The Economic Effects of President Trump’s Tariffs
Introduction
On April 2, 2025, President Trump signed an executive order imposing a minimum 10 percent tariff on all U.S. imports, with higher tariffs on imports from 57 specific countries. The general tariff rate became effective on April 5, while tariffs on imports from the 57 targeted nations, ranging from 11 to 50 percent, took effect on April 9. See the PWBM tariff simulator posted separately, which may have been updated after the publication date of this brief. This resource provides revenue estimates and projected price increases across thousands of different spending categories.
Conventional Effects on Revenues and Imports
As shown in Table 1, we project that tariffs will raise $5.2 trillion in new revenue over the next 10 years, even after accounting for reduced import demand due to higher prices. Over the next 30 years, tariffs are expected to raise revenues of $16.4 trillion. (These revenues fall to $4.5 trillion and $11.8 trillion, respectively, on a dynamic basis.) This revenue can be used to reduce federal debt relative to the baseline path. Table 1 also shows that President Trump’s tariffs will reduce total imports by $6.9 trillion over the next decade and by $37.2 trillion through 2054. These reductions in imports will also reduce capital flow.
Economic Impact: Modeling Approach
President Trump’s tariffs will impact the U.S. economy through at least three main channels:
Direct Tax on Imported Goods: Tariffs impose a direct tax on imported goods. The economic burden of these tariffs can fall on either domestic consumers or businesses, depending on factors such as the elasticity of supply and demand for each product and businesses’ ability to pass on costs to customers. We consider several tax incidence scenarios, ranging from one in which consumers bear the entire burden to one in which the tariff costs are shared equally between consumers and businesses. In the short run, consumers and businesses are likely to share the burden, with more of it falling on consumers over time. Nonetheless, the macroeconomic performance does not differ significantly between these scenarios.
Reduction in Imported Goods and Capital Flows: A reduction in imported goods means foreign businesses and governments will purchase fewer U.S. assets, including U.S. federal government bonds. The decrease in the value of imports directly corresponds to reduced foreign purchases of U.S. assets through standard accounting relationships. U.S. households will need to increase their future take-up of government bonds and will subsequently decrease their savings into productive capital.
Increased Economic Policy Uncertainty: President Trump’s tariff announcements have increased economic policy uncertainty, which generally depresses economic activity by prompting firms and households to postpone investment, hiring, and consumption decisions. Economic policy uncertainty can be quantified using the Economic Policy Uncertainty (EPU) Index, a measure designed to capture uncertainty surrounding economic policy decisions. By the end of March, the EPU reached its highest point since the beginning of the COVID-19 pandemic, doubling in value from the start of January. We apply the methodology of Baker, Bloom, and Davis (2016) to determine that the rise in economic uncertainty will reduce investment by about 4.4 percent in 2025. However, we assume that EPU returns to pre-tariff average by start of 2027.
Economic Effects: Results
Table 2 presents the economic effects of President Trump’s tariffs under different assumptions about how the burden (“incidence”) is distributed between consumers and businesses. Because tariffs are applied to imported intermediate and final goods across different industries, future work will be needed to understand the actual incidence in more detail.
Table 2.A: When consumers bear 100 percent of the burden, consumption falls by 3.5 percent in 2030 and by over 3 percent in 2054. The decline in imports reduces foreign purchases of U.S. government debt, requiring U.S. households to absorb more of this debt and divert savings away from investment in private productive capital. This shift, coupled with reduced short-term investment due to increased economic uncertainty, leads to a decline in the capital stock of 0.6 percent in 2030 and nearly 10 percent in 2054. Less capital reduces worker productivity, translating into lower wages and causing households to work slightly less. By 2054, wages will decline by 3.9 percent, and hours worked will fall by 1.3 percent. The combination of reduced private capital and fewer hours worked leads to a 5.1 percent decline in output by 2054. However, the additional revenue from tariffs helps reduce federal debt, which is 7.3 percent lower in 2030 and 11.6 percent lower in 2054.
Table 2.B: When 75 percent of the tariff burden falls on consumers and 25 percent on businesses, the initial decline in consumption is slightly smaller. However, the decline in capital and wages in 2030 is larger. By 2054, the capital stock is 11 percent lower than under current law, and wages are 4.8 percent lower—both worse than when consumers bear the entire cost of the tariffs. Consumption declines slightly more by 2054 due to lower wages. Lower wages also lead to lost tax revenues on labor income, resulting in a smaller reduction in federal debt, which is only 10.7 percent lower by 2054.
Table 2.C: When businesses and consumers equally split the cost of the tariffs, the economic effects follow a similar pattern to the differences between Tables 2.A and 2.B, but the impacts are more pronounced. Capital, wages, and output fall even further, while the reduction in debt is slightly smaller.
Dynamic Distributional Effects
Dynamic distributional analysis considers how a policy affects households across the income and age distribution, including the unborn (represented by a negative age index at the time of the reform). It evaluates how much, on average, households in each (income, age) bucket value the proposed policy change over their entire lifetime, represented as a one-time transfer at the time of the policy change. Dynamic distributional analysis is the standard in academic research, addressing several key limitations that dynamic analysis addresses.
Table 3 reports policy “equivalent variations” for the same cases and versions reported in Table 2. A positive equivalent variation means that the person would be better off under the policy reform, while a negative equivalent variation means that the person would be worse off. For example, as shown in Table 3.A, a household aged 30 in the bottom 20th percentile of income loses the equivalent of $15,800, as indicated by the negative value. This household would be indifferent between this policy bundle and a one-time payment of $15,800 to avoid the tariff increase.
As Table 3 shows, almost every household is worse off. Older households experience the largest variation of losses across the three tax incidence scenarios because they are more directly impacted by the tax incidence assumption than by the longer-term macroeconomic effects. For example, losses for a 60-year-old household in the top income quantile vary from $31,900 when consumers bear the entire incidence (Table 3.A) to $12,300 when consumers and firms share the incidence (Table 3.C). The return to a blended portfolio of stocks and government bonds is negative 10 percent in the first year, which also impacts older peak savers more. Differences in losses narrow somewhat for future households where macroeconomic effects dominate. For example, losses for a newborn in the top income quantile at the time of the policy change range from $12,800 (Table 3.A) to $22,200 (Table 3.C).