Editors' note: This column first appeared as a chapter in the CEPR book, The Economic Consequences of the Second Trump Administration: A Preliminary Assessment, edited by Gary Gensler, Simon Johnson, Ugo Panizza and Beatrice Weder di Mauro.
The tariff spree during the first 100 days of the second Trump administration created a bewildering economic policy chaos, disrupting the path of the US macroeconomy, challenging longstanding international trade norms, and threatening the prosperity of consumers, workers, and firms in the United States and beyond. Further, for US taxpayers, Trump’s first 100 days mark the largest tax increase in more than a generation.
Here, I will briefly recap the current state of affairs (as of 1 May 2025)
and then discuss the consequences of the current administration’s tariffs for the US economy (considering consumers, producers, and the macroeconomy) and the larger world community (considering detrimental effects as well as possible policy responses).
Trump’s tariffs
In the first 100 days of the second Trump administration, there have been so many tariff policy announcements that it is difficult to even keep track; one excellent timeline is provided by Chad Bown at PIIE. Several of the tariff actions have evoked the president’s emergency authority under the International Emergency Economic Powers Act (IEEPA) to impose tariffs with respect to Canada, Mexico, and China (citing supposed emergencies surrounding migration, crime, and drugs) and with respect to every country in the world (citing supposed emergencies surrounding bilateral trade deficits and trade practices abroad). The latter – so-called “reciprocal tariffs” – include both a country-specific component (now paused in most cases) and an across-the-board 10% tariff.
In this analysis, I will focus on the tariffs in place as of 1 May 2025 , noting that the evolution of future tariff policy is still subject to a substantial level of uncertainty.
Many of these policy changes have been subject to reversals, pauses, exceptions, and new threats, layering chaotic policy uncertainty on top of the serious disruption caused by such a large economic shock. Further, some countries have retaliated, some have paused retaliation, and the US government has also responded to retaliation. In the case of China, a tit-for-tat retaliatory spiral has ensued, such that there are now sky-high (125–145%) tariffs in both directions, threatening the possibility of an effective embargo of trade between the world’s two largest economies.
Beyond these actions, there have also been sector-specific tariffs announced in the automobile, automobile parts, and steel and aluminium sectors; in addition, there have been announcements that tariffs may be coming in several other sectors, including semiconductors, pharmaceuticals, lumber, copper, critical minerals, cranes, seafood, and trucks.
At present, effective tariff rates (average tariffs on all imports) are an order of magnitude higher than they were at the beginning of the second Trump administration, standing at about 25%. US effective tariff rates were below 4% for most of the last 50 years, stood at about 1.5% prior to the first Trump administration, rose to nearly 3% by the end of that administration, and declined to about 2.3% by the end of the Biden administration. Consumer substitution will eventually lower today’s high effective tariff rates, but there is no question that the new tariffs are a very large economic shock for the US economy; they will also have large impacts on countries that trade large amounts with the United States (Irwin 2025).
How tariff policies will play out in the coming months remains a matter of some mystery as of this writing. The end goals of the current administration are unclear, and the governments that have attempted to negotiate with the United States have often expressed dismay at the lack of clarity regarding US objectives. To some extent, this state of affairs is a consequence of President Trump’s contradictory set of goals for the tariffs, which are seen as instrumental for extracting concessions from foreign governments (implying that tariffs might be negotiated down, thus reducing their revenue yield), raising enough revenue to finance large income tax cuts (which implies large, persistent tariffs), and revitalising the US production base (which implies a continued price signal in favour of domestic production as well as a model of the economy that ignores the negative effects of tariffs on production).
Consequences for the US economy: Consumers and taxpayers
As noted above, Trump’s first 100 days mark the largest tax increase in more than a generation for US taxpayers. As of mid-April (when tariffs were at similar levels as of this writing), estimates of the cost for a typical household are in the thousands of dollars. The Budget Lab places short-run costs (including effects on domestic price increases) for typical households at $4,900, declining to $2,600 after consumer substitution effects. A Tax Policy Center analysis indicates a cost of about $3,100 from the tariffs. The Penn Wharton Budget Model (2025) implies reduced consumption of about 3%. To put these estimates into context, these are enormous tax increases relative to current federal tax payments. For the median taxpayer, federal tax rates (all in) were about 13% in 2019, 9% of which was due to the payroll tax (which funds social security and Medicare) and only 2.5% of which was due to the federal income tax.
