Analyzing the Trump administration’s tariff policies and goals

During the 2024 campaign, President Donald Trump never shied away from his affinity for tariffs, claiming they have a record of success that does not exist.

The White House did not specify the severity of the tariffs until April 2, when Trump announced his “Liberation Day tariffs.” The president announced rates on some countries, but others would still be subject to a 10% global tariff imposed on all imports.

A full list of the tariffs by country (as originally revealed on Liberation Day) is here.

How were these tariff rates determined? The administration didn’t give its formula for the tariffs, but the math was simple:

Tariff (Percent) = (U.S. Trade Deficit with Country ÷ U.S. Imports from Country) ÷ 2

The Center for Strategic and International Studies used the European Union (EU) and Indonesia as examples.

The EU’s reciprocal tariff rate was 20%. This rate was generated by the formula above: $235.6 billion deficit ÷ $605.8 billion imports = 39%, halved to 20%.

Indonesia’s rate was set similarly: $17.9 billion ÷ $28.1 billion = 64%, halved to 32%.

The tariff rates, as given in April, were predicated on two core beliefs of President Trump. The first is bad economics. The Trump administration noted that imports are subtracted when calculating gross domestic product (GDP), giving them a negative connotation. This reflects a fundamental misunderstanding of what GDP measures—domestic production, with the general accounting identity being expressed as GDP = Consumption + Investment + Government Expenditures + (Exports – Imports). 

Goods produced abroad are, by definition, not domestically produced, but are included in the Consumption, Investment, or Government Expenditure variables because the Bureau of Economic Analysis’s National Income and Product Accounts do not distinguish between domestic and foreign production. Thus, to accurately measure domestic production, Imports need to be subtracted. The upshot is that imports have a neutral effect, not a negative one, on GDP.

The second wrong core economic belief driving the tariffs is Trump’s belief that a trade deficit is a bad thing. Economist Noah Smith described this thought process well:

[B]ecause Trump misunderstands trade deficits in these two ways, he believes that when America runs a trade deficit with a country, that country is ripping us off. He thinks imports are lowering U.S. GDP by forcing us to produce less stuff — essentially, stealing American production. He thus sees trade deficits as a measure of how much is being stolen from America.

Smith describes a trade deficit as “buying stuff with a credit card.” Can trade deficits be bad? Yes, but they can also be good. Smith uses the example of a productive investment as the case for a good trade deficit. If a U.S. company imports a Japanese CNC machine for $100,000, that contributes to the trade deficit. But if that tool is used to make $500,000 worth of car parts, the U.S. has come out ahead.

As with GDP, the White House is fundamentally misinterpreting an accounting identity, in this case, the balance of payments. The balance of payments measures a country’s international transactions in trade, foreign investment, transfers, and changes in the central bank’s foreign currency reserves. The standard GDP equation (GDP = Consumption + Investment + Government Expenditures + (Exports – Imports)) explains how national income is created, but it can also be expressed to show how national income is spent: GDP = Consumption + Government Expenditures + Savings. By equalizing the two, we can arrive at the fundamental balance of payments accounting identity between the Current Account and Capital Account: Exports – Imports = Savings – Investment. 

The upshot is that a Current Account deficit (a “trade deficit” where imports exceed exports) is accompanied by a Capital Account surplus. In essence, when a country imports more than it exports, those additional imports are “paid” by foreign capital flowing into the country. Much of that international capital surplus is accounted for by foreign investment in domestic companies and other private assets. However, the demand for reserve currency by foreign central banks also plays an important role. The U.S. dollar is prized for its stability, which has cemented its status as the world’s primary reserve currency. Foreign central banks buying U.S. dollar reserves are essentially providing the U.S. a free loan, but this foreign demand for dollars increases the Capital Account surplus, which needs to be offset in the Current Account (i.e., increasing net imports). As a result, most expect the United States to run trade deficits for as long as the U.S. dollar remains the principal global reserve currency.

Maligning any import (and its impact on the trade deficit) as only a negative is a massive oversimplification. The rates (originally) put forward by the Trump administration have been paused, walked back, or increased depending on the country—the only part that has remained is the administration’s insistence that tariffs will right the ship, when they seem more likely to sink it.

