Impact of Potential US Trade Tariffs on the US Economy

Research about potential impact of tariffs on the US economy

Brookings: The U.S. tariff of 25% on imports from Canada and Mexico is going to reduce U.S. economic growth, reduce jobs, cause wages to fall, and prices to rise, and retaliation by Canada and Mexico will multiply the economic harms across the three countries.

  • Analysis doesn’t include China
  • The economic impacts are estimated over the medium term (three to five years).

Results:

  • Negative Impact on GDP Growth: Without retaliation, U.S. GDP growth may drop by 0.25 points ($45B loss). With retaliation, the decline exceeds 0.3 points ($75B loss)."
  • In the U.S., the 25% tariffs are estimated to cause over 177,000 job losses without retaliation, increasing to over 400,000 job losses if Canada and Mexico retaliate.

  • U.S. wages are projected to decline by 0.2% without retaliation and by 0.5% with retaliation.

  • U.S. exports to Canada and Mexico are expected to decline by around 6% with U.S. tariffs and 9% with retaliation.

  • The tariffs are projected to cause inflation to rise in the U.S. by over 1.3 percentage points without retaliation. With retaliation, the inflation increase is estimated to be around 0.8 percentage points due to the greater economic slowdown.

According to Tax Foundation tariffs will weight on GDP Growth and employment for the US instead of the opposite as Trump is declaring

  • The average tariff rate on U.S. imports could rise to 8.4% in 2025, the highest since 1946.
  • Second Trump administration tariffs now affect more than $1 trillion of imports, and when temporary exemptions for Canada and Mexico expire in April, the tariffs will affect more than $1.4 trillion of imports. (~5% of GDP)
  • The after-tax income of American households is projected to decline by 1% on average in 2026 across all income levels:
    • Lower-income households are hit harder in relative terms due to higher prices on basic goods.
    • The top 1% of earners face a smaller decline of 0.8%, but no group escapes the overall cost burden
  • Estimated $2.34 trillion in additional tax revenue over 10 years, but dynamic effects lower revenues as tariffs shrink the economy.
  • Academic and governmental studies find that the previous Trump-Biden tariffs have raised prices and reduced output and employment, producing a net negative impact on the US economy.

Potential Auto Tariffs Impact On PCE according to BoA. They also think tariffs to Mexico and Canada are likely to be negotiated

BoA says that their “back of the envelope” calculation is the announced auto tariffs would add around 0.25% to PCE inflation, but they continue to expect that “these announced measures will be negotiated down…Our view remains that the end game for Canada and Mexico is a renegotiation of USMCA and that any potential broad tariffs against these countries would prove be temporary.”


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