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TARIFFS—EVERYTHING YOU NEED TO KNOW BUT WERE AFRAID TO ASK  
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Adam S. Hersh and Josh Bivens
February 10, 2025
Economic Policy Institute
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_ Answers to key questions. _

, Francis Scialabba

 

During his presidential campaign, President Trump pledged to
impose universal tariffs of 10–60%
[[link removed]] on all
U.S. imports [[link removed]]—a whopping
$4.2 trillion in goods and services purchased from abroad in 2024.
This was always a real possibility. The International Economic
Emergency Powers Act
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president broad authority to do so. In early February the Trump
administration seemed to be making good on the threat to enact
extremely high and broad-based tariffs. They announced tariffs of 25%
on all goods from Mexico and all goods (except energy goods) from
Canada, as well as tariffs of 10% on all goods from China, though
ultimately punting on action against our neighbors for one month.
These three countries combined account for over 40% of goods imports
to the United States. Tariffs this high and applied to such a broad
scope of U.S. imports would have constituted a highly significant
change in economic policy. Almost immediately, the Mexican and
Canadian tariffs were suspended for a month. Yet, all this highlights
that historically large and broad-based tariffs remain a very possible
policy outcome in the coming years. This FAQ provides information on
the likely effects of these tariffs and, crucially, the effects that
will not occur due to these tariffs.

CAN TARIFFS EVER BE EFFECTIVELY USED TO TARGET SMART POLICYMAKING
GOALS?

IN BRIEF: Yes. Tariffs can do a number of useful things. Three broad
uses include: 

* providing effective protection for domestic production in specific
economic sectors 
* shielding U.S. workers from unfair forms of competition from
specific trading partners (like those with abusive labor rights
regimes)
* complementing a country’s strong domestic climate policy when
trading partners’ policies are not as strong

Because tariffs are most effective when they focus on well-defined and
narrowly tailored goals, they work best as part of a larger strategy.

IN DETAIL: The most direct benefit of tariffs is protection for
domestic sectors in the U.S. economy that warrant strategic support.
For example, some sectors are harmed when our trading partners take
actions to support their own domestic exporters or undercut labor and
clean air and water standards, or are critical for economic or
national security. As a recent example, U.S. steel and aluminum
producers have faced chronic global oversupply
[[link removed](2023)10/FINAL/en/pdf] that has
largely been caused by subsidies (direct and indirect) that trading
partner governments have given their own domestic producers—who are
among the world’s worst polluters
[[link removed]].

As part of a strategic suite of complementary industrial policies,
tariffs can help sustain and support the development of key industries
and maintain them during periods when trading partners are engaged in
market-distorting subsidization of their exports. Tariffs can help
correct these pervasive distortions and improve economic efficiency,
allowing firms to thrive in the face of these distortions.

Other reasons for wanting to target more domestic production from
specific sectors include national security concerns, the
underinvestment of private actors in the resilience of key nodes of
supply chains, and combating monopolization of key inputs by another
country—a lesson learned painfully during the COVID-19 pandemic when
everyone was scrambling to source personal protective equipment (PPE),
respirators, and critical medicines unavailable domestically at the
necessary scale. Tariffs can help internalize the social costs of
fragile global production chains otherwise created by
profit-maximizing corporations. In short, tariffs are a valid, and
often useful, industrial policy tool that can provide narrow and
targeted protection for key sectors. 

Tariffs can also be used to shield U.S. workers from low-road
practices (like labor abuses) among trading partners. For example, if
tariffs were higher for countries that routinely failed to protect
workers’ fundamental rights (or if tariffs were lowered when a
country made a genuine commitment to protect these rights), the
benefits of pursuing international competitiveness through wage
suppression would be reduced.

Similarly, tariffs could also be useful in complementing high-road
competition in environmental standards, for example by embedding the
costs of greenhouse gas emissions (GHGs) from manufacturing and
transportation in low-standard countries. This would incentivize clean
air while also making sure U.S. workers in trade-exposed,
energy-intensive industries do not bear the extra burden of adjusting
to new climate policies. An approach that explicitly used tariffs to
internalize the social costs of labor and environmental exploitation
in low-standard countries would help correct these problems and
provide transparent incentives for countries to pursue pro-worker and
pro-environment policies.

