Number Theory: What Trump’s tariffs mean for US

How will the latest tariffs affect US consumers? Here is what the data shows

The Trump administration’s latest wave of tariffs marks a sharp escalation in US protectionism. Announced on April 2, the new duties target a wide range of imports and build on years of rising trade barriers. While pitched as a defence of American industry, the immediate fallout will likely be felt by US consumers in the form of higher prices. While increasing imports hurt the US in areas such as manufacturing employment, they did usher in an era of cheaper goods. For example, an analysis published in the Wall Street Journal on March 30 said that Chinese imports between 1998 and 2014 in the US brought down inflation for imported goods by 0.6 percentage points a year. How will the latest tariffs affect US consumers? Here is what the data shows.

Reuters photo

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  How much imported goods do the Americans buy?

  In 2023, gross domestic purchases of manufactured goods in the US was $3.7 trillion in nominal terms. 48% of this value consisted of import content either in the form of final goods or imported inputs in domestically produced goods. While the ratio of domestic-foreign content in what US consumers purchase has stayed consistent over the last decade, a longer-term view shows that the share of import content has been rising—from just 35% in 1997, according to the United States International Trade Commission. As expected, import content of US consumption varies across commodity groups. The highest import content in US purchases is seen in labour-intensive sectors such as apparel, leather and textiles, along with electronics. The import content in apparel and leather and allied products stands as high as 89%.
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  How much will costs rise for US consumers?

  The new tariffs alone raise the average effective tariff rate by 11.5 percentage points. In the short term, and assuming no policy response from the Federal Reserve, this translates into a 1.3% increase in consumer prices. That’s roughly equivalent to an average loss of $2,100 a year in household purchasing power, adjusted to 2024 dollars, according to The Budget Lab at Yale, a non-partisan policy research centre. However, when these new tariffs are combined with those already in place—targeting imports from China, Canada, Mexico, and, automobiles, steel, and aluminium—alongside the retaliatory measures announced by other countries, the impact becomes more severe. Altogether, these measures raise the average effective tariff rate by nearly 20 percentage points. The result is a 2.3% rise in consumer prices in the short run, amounting to an average loss of $3,800 in household purchasing power in 2024 terms.
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  The poorest consumers will be the hardest hit

  The biggest assumption Donald Trump is working on in his trade war is that its effects will be confined to the world of merchandise trade alone. History shows that capitalism has never worked in silos. While Trump is bemoaning the current economic order for the fact that it has created a huge merchandise deficit for the US, he is refusing to acknowledge the fact that it also gave the US the world’s dominant currency and opened doors for the US financial sector and services across the world. While India missed the manufacturing and exports bus even after liberalisation, it did reap global tailwinds from the white-collar global services economy. This becomes clear from a comparison of contribution of manufacturing and financial and professional services sectors to India’s overall GVA growth. If the US economy indeed goes into a recession -- most analysts believe this is likely -- its service sector is unlikely to remain unaffected. A similar outcome is likely if globalisation outside merchandise trade were to retreat across the world, which once again, is not something which can be ruled out completely at the moment. This is also why India needs to invest more in evolving a consensus in reforming the global economic order than seeing the current disruption as some sort of a zero-sum game. The tariffs announced on April 2 would cut the disposable income of lower-income households (those in the second income group from the bottom) by 2.3%, while the richest households would lose just 0.9%. In absolute terms, this means the poorer group would lose about $980 a year, middle-income households around $1,700, and the richest about $4,600. This pattern stays the same when looking at all the tariffs planned for 2025, with the poorer households losing a bigger chunk of their income, even though the richer ones lose more money overall — up to $8,100 a year.
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  The fiscal impact

  If the new tariffs stay in place, they’re expected to raise $1.4 trillion in taxes over ten years (2026–2035), according to the Yale Budget Lab. However, because tariffs slow down economic activity, the government would lose revenues from other kinds of taxes. Yale Budget Lab estimates suggest that the net revenue impact on the US could be a loss of around $366 billion.