Note: This version is updated with results for additional tax revenue and a retaliation scenario.
Key Points
- CPA modeled former President Trump’s recent proposal regarding a 10% universal tariff. Our simulation finds that the tariff change would increase economic growth and create opportunity for Americans through increasing incomes and job creation. Under the proposal, real household incomes would increase by nearly $8,000 and 3.3 million new jobs would be created. Real GDP would grow by 3.61%.
- New federal tax revenue of $460.3 billion a year would be generated by the tariff increase. Policymakers would have the opportunity to use the increased government revenue to reduce income taxes on American families or further invest in growing the economy through tax credits that promote investment in American manufacturing.
- The CPA modified GTAP model is based on real-world evidence of how tariffs expand economic output and allows firms to respond to the increase in domestic demand by increasing investment and creating new jobs.
- Retaliation in the form of a 10% tariff on all U.S. exports actually improves overall U.S. economic performance because U.S. households see a larger increase in household income of 11% as retaliation reduces the inflation effect from 3.8% to just 1%.
Policy Proposal: 10% Universal Baseline Tariff
A recent proposal by former President Donald Trump to establish a “universal baseline tariff” has generated renewed public debate about the role of tariffs as an industrial strategy tool. Trump’s recent proposal appears to be a 10% additional tariff on all imports. Most countries in the world impose higher tariffs on all imports than the United States currently does.
To help inform the debate, CPA’s economics team simulated the expected economic impact of the 10% universal tariff proposal. We expect to run further simulations relating to production tax credits as well as future tariff proposals in Congress or in the presidential race.
Previous CPA model simulations estimated the impact of 35% tariffs on manufacturing imports. In this simulation, we estimate the effects of a 10% universal tariff increase on all imports into the U.S. Our model shows that increasing tariffs by 10 percentage points on all imports would be pro-growth and improve the lives of Americans by creating new, high-paying employment opportunities in manufacturing and increase real household incomes.
Critics of the proposal claim that it would make the cost of consumer goods more expensive and equate it to a tax hike on Americans. This is flawed analysis because it uses models that ignore how tariffs increase domestic production spurring output and employment while assuming a full pass-through of the tariff to consumers. This analysis and other studies critical of the proposal do not capture the real-world evidence of how tariffs work in practice. We model the proposal using a more accurate economic model as described below.
CPA Modified GTAP Model
The standard Global Trade Analysis Project (GTAP) model has frequently been used to evaluate the economic impact of trade policy proposals. The standard model has built-in rigidities that bias it in favor of free trade despite the empirical evidence, including the experience of U.S. tariffs from 2018 to today, that tariffs can increase domestic output and employment. The standard model makes several unrealistic assumptions, including permanent full employment.
In fact, when imports are restricted, domestic producers can take advantage of the larger market opportunity to increase sales, output, and employment. As the recent U.S. International Trade Commission report demonstrates, price increases in tariffed products are typically so small as to be barely visible to buyers in the tariffed industries, whether they are industrial buyers or consumers.
We modify the standard GTAP model by introducing productivity elasticities to the model that allow domestic producers to increase output and leverage the opportunity that a tariff provides. We also introduce factor elasticities that allow firms to respond to an increase in demand by increasing their capital investment and increasing employment. Firms respond to the increased economic activity by expanding capital investment and hiring more workers, which further amplifies the effect of the tariffs.
To model the economic impact of the 10% Universal Tariff proposal, we increase the tariff level on all U.S. imports (both manufactured and non-manufactured goods) by 10 percentage points.
Results: 10% Universal Tariff Would Grow U.S. Economy and Create Jobs
Our model finds that increasing tariffs on all imports to the U.S. by 10 percentage points would grow the U.S. economy and expand economic opportunity for millions of Americans in the form of job creation and gains in household incomes. We find real GDP would increase by 3.61%. Real household incomes rise by 10.43%; equivalent to approximately $7,779 at current income levels as of 2022. Employment would increase by 2.1%. At current employment levels, this means the U.S. economy would add 3.3 million new jobs as a result of the economic expansion created by the tariffs. Summarized in Figure 1, the overall impact of the 10% Universal Tariff proposal is that Americans’ economic situation would be substantially improved.