All this raises a further question: What are the administration’s goals, and how do they justify them? The administration has five claimed uses and goals for tariffs:

• A negotiating tool
• Reshoring production to the U.S.
• Protecting national security
• Raising federal revenue
• Deterring property theft and unfair subsidies

The following sections will evaluate each of these claims.

Tariffs As a Negotiating Tool

President Trump often portrays tariffs as “the art of the deal,” expecting them to coerce trading partners into concessions. In practice, however, traditional allies and rivals have been left baffled. EU diplomats report Washington told them not to expect talks until the United States imposes even higher tariffs. Countries that tried to engage—Britain, Japan, and Israel—found the White House either unresponsive or vague about its demands. As Politico notes, foreign negotiators keep “waiting for a reply” from the Trump administration while being offered no clear agenda.

China initially rebuffed U.S. pressure—when the White House floated talks, Beijing said it was “evaluating” dialogue but warned against “extortion and coercion”, deriding tit-for-tat tariff spikes as a “joke” and retaliating rather than negotiating on intellectual property or subsidy disputes. Eventually, however, both sides agreed to lower rates—U.S. duties on most Chinese imports fell from 145% to 30%, and China’s from 125% to 10%—yet many sectors, notably steel, face disproportionately high levies. Importers point out that relief remains limited by lingering measures such as a 20% ‘fentanyl-related’ tariff and 10% reciprocal tariffs, to name a few.

Likewise, President Trump said his new trade deal with the United Kingdom was a “maxed out deal” and would be the running standard for trade negotiations with other nations. The problem is that even the lowered 10% tariff on imports is substantially higher than the 3% rate in place prior to Trump’s second term.

Reshoring Production to the U.S.

One of President Trump’s repeated claims is that tariffs will spur manufacturing jobs to return to America. In reality, the unpredictable trade environment has done the opposite. Businesses report that the constant threat of new duties has frozen investment plans worldwide. To build new factories, there needs to be an abundance of capital to invest in those projects. And financial markets have reacted badly: for example, the S&P 500 plunged about 4% in the weeks after the “Liberation Day” tariffs on April 2, and 10-year Treasury yields jumped as investors fled U.S. assets. Corporate leaders have been vocal: dozens of firms have pulled or slashed earnings guidance amid the tariff chaos. One CEO admitted it’s become impossible to predict policy, lamenting that “every single prediction has been proved wrong”.

In this climate of uncertainty, long-term capital expenditure has ground to a halt. Yale economists Jeffrey Sonnenfeld and Steven Tian argue that firms simply will not green-light billion-dollar factory projects when trade policy “[is] being enacted in the most uncertainty-inducing way possible.” They observe that “business investment is entirely paralyzed—and will continue to be frozen for the foreseeable future.” Surveys reflect this paralysis: U.S. small-business confidence has plunged sharply, and capital spending plans have stalled. 

Worse still, roughly half of imports to the United States are used in the production and manufacturing of goods in the country, meaning tariffs hurt U.S.-based manufacturers; they do not help them.

In short, rather than encouraging reshoring, the tariffs’ unpredictability has scared off the investors needed to build factories. As one analysis notes, corporations won’t authorize multi-year plant investments when policy whipsaws threaten their returns.

Protecting National Security

The administration justifies its broad metal and tech tariffs on national security grounds, but experts say the evidence is thin. In many cases, economists and defense analysts warn that the blanket tariffs actually undermine security. For instance, Jonathan Hillman of the Council on Foreign Relations argues that without targeted exemptions, the tariffs “are likely to negatively impact the U.S. defense sector, critical infrastructure, and U.S. allies.” 

In other words, blocking imports of steel, aluminum, or semiconductors can raise costs for military suppliers and domestic manufacturers without strengthening them. Hillman concludes flatly that the regime “can backfire without exemptions, harming rather than helping national security.” Beyond that, even if all imports of steel (for example) were blocked, it would take time for any domestic supply to rise to meet demand. 

Worse, there is no sign of any upside in the semiconductor claim. Trump’s team has invoked chip production as a priority sector, yet analysts point out that global chip supply chains cannot simply be reshored by punitive tariffs. China and allies control much of the semiconductor manufacturing ecosystem, and Washington’s measures have only accelerated China’s self-sufficiency drive. In fact, defense industry observers note that the U.S. depended on friendly suppliers even before the trade war; broadly defined “national security” tariffs will do little to change that. In sum, the tariffs have increased industry costs (raising prices by roughly 7% in one model) but have not demonstrably bolstered any specific U.S. military capacity.

