Donald Trump likes to say he created the strongest U.S. economy in history. But the centerpiece of his plans for a second term — tariffs on imported goods, especially those from China — runs the risk of bringing the U.S.′ currently robust economy to a screeching halt, and possibly the world’s, as well.
Despite warnings from even conservative economists, Trump has stood by his proposed 10% tariff as both a moneymaker for the government and a way to show American strength.
“Number one, it’s great economically for us and it brings our companies back,” Trump said on CNBC March 11.
“It also gives us a big political power. Tariffs are tremendously powerful in terms of stopping wars, because they don’t want tariffs,” he added. “I made other countries sing with the threat of tariffs. And if you don’t have tariffs, we have nothing whatsoever on them.”
But economists across the political spectrum say Trump’s tariff plans, particularly with regard to China, the world’s second largest economy, would have a huge risk of backfiring and could supercharge inflation.
Mark Zandi, chief economist with Moody’s Analytics, said the U.S. and China combined produce between one-third to almost half of global economic output, and a trade war between them would be devastating.
“That decoupling of these two economies — the disengagement, the deglobalization — would be very tough for the global economy to digest,” he said. “Depending on how quickly it’s imposed and timing and all kinds of events, that would significantly diminish the global economy.”
Trump’s plans include a 10% tariff on almost all imported goods and higher tariffs in cases where another country has put a large tariff on U.S. goods or has devalued its own currency, as China is accused of doing.
In February, he said he was weighing a 60% tariff on Chinese imports specifically.
Zandi, though he served as an advisor to GOP presidential candidate John McCain in 2008, is seen as a Democratic favorite in the field. But even conservative economists have raised red flags about Trump’s plans.
The American Action Forum, a conservative think tank, said in a November study the 10% tariff would cut imports into the U.S. by more than 11% and trim the size of the American economy by 0.16% — that is, if no other countries retaliated.
But the picture changed, according to AAF, if what it called the more likely scenario ensued: trade partners reacting by putting in place their own tariffs on U.S. goods. In that case, the AAF estimated a 0.31% decrease in the size of the economy and a whopping 17.8% decrease in U.S. exports abroad.
Capital Economics, an economic analysis and consulting company with offices in London, New York, Toronto and Singapore, came to a similar conclusion in January.
“In our work on global fracturing, we have characterised the world as breaking into two distinct blocs — one US-led and one China-led. Trump’s plans to double-down on a trade war with China would represent a major escalation in that fracturing,” wrote Paul Ashworth, chief North America economist for the company.
In his estimation, the hit to the U.S. economy would be about 1.5%, with two-thirds coming from the broad import tariff and the rest from the 60% tariff on Chinese goods. But he wrote the estimate also depended on how other countries and the Federal Reserve could react, as well as whether the money from the tariffs was used for deficit reduction or to finance new spending or tax cuts.
Trump has continued to tout these ideas on the campaign trail, and as recently as March 16 said at a rally that tariffs will be key to protecting the U.S. auto industry.
Asked about the possibility tariffs would hurt the economy, Trump in the CNBC interview insisted economists were simply wrong. On the prospect of retaliatory tariffs, Trump said China had failed to respond in kind when he imposed tariffs on some goods during his administration.
“But even if they do, let American companies come back to America,” he said.
China did hit back, though not as hard. In 2018, the U.S. imposed tariffs on $370 billion worth Chinese imports and China responded by putting tariffs on $110 billion worth of American goods, according to the Congressional Research Service. And Trump got Congress to approve $61 billion in relief payments to farmers from 2018 to 2020, to make up for business they lost due to the trade fight and then COVID-19.
Much of Trump’s rationale for tariffs, especially on Chinese goods, is his belief that Beijing is taking advantage of the United States because the U.S. runs a large trade gap — it buys more than sells — with China.
But many economists think individual bilateral trade gaps are meaningless. And in any case, the trade gap with China fell almost 27% in 2023, making it as small as it’s been since 2010.
A Trump campaign spokesperson did not return a request for comment.
Another likely byproduct of tariffs would be a faster rise in prices — higher inflation — as the cost of importing goods gets passed on to consumers. That would be ironic, given Trump’s accusations that Biden administration policies fanned the flames of inflation, which in 2022 ran at the highest level since 1982.
Add in other Trump plans aside from tariffs, like the “mass deportations” of undocumented workers that would crimp the supply of labor, and additional tax cuts, and the likely result would be major inflationary pressures.
“I don’t think it’s particularly arguable. I think, all else being equal, all of those policies would push prices up in various ways, through various mechanisms,” said Michael Linden, senior policy fellow at the liberal Washington Center for Equitable Growth.
“They’re likely to increase inflation, especially in an environment where debt is growing quite dramatically,” said Veronique de Rugy, senior research fellow at the libertarian Mercatus Center at George Mason University.
The Fed spent a lot of its political capital in raising interest rates to get inflation under control and could have to raise rates again if tariffs boosted inflation. But Lindsay Owens, executive director of the liberal Groundwork Collaborative think tank, said Trump could interfere there, too.
“The most likely thing you will see from Trump I think — we’ll see it on the campaign, but also you’d see in a Trump presidency — is just a very aggressive advocacy campaign against the Fed,” Owens said.
One possibility, she said, is Trump could try to replace Jay Powell as Fed chair if he did not acquiesce to Trump’s policy wishes.
Trump’s broader economic policy plans, if enacted, could also put the brakes on what has been the strongest post-COVID-19 pandemic economic recovery in the developed world.
The U.S. economy grew by 3.1% last year, confounding 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 disparities in employment and earnings across demographic groups,” Powell told Congress in early March.
Inflation has also fallen. While still not at the Fed’s target of 2% annual growth, inflation in the U.S. is below that of the world’s other major industrialized economies.
Trump has said he would use increased energy exploration revenues to pay off the government’s national debt. In order to pay off debt, you first need to run a budget surplus, Linden said, which is simply impossible just through more energy royalties. That, he said, is where things get tricky.
If Trump won’t raise taxes or cut the government’s biggest programs in the form of Social Security or Medicare, all that would be left to cut is the annual spending on the rest of the government.
Linden said that would need to decrease by about a trillion dollars a year just to balance out. And the economic impact of that kind of cut in federal spending would be severe, he said.
“It would be disastrous, there’s no question,” he said. “I think if you asked any economist who is not on the payroll of the Republican Party — I even think if you asked some of them — what would happen to the economy if you tried to ‘pay down the debt’ while also cutting taxes immediately, they would say you would have a massive recession.”
