Trump's tariff plan: Why he's pushing for them, and how they might end up raising prices

If you look at what President-elect Donald Trump has shared about his economic plans over the last several months, one word comes up again and again: tariffs.

President Trump has said he plans to install a blanket tariff of 10% to 20% on all imports, with additional tariffs of 60% to 100% on goods brought in from China. In the September Presidential debate, Trump characterized the plan as a way to extract money from rival nations.

A sweeping tariff policy will kill two birds with one stone, Trump says: It could find a new source of revenue for the U.S. government, which could offset losses from lowering or eliminating certain forms of income tax, while extracting money from rival governments.

"Other countries are going to, finally, after 75 years, pay us back for all that we've done for the world," he said at the debate.

Economists, however, tend to agree that such a plan would would have the effect of raising prices on everyday goods. "If President Trump raises tariffs on imported goods, it means inevitably that American consumers are going to pay more," Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, told CNBC.

How tariffs work

Simply put, a tariff is a tax on imports, though not one paid by the exporting country. Rather, U.S. companies seeking to import goods from China, for example, would have to pay more to bring them in.

This generally serves two purposes. One is to protect certain domestic industries. By making it more expensive to import a product, the U.S. government effectively prevents foreign firms from undercutting the prices of American companies.

The other is to generate revenue for the U.S. government. The nonpartisan Tax Foundation estimates that a 10% universal tariff would raise $2 trillion in revenue for the federal government from 2025 through 2034, and a 20% tariff would raise $3.3 trillion.

That's quite a bit of money in raw terms, but not enough to cover the revenue shortfall that would result from making the tax cuts from the 2017 Tax Cuts and Jobs Act permanent, the Tax Foundation found.

Trump has floated the idea that a tariff policy could eventually replace U.S. federal income tax altogether, a convention that the nonpartisan Peterson Institute for International Economics called "literally impossible."

The side effect of tariffs: higher consumer prices

A side effect of imposing tariffs — and what Trump's opponents focused on during his presidential campaign — is that importing companies that pay the tax tend to pass the cost along.

"Ultimately, the cost of tariffs will be paid by us, the consumer," says George Ball, chairman of investment management firm Sanders Morris. "They'll be buying things at higher prices than they otherwise would."

Exactly how much higher prices would go is hard to say. The relationship certainly isn't as simple and direct as some Democrats have suggested by contending that tariffs would function as a "20% sales tax," says Clark Bellin, chief investment officer at Bellwether Wealth.

"Especially when you throw the inflation we've been having into the mix, it's hard to come up with a line item like, 'This is how much things have gone up because of tariffs,'" he says.

Trump instituted a new set of tariffs on certain products in 2018 and 2019, and inflation remained moderate throughout his presidency. Those tariffs on certain imported Chinese products, including aluminum, steel, semiconductors and electric cars, have remained in place or in some cases increased during the Biden presidency.

Still, a number of organizations say Trump's new tariff policy would have a negative effect on American consumers.

Democrats on the campaign trail insisted the policy would cost middle-class families $4,000 a year. That number is in line with estimates from the left-leaning Center for American Progress and the right-leaning American Action Forum.

The Peterson Institute for International Economics pegs the yearly cost at $2,600 per household. The Tax Foundation says a 10% universal tariff would increase taxes on U.S. households by $1,253 on average in 2025, and a 20% universal tariff would bump costs by $2,045.

Financial experts say a more aggressive tariff policy could be viewed as a form of economic saber-rattling, too. "Typically in a situation where a country is imposing a number of new tariffs, what you tend to see is a reaction from the other countries that are impacted," says Sam Millette, director of fixed income at Commonwealth Financial Network.

"That creates a trade war. And effectively, what that does is create a situation where both impacted countries are seeing this government intervention. It tends to lead to higher prices for consumers in both countries."

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