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Just the Facts: Creating a Trade Policy that works for America
June 2025
Summary: In response to the US trade deficit, President Trump has proposed large tariffs on other countries. These tariffs are harmful to the US, and there are better ways to address the trade deficit. This paper addresses how tariffs work, why Trump's tariffs are a terrible idea, and better policies to reduce the trade deficit.
International Trade
International trade is an important part of our economy. More than 40 million American jobs depend on trade (1). It also allows each country to focus on the products and industries that it does best, lowering costs and improving quality for everyone. It gives consumers more choices (such as fresh fruit in the winter) and gives US businesses a bigger market for their goods and services.
However, this can lead to a "trade deficit". That is what is happening in the US now. A trade deficit occurs when a nation imports more than it exports. For instance, in 2024 the United States exported nearly $3.2 trillion in goods and services to other countries, while it imported $4.1 trillion, leaving an overall trade deficit of more than $900 billion. (2)
While economists disagree about how big of a problem this is, there are legitimate reasons to be concerned about a large and persistent trade deficit. For example, it may lead to job losses, and financing the deficit puts the US in debt to other countries. It may also put the US at risk by making us dependent on other countries for critical supplies. (2)
What are Tariffs and how do they work?
Donald Trump is using tariffs to try to reduce our trade deficit. So, what are Tariffs and how do they work? A tariff is a duty imposed by a national government on imports of goods, and is paid by the importer. (3)
As shown on this diagram, without tariffs an importer in the US buys goods from an overseas manufacturer, marks them up to cover expenses and profit, and sells them to consumers or other businesses. In this example the overseas manufacturer charges $10 to make a shirt, the importer in the US adds a $10 markup, and the consumer pays $20.
When a tariff is imposed, the importer pays it to the US government, and then usually passes it on to the consumer in the form of higher prices. This is why tariffs are often referred to as a tax on consumers.
In this example, the US importer is still paying $10 to the manufacturer and is still adding the $10 markup. But they also have to pay the $5 to the US government, which usually gets added to the amount the consumer pays. So, in this example, the government gets $5 but the consumer pays for it.
The tariffs proposed by Trump are the highest since the 1940's! (4) The last time tariffs went up like this we got the Great Depression. (5)
So, why are Trump's tariffs such a bad idea? There are lots of reasons - here are three big ones:
As we saw above, they are a tax on consumers. The Center for Economic Policy and Research points out that Trump's tariffs will "give the country the most massive tax increase in its history, possibly exceeding $1 trillion on an annual basis, which comes to $7,000 per household. And this tax hike will primarily hit moderate and middle-income families." (6)
They increase prices and cause inflation to go up. US News and World Report has stated "Leading economists, largely critical of Trump’s moves, warn the tariffs could destabilize global markets, disrupt trade and ultimately increase costs for U.S. businesses and consumers." (6)
They are reducing economic growth and could cause a recession. Tariffs make it harder for American manufacturers to buy the raw materials they need. In addition, other countries have proposed tariffs on US goods in response, making it harder for US companies to sell their products overseas.
Trump's tariffs are a terrible idea. They will cost consumers money and hurt our economy. So, what is a better way to address our trade deficit? Here are three better ideas:
Use tariffs selectively, and in combination with industrial policy. The Roosevelt Institute observes that "one of the major focuses of the Biden administration was using a mix of subsidy and tariff tools to make it more attractive to produce in the United States." (7)
Invest in important US industries. Biden's CHIPS Act is a great example - encouraging investment and innovation in semiconductors, which is a strategically important industry. Making these industries more competitive globally will help to reduce our trade deficit.
Build a 21st century workforce by encouraging higher education and vocational training, so that the US can be competitive in strategic, high value-added jobs of the future.
Bottom line, tariffs are not a good solution for America. They will drive up prices and hurt our economy. There are better ways to reduce the trade deficit while making our economy and our country stronger.
Sources:
US Chamber of Commerce, 1/15/21, https://www.uschamber.com/international/trade-agreements/the-benefits-of-international-trade
Council on Foreign Relations, 4/23/25, https://www.cfr.org/backgrounder/us-trade-deficit-how-much-does-it-matter
Oxford Economics, 3/19/25, https://www.oxfordeconomics.com/resource/tariffs-101-what-are-they-and-how-do-they-work/
Tax Foundation, https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/
Britannica, https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act
US News and World Report, https://www.usnews.com/news/national-news/articles/2025-04-03/monstrously-destructive-and-unwise-economists-react-to-trumps-tariffs
For More Information:
A summary of several economists’ views on Trump’s tariffs - US News and World Report, https://www.usnews.com/news/national-news/articles/2025-04-03/monstrously-destructive-and-unwise-economists-react-to-trumps-tariffs
Analysis of the economic impact of the Trump Trade War - Tax Foundation, https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/