Figure 1: Results of Modified GTAP Simulation of 10% Universal Tariff
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, U.S. Census Bureau; CPA Calculations
The increase in tariffs would also expand domestic manufacturing output by $646.6 billion. The increase in manufacturing output is broad-based throughout the economy with the largest gains in the Computer and Electronic goods sector, which grows by 32%.
The increase in tariffs would also generate substantial additional income for the U.S. Treasury. In 2022, imports into the U.S. amounted to $3.243 trillion. Our model shows the tariffs would result in a reduction of imports by 7.48%. After that reduction in imports, the annual tariff revenue from this proposal would amount to $300 billion. The growth in the economy would generate additional individual and corporate tax revenue worth $160.3 billion. The total new federal tax revenue would then be $460.3 billion a year. This additional tax revenue creates an opportunity for policymakers to use it either to cut taxes, increase spending, or reduce the federal budget deficit. Policymakers could for example legislate new tax credits to further stimulate investment in manufacturing.
In the simulation, consumer prices would have a temporary and modest rise of 3.82%. The transition to the new equilibrium would take time, roughly six years. A one-time price increase of 3.82% would translate to adding just 0.64 percentage points to the annual rate of inflation for consumer goods. At current forecasts of inflation, as shown in Figure 2 this would amount to 3.1% which is below the average rate of inflation thus far in 2023 and much lower than the inflation rates of 2021-22.
Figure 2: Forecasted Inflation Rate with Temporary Consumer Price Increase
Source: Federal Reserve Bank of St. Louis; CPA Calculations
Retaliation Reduces Growth, But Raises Household Incomes
What would be the impact of the 10% tariffs if other nations respond with 10% tariffs of their own? We modeled this scenario by assuming that all foreign nations impose 10% tariffs on all their imports from the U.S. as retaliation against the U.S. universal tariff.
The effect of retaliation on the U.S. economy, shown in Table 1 below, is surprisingly small. Growth in the total economy falls from 3.61% to 2.97%, a tiny fall of 0.64%. In fact, the overall economic results actually improve because the rise in consumer prices falls from 3.82% to just 1.01%. Total real household income rises by 11.46%, a point more than the 10.43% rise in the unilateral tariff case.
The most significant change caused by the retaliation is a severe fall ins U.S. exports of 21.24% which is not quite matched by the fall in imports of 15.93%. This means the U.S. trade balance would deteriorate further. More importantly though, GDP, incomes and employment all rise as a result of the tariffs plus retaliation combination.
Ironically, retaliation improves U.S. economic performance. This is because retaliation reduces price pressures on the U.S. economy, enabling the increase in domestic production to flow through more effectively to household incomes.
When the economy receives an external shock such as the imposition of 10% tariffs on all U.S. imports, a key factor in the outcome is how U.S. production responds. The response will be divided between an increase in the volume of production and the rise in prices of that production. In the unilateral U.S. tariff case, that split was roughly equal, so U.S. GDP rose by a similar amount to consumer prices. The retaliation acts to moderate foreign demand, so prices rise less. That means that real household incomes can rise more because the impact of inflation is reduced.
Table 1. U.S. Tariffs vs. U.S. Tariffs with Retaliation
| Economic Indicator | U.S. 10% Universal Tariffs
Change (%) |
10% Tariffs with Retaliation
Change (%) |
| Real GDP | 3.61% | 2.97% |
| Real Household Income | 10.43% | 11.46% |
| Consumer Price Increase | 3.82% | 1.01% |
| Real Imports | -7.48% | -15.93% |
| Real Exports | -7.28% | -21.24% |
Conclusion
The CPA modified GTAP model allows import restriction to stimulate domestic production and the domestic economy to allocate more resources, labor and capital, to those industries that are seeing growth. When the U.S. levies 10% tariffs on all imports, this allows domestic production to become more competitive against imports and domestic production rises. The result is growth in GDP, household incomes, consumption, and investment. Job growth rises, with 3.3 million jobs created.
Retaliation has a very limited effect on the economic growth, but a large effect on inflation, which falls dramatically. Retaliation reduces U.S. exports substantially but this only partly offsets the stimulus from increased domestic production. By reducing inflationary pressure, retaliation leads ironically to a larger increase in household incomes.
The modified model is more flexible and realistic than the standard GTAP model, because it allows the economy to respond to new policies with changes in volumes of output as well as price changes. These results suggest that a universal tariff of 10% would stimulate economic growth in the U.S.
Additional Material: View a slide presentation on CPA’s economic analysis here.
