Trump Tariffs Could Slash Deficit by Trillions, With Modest Impact on Inflation, Economic Output : CBO 👉 Updatem News

The nonpartisan agency’s analysis examines three possible scenarios under Trump’s proposed tariffs.

Proposed tariff hikes by President-elect Donald Trump could significantly reduce the federal deficit over the next decade and would do so at modest cost to inflation and economic output, according to a new Congressional Budget Office (CBO) analysis, which is the highest-profile impact assessment yet of Trump’s proposed tariffs.

The nonpartisan agency’s analysis, released in a Dec. 18 letter to lawmakers, assumes three scenarios under Trump’s trade policy proposals: a universal 10 percent tariff on all imports; a 60 percent tariff on Chinese imports; and a combination of the two. Under a combined scenario, the CBO projects that the Trump tariffs could slash deficits by as much as $2.9 trillion over the next decade. This would slash by roughly 13 percent the estimated $22.1 trillion in total cumulative deficits that the CBO expects will be generated through 2034.

The agency warned that the proposed tariffs also have downsides. Inflation, as measured by the Personal Consumption Expenditures (PCE) price index, an inflation gauge that the Federal Reserve relies on most heavily in setting monetary policy, would increase by 1 percent over the next two years under the combined scenario.

After 2026, the tariffs would not have any additional significant effects on prices. Economic output would also see a decline. Under the most aggressive tariff scenario, U.S. gross domestic product (GDP) growth would be a relatively modest 0.6 percent lower over the next 10 years than it otherwise would be.

Trump, who has called himself “Tariff Man,” has repeatedly touted the use of tariffs for a range of policy outcomes, including protecting domestic industries from unfair foreign competition and incentivizing the reshoring of manufacturing jobs. During his first term, he used the tariffs or the threat of tariffs as a bargaining tactic to pressure countries into renegotiating trade deals that he felt unfairly disadvantaged American businesses. Recently, Trump threatened Canada and Mexico with 25 percent tariffs if they didn’t take action to stop the flow of fentanyl and illegal immigrants across their borders into the United States.

Supporters of Trump’s proposed tariffs contend that the long-term benefits of strengthened domestic production capabilities and reduced dependence on foreign imports justify the short-term economic costs.

Critics say that the economic drawbacks may outweigh the benefits. Some economists warn that higher tariffs could disrupt global supply chains, leading to inefficiencies and higher production costs for U.S. businesses. There are also concerns about potential retaliatory measures from trading partners, which could harm U.S. exporters and further dampen economic growth.

Other Scenarios

The CBO also analyzed the potential impacts of Trump’s proposed tariffs under two narrower scenarios: a universal 10 percent tariff on all imports and a 60 percent tariff on Chinese imports only. Both scenarios would reduce the federal deficit, with varying effects on inflation and economic growth.

Under the universal 10 percent tariff scenario, the CBO estimates a deficit reduction of $2.2 trillion over the next decade, contributing to a nearly 10 percent reduction of the projected $22.1 trillion cumulative deficit. Inflation would rise by 0.6 percent through 2026, with no additional meaningful impact on prices thereafter. The economic impact would also be less severe than in the combined scenario, with GDP growth slowing by only 0.3 percent over 10 years.

The 60 percent tariff on Chinese imports would yield a smaller deficit reduction of $0.8 trillion over the same period, largely due to its narrower overall scope. Inflation would increase by 0.4 percent over the next two years, while GDP growth would decline by 0.3 percent over the decade.

There have been other analyses of Trump’s proposed tariffs, with various conclusions. Moody’s Analytics projects that Trump’s proposed 10 percent universal tariff would raise inflation by 1.1 percent at its peak in 2025, reduce GDP by 3.6 percent by 2028, and worsen the federal deficit throughout the 2024–28 period.

The Budget Lab at Yale projects that Trump’s proposed 10 percent universal tariff and 60 percent tariff on Chinese imports could raise consumer prices by 1.2–5.1 percent by 2028, reduce real GDP by 0.5–1.4 percent over the same period, and generate between $1.2-4.4 trillion in revenue over 10 years.

Tariffs as Leverage

Some analysts and individuals in Trump’s orbit have suggested that the president-elect’s aggressive tariff proposals may be more about leverage than revenue.

Trump’s nominee for Treasury Secretary, Scott Bessent, has repeatedly described tariffs as a tool for securing broader foreign policy goals. In a recent Fox News op-ed, Bessent said that tariffs could be used as a useful tool for achieving various aims.

“Whether it is getting allies to spend more on their own defense, opening foreign markets to U.S. exports, securing cooperation on ending illegal immigration and interdicting fentanyl trafficking, or deterring military aggression, tariffs can play a central role,” he wrote.

Howard Lutnick, Trump’s pick for Commerce Secretary, has described tariffs as a “bargaining chip” to get policies in place that are better for American industry and workers.

Billionaire investor Bill Ackman has called Trump’s tariff threats against Canada and Mexico a way to prod the two countries into stronger action on drugs and illegal immigration.

“To be clear, according to Trump the 25 percent tariffs will not be implemented, or if implemented will be removed, once Mexico and Canada stop the flow of illegal immigrants and fentanyl into the U.S,” Ackman wrote on X.

“In other words,@realDonaldTrump is going to use tariffs as a weapon to achieve economic and political outcomes which are in the best interest of America, fulfilling his America first policy.”

Original News Source Link – Epoch Times

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