Donald Trump likes to say that he has created the strongest US economy in history. But the centerpiece of his plans for a second term – tariffs on imported goods, particularly from China – risks bringing the currently robust U.S. and possibly the world economy to a complete standstill.
Despite the warnings of even conservative economists, Trump is sticking with his proposed 10 percent tariff because it both raises money for the government and is a way to demonstrate American strength.
“First of all, it's great for us economically and it brings our businesses back,” Trump said March 11 on CNBC.
“It also gives us great political power. Tariffs are hugely effective in stopping wars because they don’t want tariffs,” he added. “I made other countries cheer with the threat of tariffs. And if there are no tariffs, we have nothing at all.”
But economists across the political spectrum say Trump's tariff plans, particularly with regard to China, the world's second-largest economy, pose a major risk of backfire and could drive up inflation.
Mark Zandi, chief economist at Moody's Analytics, said the U.S. and China together produce between a third and nearly half of the world's economic output and a trade war between them would be devastating.
“This decoupling of these two economies – the withdrawal, the deglobalization – would be very difficult for the global economy to digest,” he said. “Depending on how quickly it is imposed, the timing and all possible events, it would significantly weaken the global economy.”
Trump's plans include a 10 percent tariff on almost all imported goods, as well as higher tariffs if another country has imposed high tariffs on U.S. goods or devalued its own currency, as China is accused of doing.
In February he has said he was considering a 60% tariff specifically on Chinese imports.
Although Zandi served as an adviser to Republican presidential candidate John McCain in 2008, he is considered the Democratic favorite in the field. But even conservative economists have raised concerns about Trump's plans.
The American Action Forum, a conservative think tank, said in a November study that the 10 percent tariff would reduce imports into the U.S. by more than 11 percent and reduce the size of the American economy by 0.16 percent – assuming that no other countries take countermeasures.
But the picture changed, according to AAF, when what it described as the more likely scenario occurred: trading partners responded by imposing their own tariffs on U.S. goods. In this case, the AAF estimated a 0.31% decline in the size of the economy and a whopping 17.8% decline in U.S. exports abroad.
Capital Economics, an economic analysis and consulting firm with offices in London, New York, Toronto and Singapore, came to a similar conclusion in January.
“In our work on the global rupture, we have characterized the world as breaking apart into two distinct blocs – one led by the US and one led by China. “Trump’s plans to intensify the trade war with China would represent a significant escalation of this divide,” wrote Paul Ashworth, the firm’s chief North America economist.
He estimated the damage to the U.S. economy would be about 1.5%, with two-thirds coming from the sweeping import tariff and the remainder from the 60% tariff on Chinese goods. But he wrote that the estimate also depends on how other countries and the Federal Reserve might respond and whether the money from tariffs is used to reduce deficits or to finance new spending or tax cuts.
Trump has continued to promote these ideas on the campaign trail, declaring as recently as March 16 at a rally that tariffs will be key to protecting the U.S. auto industry.
When asked about the possibility that tariffs would hurt the economy, Trump emphasized in the CNBC interview that economists were simply wrong. Regarding the prospect of retaliatory tariffs, Trump said China did not take retaliatory measures when it imposed tariffs on some goods during his time in office.
“But even if they do, let American companies return to America,” he said.
China hit back, although not as hard. According to the Congressional Research Service, the U.S. imposed tariffs on $370 billion in Chinese imports in 2018, and China responded by imposing tariffs on $110 billion in American goods. And Trump got Congress to approve $61 billion in aid payments to farmers from 2018 to 2020 to make up for the business they lost to the trade fight and then to COVID-19.
A large part of Trump's rationale for tariffs, particularly on Chinese goods, is his belief that Beijing is taking advantage of the United States because the U.S. has a large trade gap with China – it buys more than it sells.
But many economists consider individual bilateral trade gaps to be meaningless. And in any case, the trade gap with China fell by almost 27% in 2023, making it the smallest it has been since 2010.
A spokesman for the Trump campaign did not respond to a request for comment.
Another likely byproduct of tariffs would be faster price increases—higher inflation—as the cost of importing goods is passed on to consumers. That would be ironic, given Trump's accusations that the Biden administration's policies fueled inflation, which reached its highest level since 1982 in 2022.
Adding in other Trump plans alongside tariffs, such as “mass deportations” of undocumented workers that would restrict labor supply and additional tax cuts, would likely lead to significant inflationary pressure.
“I don’t think it’s particularly controversial. I think all of these measures, other things being equal, would drive up prices in different ways and through different mechanisms,” said Michael Linden, senior policy fellow at the liberal Washington Center for Equitable Growth.
“They are likely to increase inflation, especially in an environment where debt is growing dramatically,” said Veronique de Rugy, senior research fellow at the libertarian Mercatus Center at George Mason University.
The Fed invested much of its political capital in raising interest rates to control inflation and could have to raise rates again if tariffs spurred inflation. But Lindsay Owens, executive director of the liberal think tank Groundwork Collaborative, said Trump could get involved there, too.
“The most likely thing you'll see from Trump, I think — we'll see it in the campaign, but you'll also see it in a Trump presidency — is just a very aggressive advocacy campaign against the Fed,” Owens said.
One possibility, she said, is that Trump could try to replace Jay Powell as Fed chair if he doesn't comply with Trump's policy wishes.
Trump's broader economic policy plans, if implemented, could also slow the strongest economic recovery from the COVID-19 pandemic in the developed world.
The U.S. economy grew 3.1% last year, shattering widespread expectations of a recession and helping reduce economic inequality.
“The strong labor market over the past two years has also helped narrow long-standing differences in employment and income among demographic groups,” Powell told Congress in early March.
Inflation has also fallen. Although inflation in the US is still not reaching the Fed's target of 2% annual growth, it is below that of the world's other major industrialized countries.
Trump has said he will use increased revenue from energy exploration to pay down the government's national debt. In order to pay off debts, you first have to generate a budget surplus, said Linden, which is simply impossible through more energy taxes alone. Here, he said, things will be difficult.
If Trump doesn't raise taxes or cut the government's largest programs in the form of Social Security or Medicare, all that would need to be cut is annual spending for the rest of the government.
Linden said that amount would have to fall by about $1 trillion a year to balance out. And the economic impact of such a cut in federal spending would be severe, he said.
“It would be catastrophic, no question about it,” he said. “I think if you asked any economist who isn't on the payroll of the Republican Party – I think even if you asked some of them – what would happen to the economy if you tried to pay down the debt and at the same time cut taxes immediately, they would say there would be a massive recession.”
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