Weighing the Benefits and Costs of America’s 2025 Tariff Strategy

Former JPMorgan Chase Global Chief Economist (Ph.D. in Economics) and Current Global Keynote Speaker

Getty Images: U.S. Treasury Secretary Scott Bessent discussing U.S. Tariff Strategy

The reimplementation of broad U.S. tariffs under President Trump’s 2025 trade policy has ignited global debate about the role of protectionism in modern economies. To help our readers understand this debate, we provide a nonpartisan appraisal of the U.S. tariff strategy.

While some may decide to support or criticize the tariff strategy outright, there is little doubt that the goals of this directive were to bolster U.S. national interests. The results, however, have generated a complex array of trade-offs: slower growth, higher inflation, and geopolitical tensions. Policymakers, businesses, and consumers must now navigate an economic landscape shaped by a more protectionist stance's intended benefits and unintended consequences.

Understanding the Tariff Mechanism

When countries retaliate, tariffs act as a tax on imports and exports. In the U.S., tariffs raise the cost of foreign goods sold in the domestic market. Many companies, including aerospace giant RTX and General Electric, have informed shareholders that they will incur an additional $850 billion and $500 billion in increased costs if the tariffs announced so far remain in place. These figures would be even higher if not for the cost-mitigating strategies these companies plan to implement.

The only question is whether these costs will be borne by reducing profit margins or passed on to consumers. A widely cited Boston Federal Reserve study estimates that nearly 100% of tariffs are usually passed on to consumers. Other studies peg the transmission as low as 90%, but most will agree that these levels are still high.

What is the Impact on U.S. Growth?

The impact on economic growth is clear, with the immediate financial cost of tariffs felt through increased input and consumer costs. Roughly 70% of U.S. GDP is driven by consumer spending, which becomes more constrained as prices rise. When the tariff rate is 10% or 20%, employers do not automatically adjust wages upward by a similar amount to compensate workers for higher tariff rates. That means that tariffs reduce consumers' purchasing power and aggregate demand for goods and services.

On the positive side, the nonpartisan Peterson Institute for International Economics estimates that a hypothetical 15% universal tariff would boost federal government tax revenues by $390 billion per year or $3.9 trillion over the next 10 years. However, an unintended consequence of such actions is that annual U.S. GDP growth is expected to decline by 0.5% to 0.75%!

This reduction stems from several mechanisms:

• Diminished consumer purchasing power due to higher prices.

• Retaliatory measures from trade partners that reduce demand for U.S. exports.

• Lower employment and real wages, particularly in sectors exposed to foreign markets such as agriculture, aerospace, and advanced manufacturing. Over 40 million U.S. jobs, or more than 1 in 5, are tied to the export and import sectors, which would be vulnerable if trade flows are interrupted or reduced.

Federal Reserve Chair Jerome Powell has labeled the tariff policy a “stagflation shock,” referencing its dual impact: suppressing growth while boosting inflation.

Although tariffs generate revenue, potentially narrowing the U.S. fiscal deficit in the short term, their long-term effects include diminished competitiveness and structural inefficiencies. Over time, disrupted supply chains and decreased global integration may leave American firms less agile and more vulnerable to economic shocks.

Global Growth and Spillover Effects

The global impact of U.S. tariffs extends well beyond its borders. According to the International Monetary Fund (IMF), the 2025 global growth forecast has been revised downward from 3.2% to 2.8%. This slowdown is attributed to several interconnected factors:

• Trade contraction, particularly between the U.S. and China, has curtailed export demand and production across multiple countries.

• Rising borrowing costs, with emerging markets now facing decade-high interest rates as investors flock to safe-haven assets.

• According to the IMF, increased policy uncertainty is a primary drag on business investment, especially in cross-border industries like automotive and electronics.

As global trade flows shift, developing countries that depend on export-led growth face rising capital flight risks and debt distress. The IMF also warns of heightened refinancing risks and greater vulnerability to external shocks, especially as global bond yields climb.

These dynamics create a dilemma for monetary policymakers. Should inflation become entrenched, the Federal Reserve may be forced to maintain higher interest rates for longer, potentially stifling investment and prolonging the slowdown.

Trade Balances and Competitiveness

While well-intentioned U.S. tariffs are often justified to reduce trade deficits, the data undercut this assumption. According to the IMF’s April 2025 analysis, U.S. tariffs have mostly redirected global trade flows by $1.4 trillion.

This outcome is consistent with long-established economic theory. Tariffs may reduce imports in the short run, but retaliation from trading partners offsets this by suppressing export volumes. Moreover, reduced efficiency that results in lower productivity growth rates from disrupted supply chains leads to higher costs, which erode global competitiveness over time.

Even a projected $3.9 trillion increase in tariff revenues over the next decade, as the Peterson Institute estimates, fails to compensate for these broader structural losses. Protectionism, while politically appealing, reduces national welfare by violating principles of comparative advantage and misallocating resources.

Summary and Concluding Thoughts

There is little doubt that the controversial U.S. tariff strategy was crafted with good intentions, but it will generate positive and negative results. On the positive side, federal tax revenues could rise annually by $390 billion or more if U.S. tariff rates average 15% or higher. Although this is far short of the amount needed to eliminate federal tax collections, given that the government spent $6.75 trillion last year, it is still a sizeable amount!

Still, the evidence suggests that while tariffs can generate short-term benefits, such as increased tax revenues and temporary boosts to protected industries, they do so at a significant cost to consumers and overall economic growth. Geopolitical tensions may also lead foreign investors (see our previous analysis on this topic) to avoid U.S. investments, and foreign tourists to avoid visiting the United States.

We leave it to the reader to weigh the benefits and costs of the U.S. tariff strategy when choosing to support or oppose the imposition of tariffs.