US imports are likely to see a new era. Last week, former president Donald Trump took the debate stage against incumbent Joe Biden. At one point, he surfaced what is likely to be his most controversial and impactful policy thus far for logistics: making tariffs the go-to policy in the international sphere. 

This wasn’t the first time Trump toyed with the idea of putting tariffs front and center of his policy endeavors. For months now, the former president has argued that, if elected come November, he will impose a 10% tariff on all imports and a 60% tariff on Chinese imports to the US. Not to mention more recent discussions of completely replacing the US income tax with a tariff system. A theory that might soon become a reality since Trump is now leading national polls (and not to mention his clear lead in two swing states and a partial lead in three more). 

Given the possibility of a Trump second term, we at Desteia wanted to calculate the likely impact of the former President’s policies. Most specifically, we sought to address two questions: is it possible to impose Trump’s desired tariffs? And, if done, how would the US economy look like as a result?

The answer to the first question is Yes—but with come caveats. Trump can, as head of the executive, impose tariffs under some broad conditions without needing approval from the US Congress. More specifically, the US president has the authority to impose tariffs against countries engaging in unfair trade practices—though the burden of proof needed to do so is unclear. The US constitution does grant Congress the explicit ability to regulate trade with foreign nations, but, in the past, Congress has granted the presidency special powers to regulate trade on its own—in particular when it comes to negotiating trade agreements. But even if some would consider Trump’s new tariffs an act of executive overreach, it is unclear if the Supreme Court would challenge the president on the matter as it failed to do so when Trump first used that same legislation to impose tariffs against China during his presidency.

So, in short, Trump would likely have the power to impose tariffs immediately through an executive order and it might face little challenges in doing so.

The next question, then, is how likely are these to cause a considerable impact to the US economy? Well, we found evidence that such impacts would be considerable.

Let’s assume President Trump passes his desired tariffs and, as a result, all imports to the US are now subject to a 10% tariff—60% in the case of China. We know that, for 2023, US imports from China equalled $426 bn, while imports from the rest of the world totalled an additional $2.6T. With the Trump plan in place, the US would’ve received an additional income from tariffs equal to $521.4 bn at such trade levels.

This is certainly a lot of money but, with an economy the size of the US with a GDP of $28T, it is merely a small fraction of resources—1.86% of GDP to be precise. Take, for instance, Trump’s proposed policy of replacing all income taxes with tariff revenue. At the time of writing, the Treasury department estimates that it receives some $1.7T worth of income taxes every year, while US citizens make some $21.21T worth of income every year—this means that, on average, a US citizen pays 8.01% of its income in taxes per year (a mistaken assumption given the progressive nature of the US tax system, but one that will allow us to calculate a simple equivalence). If Trump wanted to truly replace the income tax with tariffs, he would have to impose tariffs way above his intended 10%. In fact, to substitute income tax revenue, Trump would have to set tax rates at 56.24%—assuming equal tariffs to all countries for simplicity. 

This doesn't mean that lower tariff rates would have no impact on US tax policy—in the figure below, we estimated the needed tariff rate to progressively lower the federal income tax all the way to 0% while maintaining the same revenues for the US government; ie, the tariff and income rates that, together, result in revenues equal to $1.7T . With Trump’s current proposal, the US would be able to reduce the average income tax rate to 6.76%—a 1.26% decrease that could be further distributed amongst the lower echelons of US society. But, overall, tariffs, need to be a lot higher if Trump truly intends to replace the income tax. 

Equivalence Between Tax and Tariff Rates for the US

(Data from PIIE, US Treasury Department and US Census Bureau)

Thus far, we’ve considered tariffs as a one-sided phenomenon. That is, as a decision the US could take without facing further consequences. However, since tariffs are effectively imposing a tax to foreign nations, other parties will inevitably suffer from the novel Trump policies. In fact, it is estimated that, amongst the top ten US trade partners, Trump’s tax policies would result in an average impact worth 0.9% of their GDP. Countries like Mexico—currently the top US trade partner—could endure costs as high as 3% of their GDP while others like Germany and Japan would suffer a lower, albeit still meaningful blow of 0.4% of their GDP.

US Import Tariff Value as a Share of GDP by Country

(Data from American Action Forum)

Given the economic magnitude of these impacts, it is unlikely that countries subject to trade tariffs would stand idle as the US imposes new tariffs upon them. Quite likely, we could assume that many nations would respond to the US with equal if not greater tariffs, causing a further problem for the US government. While tariffs would result in an increased source of revenue, they could also account for a larger cost to US producers selling their products abroad.

In the figure below, we calculated the expected revenue from various tariff levels applied to imports to the US based on 2023 levels (again, assuming equal tariffs on all countries for simplicity). We included all the possible levels between the current US tariff level (1.4%), Trump's proposed tariffs (10%), and the tariff level needed to fully replace the federal income tax (56.24%). But we also included the likely costs from such tariffs if foreign nations were to respond accordingly to US tariffs. 

As the figure makes clear, every increase in tariff revenue comes with a corresponding increase in tariff cost. At Trump’s desired tariff rate of 10%, the US would earn $308 bn from its own tariffs, but would suffer $201.8 bn from costs—namely, it would only profit $106.2bn. At the tariff rate needed to replace the income tax, the US would gain $1.73T but pay $1.1T—again, profiting just $597bn and falling way behind its desired outcome.

Tariff Revenue and Costs Assuming Retaliation from Other Countries

(Data from PIIE, US Treasury Department and US Census Bureau)

But even under these analyses of the potential costs, we’ve thus far ignored the population most likely to suffer from tariffs: everyday consumers. Economists have long studied the impacts of tariffs on the economy, broadly concluding that tariffs are passed down to consumers in the form of higher prices. Namely, since producers now have to pay when importing a product, they make up for their loss by charging a higher price. This, in turn, results in large pains for consumers who now face higher prices than previously accosted.

Take, for instance, the Trump tariffs against China imposed during his 2016-2020 tenure. It is estimated that the average US household was forced to pay an additional $831 from the increased costs resulting from these tariffs. This, in turn, created an uneven impact of tariffs across the US based on the number of households in each district, as shown in the figure below.

Tariff Costs by US Congressional District

(Data from Center for American Progress)

In summary, Trump can impose his intended tariff plan if he so desires to do so. But, in doing so, he is likely to encounter a number of difficulties he is currently not expecting. His tariff plan is not ambitious enough to replace the US federal income tax and, even if it were, it would still face increased costs from corresponding tariffs from other countries. But, by far, US customers are most likely to suffer in the form of increased costs to their products. Tariffs, simply put, arent a silver bullet that could fix all US problems—they are a complex policy solution that can have serious consequences.