These uses are not trivial: Tariffs are absolutely a key tool of smart
industrial and trade policy. But on their own, tariffs cannot and
should not be the centerpiece of a national economic strategy. Doing
so would represent a gross overuse of a tool for a task it’s not
suited for and would cause damage to the wider economy.

CAN HIGH AND BROAD-BASED TARIFFS FIX THE U.S. TRADE DEFICIT OR
REBUILD MANUFACTURING EMPLOYMENT?

IN BRIEF: No, mostly because high and broad-based tariffs will also
reduce exports along with imports, and this will leave the balance of
trade mostly unchanged. Exports fall when tariffs are introduced for a
number of reasons. The first is that many U.S. exports use imports as
intermediate inputs to final goods produced in the United
States. Making these inputs more expensive with tariffs will boost
the price of these U.S. exports and make them less competitive in
global markets. Second, trading partners are highly likely to
retaliate to U.S. tariffs with tariffs of their own, making exports
more expensive in international markets—which we’ve seen on
“Made in America” goods from Boeing airplanes to Kentucky bourbon.
And finally, tariffs will put upward pressure on the value of the U.S.
dollar in global markets, which will make our exports more expensive
and will increase the attractiveness of imports to U.S.
customers—primary causes of U.S. trade deficits and manufacturing
job losses.

IN DETAIL: It is true that unbalanced trade has suppressed
employment
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manufacturing in the United States for decades. We consistently import
far more manufactured goods than we export (and the difference is
nowhere near made up in the services trade). This trade deficit drives
a wedge between domestic consumption of manufactured goods and
domestic production. Closing this trade deficit would, hence,
substantially boost job opportunities in the manufacturing sector in
the U.S. However, large and broad-based tariffs on all manufactured
imports will not do much to close this deficit for several reasons.

First, many U.S. exports are produced using a large share of imported
inputs. The slicing of global value chains in recent decades means
that parts of a final good are often sourced from several different
countries. Tariffs would, hence, make these inputs more expensive, and
this would, in turn, push up the price of U.S. exports using these
inputs, weakening the competitiveness of U.S. exports in global
markets.

Second, and most obviously, tariffs are rarely unidirectional. When we
impose tariffs, our trading partners are likely to retaliate with
reciprocal tariffs on U.S. goods, pricing U.S. exporters out of
international markets. This is not speculative—it absolutely was the
result of the tariffs imposed during the first Trump administration.

American farmers and ranchers incurred the most widespread damage from
this retaliation following the 2018 tariffs. The damage was so great
that the Trump administration authorized $61 billion in emergency
relief payments
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cushion farmers and ranchers from the blow of this retaliation, an
amount roughly equivalent to all of the tariff revenue collected from
U.S. businesses. Big manufacturers like Boeing also lost access to
international markets. Prior to 2018, China accounted for 25% of
Boeing’s sales, but after the tariffs, China stopped ordering
Boeing aircraft
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created an opening for China’s homegrown COMAC C919—a direct
competitor to Boeing’s 737 series planes. Not only will U.S.
exporters lose markets abroad, but the lost exports will increase the
supply of their goods to U.S. markets, putting downward pressure on
the price of goods they sell domestically, reducing corporate
profits.

Third, large and broad-based tariffs would put upward pressure on the
value of the U.S. dollar, making U.S. exports more expensive to
foreign buyers and imports cheaper and more attractive to U.S.
businesses and consumers. This often happens as trading partners
intentionally push down the value of their own currency against the
dollar through exchange rate management policies to offset the
competitive ground lost in U.S. markets to the new tariffs.

But it will also happen essentially mechanically. Countries use the
dollars they earn from importing to the United States to purchase
exports from the U.S. If tariffs reduce the dollars countries earn
from importing to the U.S., this will either lead them to reduce what
they purchase as U.S. exports, or they will need to purchase dollars
on international capital markets in order to maintain their level of
U.S. export purchases. This increased demand for dollars in these
capital markets will push up demand for dollars, and the exchange rate
will increase.

