Could Donald Trump’s tariff plans come to fruition? Maybe—but it’s far from a sure thing.
We see a 10% probability of a 10% uniform tariff hike and a 36% probability of a China tariff increase to 60%.
Though these tariff hikes are far from assured, we assess the probability-weighted impact on the real gross domestic product at 0.32%. Owing to the upped probability of tariff hikes, we’re forecasting a GDP growth of 2.7% over the next five years.
In our latest Economic Outlook, we detail the potential future of tariffs, immigration, and inflation under the Trump administration.
What Are Trump’s Tariff Proposals?
During his first presidential term, Trump imposed several tariffs, including a 25% tariff on steel and a 10% tariff on aluminum imports from most countries.
Since then, Trump has expressed support for implementing additional tariffs. During his 2024 campaign, he proposed a 10% tax hike on all US imports and a 60% tariff on imports from China.
We Have Relatively Low Confidence That Trump’s Proposed Uniform Tariff Hikes Will Happen
We see a 10% probability of uniform, or across-the-board, tariff hikes. That’s a 20% probability that Trump seriously pursues these tariffs, and if he does, a 50% chance that they’re successfully implemented.
There’s a high likelihood that this 10% tariff talk is mere bluster. He talked about similar tariffs during his first term, but they were never seriously pursued.
There are several reasons why he may not choose to pursue them:
- The proposals could be campaign rhetoric or a hard-line negotiating stance designed to extract concessions from trading partners.
- Trump could be dissuaded by opposition from congressional Republicans, business groups, and members of his inner circle (namely, former National Economic Council Director Larry Kudlow).
- Other advisors may cite tariffs’ conflict with foreign policy goals like supporting Israel or countering Iran or China.
However, if he does seriously pursue these tariffs, we see a 50% probability that they will be implemented.
Legislative approval looks virtually impossible, so successful implementation depends on whether executive action passes legal muster.
The justifications cited for recent tariffs—that is, national security, China’s unfair trade practices, and intellectual property theft—don’t seem applicable to the 10% across-the-board tariffs. But the president does have a litany of statutory authorities available to him to adjust the tariff rates.
Given the high uncertainty, this is something of a coin flip.
There’s a Greater Chance That Trump Will Pursue China Tariff Hikes
We think there’s a 36% probability of the China tariffs being implemented. We put them at a 45% probability of being seriously pursued, and if they are, an 80% chance that they’re implemented.
That’s more than triple the chances of a uniform tax hike.
We think Trump is much more likely to seriously pursue the China tariffs because of the increasing bipartisanship of anti-China sentiment. And given the large jump in China tariffs already implemented in his first term, there’s more reason to think Trump will follow through with his newest threat on China.
Still, a host of voices will try to dissuade Trump from pursuing the 60% tariffs. Particularly, we expect massive pushback from business groups because of China’s likely retaliation, not just on US exporters but also on US firms operating within China. And it’s certainly true that China may conclude it has little to lose with severe retaliation.
At the same time, China also has very strong incentives to offer meaningful concessions that would dissuade Trump from the tariffs. Unlike in 2018-19, during the first trade conflict, other countries are now stepping up protectionist measures against China. But China needs foreign trade to compensate for a deflating domestic real estate bubble.
Should Trump pursue the 60% China tariff plan, we see an overwhelming (80%) probability of success.
Unlike the across-the-board tariffs, there could be a case for executive action here via Section 301, which authorizes the president to “investigate and take action to enforce US rights under trade agreements and respond to certain foreign trade practices.”
The Section 301 authority was used for Trump’s 2018-19 tariff hikes and was even expanded upon during Joe Biden’s administration, so there’s reason to believe it could be used again.
Trump’s Tariff Hikes Could Cause a 1.9% GDP Decline
We project a 1.4% decrease in the level of US real GDP in the case of the uniform tax hike, and we project a 0.5% decrease in the case of the China tariffs.
We expect a lower impact from the China tariffs because of the probability that many companies will dodge these tariffs by rerouting through third countries.
The probability-weighted impact of the Trump tariffs amounts to 0.32%. This reflects a higher likelihood of protectionist measures regardless of the party in power (as shown by the Biden administration’s tariffs on electric vehicles and other goods).
Higher tariffs unambiguously cause a reduction in the real GDP and are often thought to increase inflation.
Still, we think that the magnitude of any resulting inflation depends on many factors, including the Federal Reserve’s response. We’ve factored a small impact into our inflation forecast, but it’s not material.
This article was compiled by Emelia Fredlick.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
