Trump's Tariff Tough Talk

January 27th, 2025

Daniel Song

President Donald Trump has frequently promoted himself with attention-grabbing titles such as “very stable genius.” Now in his second term as president, he has dubbed himself “tariff man,” threatening to impose massive tariffs of up to 60% on China and 25% tariffs on the US’s biggest trading partners, Canada and Mexico. There are 3 main reasons why Trump is considering an extensive use of tariffs: as a revenue-raising tool, a political negotiating tactic, and a near-shoring mechanism for US manufacturing.

The first use of tariffs is to raise revenue. A brief by the Peterson Institute for International Economics found that Trump’s 10% across-the-board tariff proposals would raise about $225 billion per year, but even revenue-maximizing tariffs would only raise $780 billion, far less than the cost of Trump’s agenda, of which extending the 2017 tax cuts alone would cost $5 trillion. Most importantly, tariffs are regressive, hurting lower income Americans more because they spend more of their money on consumer goods and pay less income tax. Broadly, the bottom 80% of Americans would experience a loss in after-tax income if Trump used tariffs to pay for tax cuts with consumer prices being raised by $2,600 a year for the median household. And looking back on Trump’s first term tariffs, accounting for tariff revenue and gains to domestic producers, on net, the U.S. lost $7.2 billion of income, indicating that tariffs may not raise much money at all to finance Trump’s ambitious agenda.

The second use of tariffs is as a political negotiating tool to extract political concessions from other countries. This may have some success, as the substantial impact of tariffs on other nations may incentivize them to align with Trump politically to prevent a mutually damaging trade war. For starters, Mexico is considering increasing cooperation with the U.S. on drug trafficking and stopping fentanyl, Canada has committed to installing more cameras and sensors over the U.S.-Canada border, and Europe is working toward increasing defense spending to 2% of GDP, the NATO target that Trump has blasted European countries for not meeting.

The third use of tariffs is to bring manufacturing back to the U.S.. Unfortunately, this may be where Trump is least successful, as tariffs have caused manufacturing employment to decline by increasing the costs of imported intermediate goods for domestic producers and prompting other countries to retaliate against US exporters. In fact, any jobs created would come at such an immense cost that it would be more efficient to simply pay people in cash rather than artificially induce job creation via tariffs. For example, Trump’s 2018 tariffs led to a 12% increase in the prices of washing machines and dryers, reducing consumers’ disposable income and causing job losses in other industries. While the tariffs are estimated to have created 1,800 new jobs, the annual total economic cost per job to consumers was an estimated $817,000, far more than what these jobs would have paid. A different study found that, in general, any increase in U.S. manufacturing employment from tariffs is oﬀset by larger negative eﬀects from rising input costs and retaliatory tariﬀs. However, there may be a unique political consideration that heavily incentives Trump to impose tariff, irrespective of the economic impact. Despite workers in heavily Republican counties being the most negatively affected by the tariffs, recent research has found that voters most exposed to tariffs became less likely to identify as Democrats, more likely to vote to reelect Trump in 2020, and more likely to elect Republicans to Congress. This potential increase in political support may prove too much for Trump to resist.

To finish, it’s insightful to look back into history and examine the policies of the original “tariff man,” President William McKinley. Trump is evidently a big fan of McKinley, even ordering the tallest mountain in North America to be renamed Mount McKinley once again. Trump has also praised McKinley for leading the passage of the Tariff Act of 1890, which increased average duties across all imports from 38 to 49.5%. However, the legislation was highly unpopular amongst Americans for driving up prices, and Republicans were punished by angry voters by losing the House in the 1890 election, cutting the number of seats they held from 171 to 88. Considering Trump won this election by pledging to combat inflation, he may want to think twice about the political and economic consequences before embracing such an inflationary policy.