Again, this is not speculative—it is exactly what happened in 2018
[[link removed]] in response to Trump’s
first-term tariffs on Chinese technology goods and broader steel and
aluminum imports, when China depreciated its currency by roughly 10%
against the dollar. Against an international basket of
currencies, the dollar rose by about 7.5%
[[link removed]]. Already since the
November 2024 election, the value of China’s currency has fallen
1.1% against the dollar.

As a result of these influences, the U.S. trade deficit—how much we
export minus how much we import—saw no improvement
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administration even as tariffs were increased. The tariffs did work to
change the _composition_ of the trade deficit as Chinese exporters
sought to circumvent U.S. tariffs
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Chinese goods by rerouting trade and expanding investment in third
countries
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particular, taking advantage of the U.S.-Mexico-Canada trade
agreement negotiated by President Trump
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use Mexico as a platform to export to U.S. markets. Since the 2018
tariffs took effect, imports from Mexico have increased 63%, and the
U.S. trade deficit with Mexico increased by 159%.

Reducing damaging trade deficits cannot be achieved solely through
trade policy—except in the extreme case where trade policy measures
are so severe that they essentially shut down all international trade,
which would cause radical disruption to the U.S. economy. Instead,
more balanced trade will only result from macroeconomic policies that
are consistent with lower trade deficits—including exchange rate
management to realign an overvalued U.S. dollar
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a reasonable mix of fiscal and monetary policies
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ARE TARIFFS THE SAME AS AN INDUSTRIAL POLICY FOR THE UNITED STATES?

IN BRIEF: No, tariffs are only one tool in the industrial policy
toolkit, and they need supporting policies in strategic endeavors to
effectively boost domestic sectors.

IN DETAIL: Tariffs, on their own, are an incomplete industrial policy
strategy, even for the narrow goal of supporting a strategic domestic
sector. New research confirms the efficacy
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industrial policies when applied strategically. While these policies
can take a variety of forms, all successful industrial policies do
three main things
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mostly aimed at addressing key market failures:

* promote positive economic spillovers that provide economic
benefits beyond the targeted industry—such as by creating innovation
that benefits other industries or by supplying complementary goods or
services that make other investments viable—and limit or abate
negative economic spillovers that impose costs on other industries,
consumers, or the public. For example, industrial policy to
intentionally spread out the production of key inputs like
semiconductors so that bottlenecks specific to a single country
don’t choke global supply chains in the future creates the positive
externality of resilience—left to their own private profit-making
devices, individual companies will not have the incentive to make
these investments.
* provide complementary and industry-specific public inputs. Key
examples include infrastructure, research and development, and
workforce development investments that complement and crowd-in private
investment.
* provide coordination of disparate actors where complementary and
collective actions are needed for an industry’s success, but market
mechanisms are incapable of playing this role. One example of this is
publicly provided monitoring of potential supply-chain stresses to
keep private actors informed of how they can plan deliveries and
marshal inputs to solve blockages before they happen. Industrial
policy can also provide market-creating guarantees to crowd investment
into cutting-edge technologies that individual investors might
consider too risky to support, such as the COVID-19 vaccine
development [[link removed]]. 

Tariffs can be part of this formulation when there is a compelling
public interest to support a particular industry. But they are
insufficient on their own to ensure that industries critical to U.S.
economic and national security—from primary metals, to critical
medicines and health equipment, to semiconductors and other advanced
technologies—can overcome market failures and unfair competition.

Tariffs change the price signals in markets from which investors
decide to shift resources between different sectors. But price signals
alone are often not sufficient to ensure key market failures are
overcome. But there are many market failures _besides_ getting
prices wrong that domestic capital owners and workers need to overcome
in order to be willing to invest in producing in tradeable goods
sectors.