Thus, these tariffs have the potential to amount to a larger tax burden that the federal income tax for a median taxpayer , and even more so for lower-income taxpayers!
For most families, these tariff tax increases will also dwarf any forthcoming tax cuts that are contemplated due to Tax Cuts and Jobs Act (TCJA) extensions. The tax cut from extending the TCJA provisions (that would otherwise expire at the end of 2025) amounts to only about $1,000 for a median family, and even that would not be experienced as a tax cut since it merely continues current policy, avoiding a counterfactual tax increase of $1,000 under current law, under which many TCJA provisions expire. Thus, the net effect of the tariffs and the tax cut extensions is likely to be negative for a majority of US households.
Further, the combination of income tax cuts and tariff increases is a regressive fiscal switch that moves the tax burden down the income distribution, away from the well-off and towards poorer members of society. The income tax is a very progressive tax, and TCJA extensions are forecast to disproportionately benefit the well-off. In contrast, tariffs are a consumption tax that disproportionately burdens those lower in the income distribution, especially in the short run, for the simple reason that savings (which are not burdened by tariffs) increase steadily with income. Lower-income people save little, if any, of their income, whereas higher-income people often save substantial shares of their income.
As one illustration, consider a situation where tariffs eventually settle at 10% for most of the world and 60% for China, and TCJA tax extensions are passed by Congress and take effect. The net effect of the combined policies is illustrated in Figure 1. For the lowest quintile, tariffs cost more than 5% of their after-tax income, and tax cuts generate little benefit. For the top quintile, tax cuts and increases nearly balance; only those at the top of the distribution are net beneficiaries of this policy combination. Further, the spending cuts envisioned by Congress would also have regressive effects if enacted, exasperating this pattern.
Beyond the impact of these historically large tax increases, the way they were implemented is likely to exacerbate the harm for consumers by generating shortages and supply chain disruption, similar or worse that that experienced during the Covid-19 pandemic (operating with a lag).
For example, at the time of this writing (early May 2025), West Coast ports were reporting large drop-offs in shipping volume, which could certainly lead to shortages and empty shelves in American stores.
Figure 1 An illustrative Trump fiscal policy switch from income taxes to tariffs (percent change in after-tax income)
Notes: The tariff estimates consider a 10 % US tariff for most goods from the rest of the world and an incremental 50% tariff on Chinese imports. The net effect bars show the combined net effect of the loss from proposed tariffs and the gain from TCJA extensions. The method follows Clausing and Lovely (2024), using updated data. Tariff burden calculations use data from the Consumer Expenditure Survey on consumption patterns and data on incomes from the US Treasury. TCJA extension estimates are from Tax Policy Center (2024); these do not include the full suite of tax cuts that have been proposed.
Consequences for the US economy: Firms and workers
Many tariff advocates note that tariffs could increase costs somewhat for consumers, but the increased costs will ultimately be worth the sacrifice, since the resurgence of American productive activity will create better US manufacturing jobs, improving (over time) workers’ standards of living. While this hopeful scenario sounds plausible, it runs into large problems when confronted with basic logic or the data from prior tariff episodes. Many studies of the first Trump administration tariffs concluded that they were, on net, harmful for job creation (e.g. Flaaen and Pierce 2024, Russ 2019, Russ and Cox 2020a, 2020b, Autor et al. 2024, Handley et al. 2025).
There are several basic reasons for these findings. First, tariffs create new shocks and supply disruptions that are harmful for businesses. A majority of US imports are intermediate goods; raising their costs makes US producers less competitive relative to peer firms abroad. For example, studies of steel tariffs have found that, while they may have preserved some steel jobs, those jobs came at the expense of a far larger loss of jobs in industries that use steel, which face higher input costs and lower competitiveness as a result.
