Over the weekend, President Donald Trump proposed tariffs ranging from 10% to 25% on Americans who import goods from Canada, China, and Mexico. Here are five things to know about the proposed tariffs:
- In real dollars, NTU estimates that, if imposed, proposed tariffs on Americans who import goods from Canada, China, and Mexico would be the biggest overall tax increase since the end of World War II. They would cost an average of $843 per household, the third-biggest increase by that measure in recent history.
- The U.S. International Trade Commission’s comprehensive study of tariffs imposed under Section 301 and Section 232 of U.S. trade law from 2018 to 2021 concluded that Americans paid nearly the full cost of the tariffs.
- Broad-based U.S. tariffs increase the value of the dollar, making it more difficult for Americans to export and reducing the cost of imports that are not subject to tariffs. If tariffs take effect, our farmers and manufacturers will also face retaliatory tariffs from our trading partners. Canada has proposed 25% retaliatory tariffs on hundreds of U.S. exports ranging from apricots to video games. Mexico has also promised to retaliate, and China plans to adopt “necessary countermeasures.”
- The continuation of the Joe Biden Administration’s confrontational “tariffs as a tool” approach comes with risks, as it could affect America’s standing as the leader of the free world. China reportedly stopped cooperating with the United States to control fentanyl as a result of trade tensions, and its trade practices actually got worse. Canadians are now booing our National Anthem at hockey and basketball games. On the other hand, proposed tariffs on imports from Mexico have been paused now that Mexican President Claudia Sheinbaum has agreed to increase border enforcement in return for efforts to reduce U.S. weapons sales to Mexico. According to Sheinbaum: “Mexico wants to prevent fentanyl from reaching the United States or any other destination . . . problems are not solved by imposing tariffs, but through discussion and dialogue, as we have done.” If we are going to lead our allies on important matters like fighting terrorism, combatting drug cartels, and containing rogue actors, it’s critical to preserve our status as the freest and most respected nation in the world.
- Regardless of the outcome of this dispute, ongoing trade threats impose an uncertainty tax on Americans. This affects farmers trying to decide what to plant and how much fertilizer to buy, car manufacturers trying to decide what to produce and where to source their parts, and consumers trying to decide when to buy a new guitar or smartphone. This uncertainty tax will continue to work against Trump’s efforts to combat concerns about the high cost of living that contributed to his election.
Congress can improve the situation by reclaiming its constitutional authority over trade policy. Enacting legislation like the No Taxation Without Representation Act, introduced by Sen. Rand Paul (R-KY), should be a priority. Such legislation would greatly reduce the “uncertainty tax” by requiring Congress to vote before new tariffs can take effect, thereby making it more likely for Trump’s pro-growth regulatory and tax agenda to succeed.
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Methodological notes: NTU assumes that proposed tariffs would reduce imports from Mexico by 50%, tariffs on China by 20%, tariffs on energy from Canada by 20%, and tariffs on other goods from Canada by 50%. This is based on estimates from the U.S. International Trade Commission, Economic Impact of Section 232 and 301 Tariffs on U.S. Industries, p. 146. Everything else being equal, this would increase tariff revenue by $139.6 billion from 2023 levels. Historical tax increases are from the Treasury Department, Revenue Effects of Major Tax Bills, Revised September 2006. Figures were converted to 2017 dollars using GDP deflator information from the Bureau of Economic Analysis. NTU does not account for any additional indirect or dynamic effects. For comparison purposes, NTU’s estimate is slightly higher than a Tax Foundation estimate that the tariffs would increase taxes by $1.1 trillion between 2025 and 2034 on a conventional basis. Earlier this year, the Committee for a Responsible Federal Budget estimated that 25%/25%/10% tariffs would raise $140 billion to $150 billion in 2025.