Tariffs on Chinese and Mexican Imports Could Cost Consumers $250 Billion

Presidential Candidate Donald Trump has been exceedingly critical of U.S. trade policy.  He is particularly vocal about trade with China and Mexico, which together make up nearly one-third of all U.S. trade (31.3 percent).  Trump claimed that, “If you look at China, and you look at Japan, and if you look at Mexico … they’re killing us.”

It is true that the U.S. is a net importer from these countries.  To rectify this imbalance, Trump has called for increasing tariffs on foreign goods as a way to encourage American importers to purchase domestic goods.  In a New York Times interview from January, the candidate suggested a 45 percent tax on all goods imported from China.  Similarly, in his presidential announcement speech, Trump called for a 35 percent tariff on Mexican auto imports to discourage U.S. companies from locating their manufacturing facilities abroad.

Currently, the U.S. does not impose any tariffs on Mexican imports, according to the terms of the North American Free Trade Agreement (NAFTA).  For Trump’s auto tariffs to come into force, the U.S. would either have to renegotiate NAFTA or break it altogether.  And while some Chinese goods, such as steel, are subject to import taxes, the overall U.S. trade-weighted tariff rate is only 1.5 percent.

To get a sense of the magnitude of the impact, we assume that the U.S. maintains its current import levels and businesses pass the entire cost of the tariffs on to consumers. This provides an upper bound estimate of the impact, as shifts to domestic sources would generally mitigate the impact. Under these assumptions, Trump’s plan could cost American consumers $250 billion per year.  The potential cost per person is detailed below.

A protectionist trade agenda would have dramatic impacts on American consumers.  American importers would see their costs increase, which would most likely translate into price increases and reduced access to foreign goods.

Additionally, protectionist policies also disrupt the benefit of imports in today’s global supply chain; a 2014 study from the National Retail Federation found that 25 percent of the value of imported products in 2009 were American made.  These massive tariff increases would radically change U.S. trade policy and come with substantial costs.