Even on Pause, Trump's Trade War Runs Up a Big Price Tag

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14-04-2025

If you're keeping track—and economists are making their best efforts—President Donald Trump's trade war with the entire planet is running up quite a price tag. Even with a 90-day pause on some tariffs (except for China), the imposition or even just the threat of import taxes on goods from around the world and the inevitable retaliation by other countries is expected to take a bite out of the economy and people's prosperity. Figuring out how much of a bite it will take is a trick, but there's little doubt that it will be painful.
The grimmest assessment of the trade war's impact so far may come from the Penn-Wharton Budget Model (PWBM). In an analysis considering costs of the Trump administration's tariff plans as of April 8, economists and data-crunchers Lysle Boller, Kody Carmody, Jon Huntley, and Felix Reichling warned that "many trade models fail to capture the full harm of tariffs." Using their own model, the authors project that tariffs announced so far "would reduce GDP by about 8% and wages by 7%" over time.
The tariffs, the PWBM team adds, affect the economy through three main channels: The tax on imported goods imposes costs on consumers and businesses in the United States, with consumers suffering the brunt of it in the longer term; the reduction in imported goods "means foreign businesses and governments will purchase fewer U.S. assets, including U.S. federal government bonds"; and increased economic policy uncertainty from the tariff announcements will reduce economic activity as businesses and individuals put off investment, hiring, and spending while they wait to see how matters shake out.
The PWBM analysis concluded that the tariffs would raise revenue roughly equivalent to increasing the corporate income tax from 21 percent to 36 percent, or $5.2 trillion over 10 years. "While raising the corporate tax rate is generally seen as highly economically distorting, tariffs would reduce GDP and wages by more than twice as much," the authors caution.
What that would mean in real terms for average Americans, they add, is that "a middle-income household faces a $58K lifetime loss."
The Tax Foundation has also been tracking the cost of the trade war in an ongoing analysis by Erica York, vice president of federal trade policy, and senior economist Alex Durante. As of April 11, they "estimate tariffs will cause imports to fall by slightly more than $800 billion in 2025, or 24 percent." Revenue-wise, they see tariffs raising $2.2 trillion over the next decade. Obviously, that big an effect on trade will also have an impact on the U.S. economy.
"We estimate that before accounting for any foreign retaliation, Trump's tariffs will reduce long-run US GDP by 0.8 percent," York and Durante warn. "As of April 10, threatened and imposed retaliatory tariffs affect $330 billion of US exports based on 2024 US import values; if fully imposed, we estimate they would reduce US GDP by 0.2 percent. Combined, the US-imposed tariffs and the threatened and imposed retaliatory tariffs reduce US GDP by 1.0 percent."
As does PWBM, the Tax Foundation expects the Trump administration's tariffs and resulting retaliation to hurt the U.S. economy. But there's a substantial difference between the Tax Foundation's negative forecast and the darker predictions of PWBM. The economists at PWBM already said they think other models underestimate the impact of tariffs. By email, I asked York for her take on the difference between her organization's calculations and the PWBM numbers.
"While tariffs are more economically harmful than a simple analysis suggests due to how they affect capital investment and productivity growth, PWBM's approach and findings seem very aggressive," she responded. She added that the grimmer predictions "are very far outside the range of what other modeling finds."
That said, the disagreement between the two analyses is one of degree; both concur that a trade war will hurt Americans. Part of the difference is a matter of uncertainty over economic policy, foreign and domestic, which PWBM notes "generally depresses economic activity by prompting firms and households to postpone investment, hiring, and consumption decisions."
That point was emphasized by Minneapolis Federal Reserve President Neel Kashkari, who last week wrote, "the significant increase in economic uncertainty will likely reduce firms' desire to invest."
Agreeing with that point is Larry Fink, CEO of the financial firm BlackRock.
"I think you're going to see, across the board, just a slowdown until there's more certainty," Fink told CNBC on Friday. "And we now have a 90-day pause on the reciprocal tariffs—that means longer, more elevated uncertainty."
From a trade perspective, it's good that tariffs have been partially paused—again, except for China. But a 90-day pause isn't a cancellation of the trade war; it just kicks the can down the road. Until people know whether tariffs will eventually be hiked, and the degree to which other nations will retaliate, many would-be investors are likely to sit on their hands, businesses will hold off on committing to deals, and consumers will put off purchases. The almost certain result is a big hit to the economy.
"I think we're very close, if not in, a recession now," Fink added.
It's probably a mistake to look to economic models for precise crystal-ball gazing. When it comes to this trade war—or most economic policies—the economists are better pointing to a direction rather than a specific destination.
"Economics is not about forecasting," comments economist and Hoover Institution senior fellow John Cochrane. "Most of what happens comes from external shocks. Economics is better at cause and effect—what is the effect of tariffs?"
And most economists agree on the effects of tariffs in general, the protectionist measures imposed by both the first Trump and subsequent Biden administrations, and the draconian trade barriers now championed by the second Trump administration. They'll hurt the U.S. economy and make us poorer.
It may be too soon to forecast the precise costs of protectionism and of starting a trade war with the entire world, but we can be sure that it will run up an enormous price tag.
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