Within the first few months of 2018, the Trump administration enacted tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. s on imported solar panels, washing machines, steel, and aluminum. The administration is expected to impose a 25 percent levy on approximately $50 billion worth of Chinese imports as soon as tomorrow. The proposed Section 301 tariffs are the result of an investigation conducted by the Office of the U.S. Trade Representative (USTR), which found that China engages in unfair trading practices.
We’ve updated our previous analysis to include tariffs on steel and aluminum, as well as the tariffs on approximately $50 billion worth of Chinese products. Our previous analysis modeled tariffs on imports of $150 billion. This analysis models the enacted and soon-to-be-enacted tariffs on about $95 billion worth of imports. We find that the resulting $21.5 billion in tariffs would lower GDP and wages by 0.06 percent, lower employment by the equivalent of 45,293 fewer full-time jobs in the long run, and make the U.S. taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burden less progressive.
Tariffs and the Economy
Economists generally agree that free trade increases the level of economic output and income, and conversely, that trade barriers reduce economic output and income.[1] Historical evidence shows that tariffs raise prices and reduce available quantities of goods and services for U.S. businesses and consumers, which results in lower income, reduced employment, and lower economic output.[2]
Tariffs could reduce U.S. output through a few channels. One possibility is that a tariff may be passed on to producers and consumers in the form of higher prices. Tariffs can raise the cost of parts and materials, which would raise the price of goods using those inputs and reduce private sector output. This would result in lower incomes for both owners of capital and workers. Similarly, higher consumer prices due to tariffs would reduce the after-tax value of both labor and capital income. Because these higher prices would reduce the return to labor and capital, they would incentivize Americans to work and invest less, leading to lower output.
Alternatively, the U.S. dollar may appreciate in response to tariffs, offsetting the potential price increase on U.S. consumers. However, the more valuable dollar would make it more difficult for exporters to sell their goods on the global market, resulting in lower revenues for exporters. This would also result in lower U.S. output and incomes for both workers and owners of capital, reducing incentives for work and investment, and leading to a smaller economy.
Results
According to the Tax Foundation Taxes and Growth model, raising tariffs by about $21.5 billion annually would reduce the long-run level of GDP by 0.06 percent, or about $11.8 billion. The smaller economy would result in 0.06 percent lower wages and 45,293 fewer full-time equivalent jobs.
Table 1. Economic Impact of President Trump’s Enacted Tariffs
|
Change in long-run GDP |
-0.06% |
|
Change in long-run GDP (Billions $2018) |
-$11.8 |
|
Change in long-run wage rate |
-0.06% |
|
Change in full-time equivalent jobs |
-45,293 |
|
Source: Tax Foundation Taxes and Growth Model, March 2018 |
|
On a static basis, the new tariffs would reduce after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. s for all taxpayers by 0.14 percent. The increase in tariffs would make the distribution of the tax burden less progressive. These tariffs would reduce after-tax incomes for taxpayers in the bottom 80 percent by 0.14 percent and by 0.13 percent for the top 20 percent. The top 1 percent of taxpayers would see the smallest reduction in after-tax income, at 0.11 percent.
|
Table 2. Distributional Impact of the Tariffs on Steel, Aluminum, and Chinese Imports |
|
|
Percentage Change in After-Tax Income, 2018 |
|
|
Income Group |
Steel, Aluminum, and Chinese Tariffs |
|
0% to 20% |
-0.14% |
|
20% to 40% |
-0.14% |
|
40% to 60% |
-0.14% |
|
60% to 80% |
-0.14% |
|
80% to 100% |
-0.13% |
|
80% to 90% |
-0.14% |
|
90% to 95% |
-0.14% |
|
95% to 99% |
-0.14% |
|
99% to 100% |
-0.11% |
|
TOTAL |
-0.14% |
|
Source: Tax Foundation Taxes and Growth Model, March 2018, and author calculations |
|
Conclusion
President Trump is enacting tariffs on $29 billion worth of steel imports, $17 billion of aluminum imports, and $50 billion of Chinese imports. These tariffs would result in GDP and wages falling by 0.06 percent in the long run, and more than 45,000 fewer full-time jobs. The tariffs would fall more on middle- and lower-income taxpayers, making the distribution of the tax burden less progressive.
Modeling Notes
The Tax Foundation modeled the impact of tariffs with the Taxes and Growth model.[1] In the Tax Foundation’s model, tariffs are treated as a targeted excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on the tradeable sector, which ultimately fall on U.S. labor or capital and result in lower output. To model the distributional impact, we passed the tax backwards as reductions in factor income, which reduced the returns to both labor and capital income. In modeling the tariffs, we did not account for the potential reaction of foreign countries, nor the additional losses in welfare from having taxes with uneven impacts across sectors, both of which could result in additional economic effects.
[1] Tax Foundation, “The Tax Foundation’s Taxes and Growth Model,” April 11, 2018, https://taxfoundation.org/overview-tax-foundations-taxes-growth-model/.
[2] L. Alan Winters, “Trade Liberalisation and Economic Performance: An Overview,” The Economic Journal 114:493 (February 2004).
[3] Erica York, “Lessons from 2002 Bush Steel Tariffs,” Tax Foundation, March 12, 2008, https://taxfoundation.org/lessons-2002-bush-steel-tariffs/.
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