Second, tariffs generate multiple sources of disruption for exporters, who often import key intermediate inputs; indeed, the largest exporting firms are frequently the largest importing firms (Jensen 2016). In addition to higher costs, tariffs often beget retaliation, and foreign tariffs reduce market opportunities for US exporters. Concerns along these lines have been raised by many producers, from farmers in Iowa to large manufacturers like Boeing, which has seen previously ordered planes returned.
Finally, there are also ‘general equilibrium’ problems; in particular, the first consequence of tariffs is not their only effect. Tariffs attempt to encourage production, true, but in order to increase production of goods that were formerly imported, labour and capital must be freed from other sectors. Thus, expansion of the import-competing sector comes, in part, at the expense of contraction in the export sector (as well as the nontraded sector). This reorients the economy away from the goods where comparative advantage lies and toward goods that the economy is less suited to producing, reducing efficiency and diminishing innovation and growth.
The US macroeconomic context
The experience so far from the tariffs of Trump’s first 100 days provides early evidence of the disruption such large tariffs can cause. Consumer confidence has fallen, measures of investor uncertainty and economic policy uncertainty have risen, economic growth expectations have been revised downward, and forecasters have raised the probability of a US recession substantially. Tariffs are cited as a key determinative factor in all instances.
The tariffs have also worsened the problem of macroeconomic management, as noted by Chairman Powell and other Federal Reserve officials. Tariffs risk stagflationary pressures, due to the simultaneous occurrence of upward price pressures and recessionary headwinds. This makes the job of the central bank particularly vexing, since there will be conflicts between the ‘loose’ monetary policies that might address recessionary headwinds (which would worsen inflationary pressures) and the ‘tight’ monetary policy that would address upward prices pressures (but worsen recessionary forces). Further, this occurs alongside threats from the President of the United States regarding Federal Reserve independence. President Trump has even mused that he might remove Chairman Powell on several occasions, even if he ultimately backed down, arguably due to market pressures.
Casual attacks on Federal Reserve independence have occurred in a particularly challenging larger context, characterised by significant erosion in US institutional strength and respect for rule of law. On multiple occasions, the Trump administration has refuted the authority of the courts, and on myriad occasions, the administration has engaged in unlawful behaviour, as a host of ongoing lawsuits is slowly establishing.
There have also been important erosions in the US fiscal stance. Beginning from a period of very high deficits and debt, despite a strong economy going into the Trump administration, the US Congress and the administration are working on a package of tax cuts (and more modest spending measures) that could end up adding nearly $6 trillion to US deficits over the coming decade.
Beyond the large new deficits, Republicans in Congress have also suggested accounting gimmicks that would disappear trillions in debt (for budgeting purposes) by adopting a ‘current policy’ baseline. Such a baseline simply assumes that there are no costs associated with extending policies that would otherwise expire under current law, leaving the cost of those extensions completely unaccounted for. (It would be akin to a person attending an expensive college for one semester, and then announcing all future semesters are costless, since it is simply an ‘extension’ of current spending patterns.) While the Senate Parliamentarian may ultimately reject such a baseline, if the Senate pursues it nonetheless (which they can do by bypassing or firing the parliamentarian), that would mark a further deterioration in budgeting norms.
Financial markets have taken note of this combination of macroeconomic risks. Indeed, movements in the bond market and the currency markets indicate some possibility that the US government may be soon (if not already) facing a risk premium associated with US debt, which raises borrowing costs and increases macroeconomic fragility in the United States, making the already troubling high deficits and debt even more worrisome. Indeed, when tariff announcements were associated with dollar depreciation, instead of the expected appreciation, many attributed these trends to declining confidence in the US macroeconomic policy regime (e.g. Butts 2025 and Lubin 2025).