Raising Federal Revenue

The claim that tariffs can generate huge federal revenue has also been overstated. In truth, customs duties make up only a tiny slice of the federal budget. For perspective, the U.S. Treasury collected about $5.1 trillion in tax revenue in fiscal 2024 (mainly from income and payroll taxes). In contrast, even very high tariffs would raise only hundreds of billions per year. One independent analysis finds President Trump’s announced tariffs (10–50% across all imports) would generate approximately $330 billion in government revenue annually, while reducing GDP by about 0.8%. That sum is barely 6% of annual tax revenue.

These numbers are at odds with an idea the Trump administration has floated—replacing the income tax with tariffs.

Figure 1: Income Tax vs. Tariffs

Source: Kailey Leinz and Erik Wasson, “Trump Floats Tariff Hikes to Offset Some Income Tax Cuts,” Bloomberg, 13 June 2024.

As Figure 1 shows, the math doesn’t add up.

The Tax Foundation estimates that a sweeping 15% universal tariff (far larger than any real U.S. tariff schedule—or so we thought) would raise about $2.9 trillion over 10 years, roughly $290 billion per year. 

In short, tariffs cannot meaningfully replace income taxes (not even accounting for payroll or other taxes). Even the administration’s own ambitious scenarios ($6 trillion over a decade) look unrealistic: most models show a multi-trillion-dollar shortfall and serious economic side effects.

Deterring Property Theft and Unfair Subsidies

Finally, there is little evidence that the tariffs have stopped intellectual property (IP) theft or state subsidies. China’s bad actors were the ostensible targets, but Beijing’s behavior has not changed. U.S. officials and analysts note that the World Trade Organization itself has long struggled to discipline China on IP and subsidy issues.

But tariffs were only ever a blunt form of pressure. As one expert puts it, trade negotiators needed a “direct approach” with clear penalties for IP theft, not a scattershot list of tariffs. Unsurprisingly, Chinese firms continue cyber intrusions and patent violations unabated, and Chinese industries still enjoy heavy state support. Instead of doing what the administration wanted, China responded to the Trump tariff onslaught with even higher retaliatory duties (up to 125%) on U.S. exports and promptly signaled it was “done” playing tariff tit-for-tat. 

Meanwhile, its “Made in China 2025” strategy and export controls on rare-earth minerals have only intensified. In practice, the tariff war has left foreign businesses cautious, but China’s tech-transfer policies are largely intact. Indeed, the Office of the United States Trade Representative’s latest reports still list Beijing as a top offender on forced technology transfer and IP theft, underscoring that broad tariffs did not eliminate these issues. 

There is no indication that the new duties have meaningfully deterred Chinese IP piracy or unfair subsidies—they have merely provoked retaliation and further hardened China’s stance.

In the end, the Trump administration’s tariff gambit has proven itself far more reversible than resolute. From abrupt freezes and carve-outs on key industries to retroactive exclusions and industry-specific credits, each promise of “reciprocal” discipline has unraveled under political and economic pressure. That same flexibility, however, leaves the entire edifice of protectionism open to swift repeal—an approach that Congress should consider.

By contrast, decades of free-trade agreements and liberalized markets have delivered enduring benefits: American consumers—particularly middle- and lower-income families—enjoy up to a 29% boost in purchasing power thanks to access to lower-cost imports, while producers and exporters have leveraged global supply chains to expand markets and drive innovation. Moving forward, policymakers would do well to remember that genuine economic security arises not from walls at the port, but from the wealth, resilience, and opportunity that come with free and fair exchange.

The Constitution assigns Congress—rather than the president—the authority to set tariffs and regulate trade, ensuring open debate and accountability. In practice, much of that responsibility has shifted to the executive branch, leading to unpredictable tariff decisions that have unsettled markets and complicated relations with our partners. By restoring its proper role, Congress can repeal the current tariffs and establish clear guidelines for any future measures, bringing greater stability to businesses, confidence to allies, and balance to our system of checks and balances in trade policy.

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Source: https://reason.org/commentary/analyzing-trump-administrations-tariff-policies-goals/