by 1.3 percent in the short-run; the average household would lose $2,100 in purchasing power; and a reduction U.S. GDP growth by 0.5 percentage points. 
• In its August update, the Budget Lab did not separate the "Liberation" Day tariffs. However, it confirms that with all the tariffs, the effective tariff rate will be 17.5 percent, which is the highest since 1935. This aggregate effect is estimated to translate into an average per household loss of $2,400 in purchasing power for the year 2025; a US GDP decline of 0.5 pp; and unemployment rising 0.3 percent (or a loss of 497,000 jobs). 

Keep in mind that these estimates are generally for the "reciprocal" tariffs alone.  When you compound these tariffs with the other tariffs, the overall effects of Trump's trade war are all the more glaring. As of August 1, the Tax Foundation's model puts its estimates of Trump's tariffs at a GDP reduction of 0.8 percent, a job reduction of 788,000 full-time equivalent (FTE), and capital stock decreasing by 0.7 percent. 

I want to point out something else that the American Enterprise Institute brought to my attention. A 0.8 percent GDP reduction might not sound like a lot at first. However, when you compare it to what the Congressional Budget Office projected long-term GDP to be before the "reciprocal" tariffs were in play (see below), it's a sizable reduction in GDP. 

The damage to the United States exceeds what think-tanks estimate or mainstream economic theory predict. We have seen this tariff terror before. During his first term, Trump's tariffs resulted in 166,000 fewer jobs, wages reduced by 0.14 percent, a GDP reduced by 0.21 percent, and an annual price tag of $51 billion. Even President Bush Jr.'s tariffs translated into 200,000 jobs lost and $4 billion in lost wages. 

Adding to this, the International Monetary Fund (IMF) analyzed tariffs across 151 countries from 1963 to 2014 (Furceri et al., 2019). Guess what the IMF found? "Tariff increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity. Tariff increases also result in more unemployment, higher inequality, and real exchange rate appreciation, but only small effects on the trade balance." That last bit about the trade balance is more important in these latest round of tariffs because trying to fix the trade balance is Trump's supposed justification for these farkakte "reciprocal" tariffs in the first place.

It would not have been surprising to see that these tariffs would have harmed investor and consumer confidence. History does not bode well for these sorts of tariffs. Back in 1930, President Herbert Hoover signed off on the Smoot-Hawley Tariff Act. Smoot-Hawley did not cause the Great Depression because the United States was already in an economic downturn at that point. But it sure made matters worse by turning a nascent recession into a full-blown depression (e.g., Mitchener et al., 2021).

Trump seems hellbent on playing Russian Roulette with repeating a history that no one ought to repeat. What Trump would have been "liberating" Americans from with his "Liberation" Day "reciprocal" tariffs is higher wages, cheaper goods, and a better quality of life.  These tariffs will make it more difficult for the everyday American to afford food, clothing, transportation, and household goods. American manufacturers will be walloped as well because they rely and parts and inputs from other countries. Those parts and inputs are about to get a whole lot more expensive with these tariffs. 

As I pointed out last October, Trump's tariffs do not help the working class or the struggling small business. It will benefit politically connected corporations and unions. Trump's "reciprocal" tariffs are so bad that economists, think tanks, and advocacy groups that have historically been in favor of tariffs think Trump is taking it too far. The United States should not have idiotic tariff policies because other countries do. No one can tax their way to prosperity, whether it is a wealth tax or a tariff. Maybe this time, the American people will learn this lesson the hard way.