Markets have calmed somewhat since the volatility of April, but key questions about the path of the administration’s economic policies are unanswered. If tariffs remain at very high levels, outcomes will be significantly worse than if they fall substantially. However, even if some tariffs are paused or negotiated downwards, it is quite likely that they will remain substantially higher than at any point in the last 50 years. For example, the Trump administration has shown very little willingness to reconsider the ten percent across-the-board tariff. In the first ‘trade deal’ with the United Kingdom – arguably an easier deal to reach than many, due to the two countries’ longstanding partnership – there was remarkably little liberalisation. The new 10% tariff on UK exports to the United States will remain intact, and other trade liberation under the deal (which itself affects less than 3% percent of US goods trade in 2024) is minimal.
Implications for the rest of the world
While the current administration’s trade stance clearly harms the economic interests of the United States, it also damages economies abroad as well as international norms. Canada and Mexico are particularly vulnerable; in 2024, trade with the United States accounted for 63% of Canadian trade and 61% of Mexican trade, with higher ratios for those countries’ exports.
Canada and Mexico are also relatively open economies, with high trade to GDP ratios, so exports to the United States comprise a sizeable share of GDP: about a fifth for Canada, and about a quarter in the case of Mexico.
China has far less dependence on the United States in relative terms; US exports amount to about 2.5% of Chinese GDP. Still, in 2024, the United States was the largest purchaser of Chinese exports, and the sky-high tariffs risk damaging both economies. That said, damage to China may be reduced by the fact that China is simultaneously expanding trade with the rest of the world, and in many respects is less vulnerable to bilateral trade disruption than the United States.
In addition, the tariffs pose a larger macroeconomic risk to the world economy, particularly given the fragile US macroeconomic context discussed above. And, if US policy errors generate a US recession, that creates negative macroeconomic spillovers, and recessionary headwinds, for the entire world economy.
Perhaps even more important than the above factors is the risk that ascendant nationalism and transactional deal-making supplant longstanding international cooperative efforts. The United States is supposedly attempting to negotiate a rapid succession of ‘trade deals’ with many US trading partners; these efforts are at times characterised by US officials as an attempt to reset the terms of bilateral economic relationships. The list of US desires appears only weakly related to trade protection, and includes other tax policy, economic policy, and foreign policy desiderata.
Should other countries take these negotiations seriously – or worse, follow the Trumpian lead and conduct more of their own trade policies on a bilaterally negotiated basis – that would bode quite poorly for the norms of the world trading system, administered by the WTO. The WTO counts 166 jurisdictions as members, including the United States. Under WTO norms, member countries agree to adhere to prior tariff commitments as well as the notion of most-favoured nation (MFN) status, whereby WTO members commit to treat their partners on similarly favourable terms.
The President’s tariff approach is antithetical to these principles. And, while of course the WTO is not perfect, the governments that join the WTO value a rules-based trading system, recognising that such a system is far superior to either isolationism or transactional deal-making.
In the coming period, an ideal approach for other governments would be to form ‘coalitions of the willing’ to continue to solve collective action problems, with or without the United States. This could include efforts to maintain world trading system norms, and even to enhance trade liberalisation on a plurilateral basis when feasible. Such an approach would also be useful with respect to other issues, such as climate change mitigation, public health, and tax competition.
The world has much to gain from continued economic collaboration. A free and open trading system provides opportunities for prosperity and economic growth. Continued climate action creates a more habitable planet and reduces the serious harms to vulnerable populations and ecosystems that stem from climate change (Clausing and Wolfram 2023, Clausing et al. 2025). Future pandemics require both scientific collaboration and information sharing across borders. And international collective action helps overcome the free-rider problems that plague the development of fair and efficient tax systems, in part due to the difficulty of taxing internationally mobile income.
If other leaders work to address these important international collective action problems, future US governments may ‘rejoin’ down the road, should future US voters reject the isolationism and protectionism that are at the heart of the Trump agenda. However, if the rest of the world follows the lead of the present Trump administration, one can easily imagine a scenario more akin to the 1930s, where countries’ inward turns exasperate economic downturns, ultimately fuelling animosity and war.
Finally, there is the question of how the Trump administration responds to the verdict that markets are already delivering on their economic agenda. If the folly of the trade wars is swiftly reversed, and something more like the first Trump administration is the end outcome, both the United States (and the world) may avoid the worst. As of this writing (1 May 2025), the economic outlook is highly uncertain.
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