At the technology frontier, by definition, no one knows the likelihood
of success in achieving technological advances or what the market
potential is for such innovation—although technological progress is
highly desirable, the potential risks and rewards cannot be accurately
priced. Another example is where complementary investments are needed
to make an individual investment financially viable, such as the need
to upgrade electrical grids and build charging infrastructure for
investments in electric vehicle manufacturing to be viable. Further,
because it’s easy to change tariffs on short notice, capital owners
and workers are unlikely to see tariffs alone as a sufficient signal
that they should make costly, long-term investments in the production
of tradeable goods.

WHO ‘PAYS FOR’ TARIFFS IMPOSED ON U.S. IMPORTS?

IN BRIEF: American households will bear most of the burden of higher
tariffs. This will mostly come through higher prices for imported
goods and, crucially, higher prices for domestic goods that compete
with imports.

IN DETAIL: Tariffs are a tax on imported foreign goods and services.
The legal incidence of these taxes falls on the U.S. company doing the
importing. If a company imports $100 worth of goods and tariffs are
20%, the company must pay a tax of $20 to the federal government.
However, one of the useful insights of economics is that the legal
incidence of a tax and the economic incidence are different. Taxes set
off a cascade of adjustments that can spread or concentrate their
ultimate economic burden. In the case of tariffs, these adjustments
essentially lead to U.S. households paying higher prices. Importers
who pay the tax initially will typically raise prices to pass this
additional cost along to consumers, known as “price pass-through.”
The precise degree of pass-through will differ by good and sector: It
is driven largely by factors such as the degree of a company’s
market power and consumer sensitivity to price changes. But
substantial research
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it is U.S. households who ultimately pay for tariffs.

It is important to note that if tariffs do not raise prices in the
U.S. market, they will not shift consumer preferences to domestic
goods from foreign goods, thereby failing to provide any useful
protection to domestic industries. And if they are not providing
effective protection to domestic producers, it is hard to see the
point of imposing them. Tariffs provide effective protection to
domestic producers by raising U.S. prices of foreign goods and
services relative to similar domestically produced goods and services.
This enables companies producing import-competing goods in the United
States to raise prices, too, without fear of losing market share to
lower-priced foreign competition. These higher prices enable domestic
firms to maintain or expand production at a viable scale.

Because the tariff on a competing foreign good does not change a U.S.
company’s production costs, in the short-run, the higher prices U.S.
consumers pay for import-competing goods go directly into higher
profits for the company. In the longer-run, and with complementary
supporting policies, some of those profits might be redirected to
investment and wages as the import-competing sector looks to expand
its output.

What’s more, for goods that the United States does not or cannot
produce domestically at adequate levels to meet demand, tariffs raise
prices for U.S. consumers and businesses without giving a boost to
domestic industries. This includes a wide range of agricultural goods
(e.g., coffee, avocados, and bananas) and commodities and minerals
that are relatively scarce in U.S. territory. Tariffs on imports that
do not compete with “Made in America” goods simply raise prices
for U.S. consumers without spurring domestic production of these
goods. They represent a pure cost to U.S. consumers without any
countervailing benefit.

SHOULD POLICYMAKERS TRY TO MAKE TARIFFS A SIGNIFICANT REVENUE SOURCE
FOR GOVERNMENT SPENDING?

IN BRIEF: No. Tariffs are essentially a tax on consumption and are,
hence, more regressive than most current federal revenue sources. This
means that with tariffs, people with lower incomes will pay a larger
share of their earnings in taxes than high-income people. For the
significant amount of revenue we need to raise in the coming years, we
should build on the existing progressive revenue sources we have
(income and estate taxes) and institute new progressive taxes.

IN DETAIL: President Trump has suggested that tax revenues from new
tariffs could replace the federal income tax
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This would require tariffs to reach historically high and broad levels
and would constitute a large, regressive shift in who finances the
federal government. In this scenario, the tax burden would shift from
higher-income households to low- and moderate-income households.
Large, across-the-board tariffs of this magnitude would also have many
negative economic side effects relative to income taxes.

