The US presidential candidate has announced massive tariff increases on US imports in general and against Chinese imports in particular in the event of his re-election. Such measures would further destabilise the global trading system and would also have a direct negative impact on incomes in export markets such as the EU and China. However, the consequences would be even greater for the US itself, as our calculations using a multi-sectoral equilibrium model show.
Introduction
As unpredictable as the outcome of the US presidential election on 5 November is, the possible consequences for international economic policy and the global trading system are just as uncertain. However, the latter depend not only on whether Kamala Harris or Donald Trump wins, but also on the but also on the post-election composition of the US Congress and the ideologies of its members. Harris and Trump pursue some of the same goals, such as protecting domestic industry, securing jobs, relocating lost industries back to the US, maintaining the country’s technological leadership and reducing US dependence on international supply chains. Nevertheless, their approaches differ considerably in terms of the radical nature of the planned measures, and the speed and method of their implementation. One major substantive difference concerns climate and environmental policy, where only Harris can be expected to take a constructive approach (see Stehrer, 2024).
The proposed tariff increases
One of Trump’s most important threats is the announced tariff increases to 10% for all US imports and possibly to 60% (or more) for imports from China; Trump has floated even higher tariffs at his campaign rallies. To assess the impact of such rises, it is first necessary to examine the current tariff rates (see Figure 1). On average, the EU imposes tariffs of 5.2% on the US and China; the US imposes tariffs of 3.5% on the EU and 3.6% on China. China imposes higher average tariffs of 7.5% on the EU and 7.6% on the US. The announced increase in US import tariffs to 10% under Trump would therefore mean a near-threefold increase.
Effects of these tariffs in a general equilibrium model
The effects of such tariff increases can be estimated using general equilibrium models. Calculations based on the model using the approach taken by Caliendo and Parro (2015) – for details, see Flórez Mendoza et al. (2024) – show that if US import tariffs were to rise to at least 10% (assuming that higher tariffs remain unchanged), total income in the US, including tariff revenue, would rise by 0.08%. However, real income excluding tariff revenue would fall by around 0.14%, mainly because imports would become more expensive. Incomes in China would fall by around 0.02%, while EU countries would be slightly more affected, with a decline of 0.05%. If tariffs on imports from China were increased to 60%, US income (including customs revenue) would rise by 0.12%, but real income would fall even more sharply, by 0.33%. In China, income losses in this scenario would be slightly higher, at 0.15%. For the EU27, the fall in income would be roughly unchanged. Overall, the global trade volume would fall slightly.
Conclusions
Our estimates show that the announced tariff increases on US imports would hit real incomes in the US itself the hardest; Clausing and Lovely (2024) and Baldwin (2024) argue similarly. The planned tariff increases would also have a (relatively) minor negative impact on the incomes of US trading partners.
Overall, it should be emphasised that our calculations build on the assumption of full employment and do not take any other factors into account. Relevant factors would include retaliatory measures and thus tariff increases by other countries against US imports, or further negative growth effects due to uncertainties and a decline in global trade flows. Such developments would result in stronger negative overall effects.
Although the announced tariff increases would have manageable overall effects on incomes and global trade, it can be assumed that such unilateral measures would further destabilise the international trading system under a Trump presidency.
References
Baldwin, R. (2024), Will Trump’s tariffs on China harm US manufacturing?, Factful Friday (via LinkedIn).
Caliendo, L. & F. Parro (2015), Estimates of the trade and welfare effects of NAFTA, The Review of Economic Studies, Vol. 82(1), pp. 1-44.
Clausing, K.A. & M.E. Lovely (2024), Why Trump’s tariff proposals would harm working Americans, PIIE Policy Brief 24-1, Peterson Institute for International Economics, May.
Flórez Mendoza, J., O. Reiter & R. Stehrer (2024), EU carbon border tax: General equilibrium effects on income and emissions, wiiw Working Paper, The Vienna Institute for International Economic Studies (wiiw), forthcoming.
Stehrer, R. (2024), Mögliche Auswirkungen der US-Präsidentschaftswahl auf den Welthandel, FIW-Jahresgutachten – Update Oktober 2024, Kapitel 2. Abrufbar unter: https://www.fiw.ac.at/publications/fiw-jahresgutachten-update-oktober-2024
Authors:
Robert Stehrer is Scientific Director at wiiw. His expertise covers a broad area of economic research, ranging from issues of international integration, trade and technological development to labour markets and applied econometrics. His most recent work focuses on the analysis and effects of the internationalisation of production and value-added trade. Other contributions relate to the connection between digitalisation, demographics, productivity and labour markets. He studied economics at the Johannes Kepler University Linz, Austria, and sociology at the Institute for Advanced Studies (IHS) in Vienna and is lecturer of economics at the University of Vienna.
Oliver Reiter is an economist and data scientist at the Vienna Institute for International Economic Studies (wiiw). His research focuses on international trade, non-tariff measures in trade, the creation/updating of a multi-regional input-output database (such as WIOD) and agent-based macroeconomic models. He holds a Bachelor’s and a Master’s degree in Economics, a Bachelor’s degree in Statistics and a Master’s degree in Computer Science, all from the University of Vienna. He is currently pursuing his doctorate at the Vienna University of Economics and Business.
The interactive graphics were created by Alireza Sabouniha. He is research assistant at wiiw and a PhD candidate at the Leopold-Franzens University Innsbruck.”