Trump’s tariff proposal could cost over $2,000 (£1,500) per capita to US consumers

Earlier in his US presidential campaign, Trump proposed imposing up to 20% tariffs on US imports from all countries and 60% on imports from China. My simulations show that, under this policy, total US imports of goods and services could fall by 37%. US real GDP could fall by as much as $680 billion in case of retaliation, a loss of $2,029 (£1,562) per capita.

UK exports to the US could fall by £34.5 billion (-18%).

As the US Presidential election campaign unfolds, one of the boldest proposals on international trade policy comes from Republican candidate Donald Trump, who plans to impose heavy import duties on America's trade partners. He aims to protect US manufacturing jobs from foreign competition.

On Sunday, in reference to tariffs on vehicles imported from Mexico, Trump said: "All I'm doing is saying 'I'll put 200 or 500, I don't care.' I'll put a number where they can't sell one car."

Central to this proposal is a 60% tariff on all Chinese imports, coupled with a uniform tariff on imports from all other countries, initially set at 10% but recent proposals have suggested raising this to 20%.1

Such a sharp escalation in tariffs could have profound implications for US trade. Trade tensions between the US and its partners rose during the previous Trump presidency when the US raised tariffs on solar panels, washing machines and metal products (most notably many kinds of steel) from many countries including close allies, and, most importantly, started a trade war with China. These tariffs have largely remained in place during the Biden administration. Following the trade war, the share of US goods imports from China fell from 22% in 2017 to 14% in 2023.2

Previous studies of the 2018-19 US tariffs found that the costs were entirely passed through to US importers, as American companies and consumers faced higher prices on their imported products. Estimates suggest that imports hit with tariffs declined by around 52% compared with products not subject to the additional duties3, and that the real income of the US was reduced by 0.04% of GDP.4

To understand the potential effects of Trump’s proposed tariffs, I utilise a modern quantitative trade model and run three key simulations based on the campaign proposals:

1. Scenario One: The US imposes a 60% tariff on Chinese imports and a 10% tariff on all other countries, with no retaliation.

2. Scenario Two: The same 60% tariff on China, but the tariff on all other countries is raised to 20%, still without retaliation.

3. Scenario Three: The 60% tariff on China, 20% tariff on all other countries, but other countries retaliate with a 20% tariff on US goods and China with a 60% tariff on US products.

The simulations suggest that US imports from China could fall by 71% under these new tariffs – scenarios 1 and 3, see Figure 1. The most significant drop in US imports occurs when other countries retaliate. Here, the retaliatory tariffs would lead to a 37% decline in total US imports of goods and services from all countries.

The economic consequences for US consumers and the broader economy could be severe. Although the policy would help to raise additional tariff revenues, these would not be enough to compensate for the loss resulting from the reduced imports. Companies using foreign products as intermediate inputs will see their costs increase, while consumers will face more expensive prices on the market.

The simulations indicate that changes in real consumption – what people can afford to buy after considering rising prices – would drop by between 1.8% and 3% in the US. Specifically, the latest proposal, with a 60% tariff on China and 20% on all other countries, could result in a welfare loss for the US of $567 billion annually – a loss of $1,691 per capita. If retaliation is factored in, the annual loss increases to $680 billion, or $2,029 per capita.5

The effects of these policies would be felt very widely. For example, in the mildest scenario, British exports to the US could drop by £19.5 billion (a 10.2% decrease), while in the worst-case retaliation scenario, British exports of goods and services to the US could fall by £34.5 billion (an 18% decrease). This is 4% of total UK exports of goods and services.6

While the intention behind these tariffs is to protect American industries, the resulting trade reductions and retaliatory measures may bring substantial economic costs, mainly in the USA but also elsewhere.

Figure 1: Simulated percentage changes in US imports of goods and services by country

Methodological note

In this analysis, I employ a modern quantitative trade model based on the framework outlined by Costinot and Rodriguez-Clare (2014). This model is widely used to study the impact of trade policies and has been adapted here to explore the effects of tariffs and trade adjustments across sectors and countries. Key features of the model include:

1. Perfect Competition and Balanced Trade: The model assumes that all sectors operate under conditions of perfect competition. Additionally, the model assumes balanced trade. Practically, this means that the trade matrix is “balanced” before running the simulation. Details of the procedure can be found in Costinot and Rodriguez-Clare (2014).

2. Trade in Intermediate Products: The model incorporates both final goods and intermediate products. Firms from different sectors in each country use intermediate inputs, which are sourced either domestically or from international markets.

3. Sectoral and Geographic Coverage: The model covers 31 distinct sectors, including both goods and services, across 10 countries plus an aggregate for the rest of the world.

The data required for this analysis includes the base inter-country input-output table, base tariff data and estimates of the trade elasticity to variable costs. The base trade data comes from the OECD Inter-Country Input-Output (ICIO) tables for 2020.

Tariff data is sourced from the UN TRAINS database, using the most recent available information for the year 2022. This allows the analysis to account for the latest tariff structures affecting international trade.

Following Costinot and Rodriguez-Clare (2014), I adopt trade elasticity estimates from Caliendo and Parro (2015), which quantify how sensitive trade flows are to changes in trade costs.