In 2024, the federal government will collect an estimated $2.5
trillion in individual income tax revenues. To raise this much
revenue, the base of any tariff would have to be extremely
broad—effectively universal, falling on all imports. If one starts
with the implausible assumption that a universal tariff would not
change U.S. demand for imports, the tariff rate would need to be 78%
to replace the individual income tax. More realistically, if tariffs
deter Americans from importing goods, then these taxes on imports
would need to be _significantly_ higher to replace income tax
revenues. In fact, most estimates
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how sensitive U.S. purchases of imports are to their prices indicate
that tariffs _literally could not_ replace even half of the income
tax.

Further, even if tariffs could somehow replace income tax revenue one
for one, this would be an extremely damaging shift for most U.S.
families who would end up paying a greater share of their incomes in
taxes. Revenues from progressive income taxes are preferable to those
from tariffs for a few reasons.

First, tariffs are a regressive tax, meaning people with lower incomes
will pay a larger share of their earnings in taxes than high-income
people. Tariffs are essentially a consumption tax, and consumption as
a share of income tends to fall as incomes rise.

Second, progressive taxation achieves more than merely raising
revenues to fund essential public services supplied by our government
from those who are most able to pay—it also creates incentives that
shape economic behavior in socially productive directions
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The runaway growth of incomes for top earners are driven by
rent-seeking practices
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gained from the exploitation of power that is unrelated to an
individual’s contribution to overall economic growth. Progressive
taxation disincentivizes such rent-seeking among those with power and
instead allows incomes to be more broadly dispersed. This disincentive
effect of the federal income tax has been greatly eroded since the
1980s as top marginal rates have fallen, but relative to a scenario
with no income tax, it is significant and worth preserving.

Finally, tariffs lead to efficiency losses as the potential benefits
of international specialization are lost. At tariff levels that have
persisted for the past 70 years, these efficiency losses are quite
small (and often very exaggerated by economic commentary). But at
tariff levels needed to replace the federal income tax, these
efficiency losses would be high. Progressive income taxes also have
some distortionary effects that might reduce economic output, but they
also have countervailing influences that might boost economic output
and welfare. For example, by raising revenue from the rich and
financing federal spending targeted toward low- and middle-income
families, this progressive redistribution supports growth in
economywide demand. Again, richer households save higher shares of
their income, so, redistribution away from them boosts spending.
Substituting tariffs for progressive taxation forgoes these economic
benefits beyond tax revenues.

ARE TARIFFS EASIER AND MORE TRANSPARENT TO COLLECT THAN OTHER FORMS OF
TAXES?

IN BRIEF: No, tariffs involve multiple compliance costs, and
across-the-board tariffs will offer many more chances for corrupt
dealing than exist under current taxes.

IN DETAIL: In 2018, tariffs imposed under Sec. 301 and Sec. 232
authorities by the first Trump administration included a process
whereby importers could petition for tariff exclusion. Essentially
this provided a huge new tax loophole for politically connected large
companies to exploit. In total, the Trump administration granted more
than 100,000 exclusions from the tariffs
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Audits by the U.S. Government Accountability Office
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Commerce’s Inspector General
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exclusion petition processes were plagued by a lack of transparency,
followed capricious and inconsistent internal procedures, and issued
contradictory and seemingly arbitrary decisions.

New empirical research indeed confirms that tariff exclusions have
been used systematically to reward political contributions
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as well as to punish political opponents, rather than to accommodate
economic need. In one instance in 2019, Apple lobbied President Trump
to secure exemptions for iPhone
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from China and pledged to repatriate some Mac computer manufacturing
from China to the United States, though they never delivered on this
promise. The scope of companies that will be incentivized to apply for
exclusions (and potentially offer improper favors in exchange for
them) and the financial benefit of avoiding tariff charges will grow
enormously if the Trump tariffs that were promised during the campaign
actually come to pass.

_Senior Economist Adam Hersh focuses on international trade,
industrial, climate, China, and macroeconomic policies._

_Josh Bivens is the chief economist at the Economic Policy Institute
(EPI). His areas of research include macroeconomics, inequality,
social insurance, public investment, and the economics of
globalization._

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