US presidential candidate Donald Trump has promised to significantly increase tariffs on foreign goods imported into the US if re-elected.

He has said he would impose tariffs of up to 20% on foreign goods and 60% on all Chinese goods. He has even talked about imposing a 200% tax on some imported cars.

Tariffs are at the heart of Trump's economic policy, and he sees them as a way to boost US economic growth, protect jobs and raise tax revenue.

On the campaign trail, he said tariffs "would not be a cost to you, but a cost to another country". But economists are almost unanimous in saying this is misleading propaganda.

How do tariffs work?

A tariff is a domestic tax on goods as they enter the US, calculated as a percentage of the import price.

If the tariff is 10%, a $50,000 (£38,000) car imported into the US would cost $5,000.

This fee is paid by US companies importing the goods, not by foreign companies exporting the goods.

So in that sense it is a tax paid directly by US companies to the government of that country.

In 2023, the United States imported about $3.1 trillion worth of goods, equivalent to 11% of its GDP.

The tariffs imposed on these imports brought in $80 billion in revenue that year, about 2% of total U.S. tax revenue.

But unlike previous bills, where the final "economic burden" of tariffs falls is a very complicated question.

If U.S. import companies raise retail prices and pass the tariff costs on to U.S. consumers, the latter will bear the burden.

If U.S. import companies absorb the tariff costs themselves, their profits will decrease, and they will bear the burden in disguise.

Another scenario is that foreign exporters reduce their wholesale prices by the same amount as the tariff value in order to retain U.S. customers. In this way, exporters' profits fall and they bear the economic burden of tariffs in disguise.

In theory, all three of the above situations are possible. But in reality, most of the economic burden is ultimately borne by U.S. consumers.

This is the conclusion of the National Bureau of Economic Research after analyzing the new tariffs implemented by Trump during his term from 2017 to 2020.

In September, the University of Chicago surveyed a group of well-respected economists, asking them whether they agreed that "tariffs cause consumers in the country imposing the tariffs to bear a large part of the price increase." Only 2% disagreed.

Price increases and tariffs

Let's use a concrete example.

In 2018, Trump imposed a 50% tariff on imported washing machines.

Researchers estimate that this directly caused the price of washing machines to jump by about 12%, equivalent to an increase of $86 per unit, and American consumers paid a total of about $1.5 billion more for these products each year.

There is reason to believe that if a future Trump administration imposes higher import tariffs, the economic burden on consumers will be the same.

The nonpartisan Peterson Institute for International Economics estimates that Trump's new tariff proposal will reduce American incomes, by about 4% for the poorest fifth of the population and about 2% for the richest fifth of the population, while the typical middle-income family will lose about $1,700 a year.

The left-wing think tank Center for American Progress uses a different calculation method and estimates that the loss for middle-income families is between $2,500 and $3,900.

Several researchers also warned that another round of major tariff measures in the United States would likely cause domestic inflation to soar again.

Are jobs affected?

Trump said his tariff policy can protect and create jobs in the United States.

He said at the campaign: "Under my plan, American workers will no longer worry about your jobs going to foreign countries. Instead, foreign countries will worry about their jobs going to the United States."

The political background of Trump's tariffs is that the public has long been worried about the loss of American manufacturing jobs to countries with lower labor costs. This concern has intensified after the signing of the North American Free Trade Agreement (Nafta) with Mexico in 1994 and China's accession to the World Trade Organization in 2001.

Trump tariff's impact on steel industry positions

When the North American Free Trade Agreement took effect in January 1994, there were nearly 17 million manufacturing jobs in the United States, which fell to about 12 million in 2016.

But economists say it is misleading to blame trade for job losses, arguing that automation is also a factor.

Researchers studying the impact of Trump's first-term tariffs found no real positive impact on overall employment in the protected U.S. industrial sectors.

Trump imposed a 25% tariff on imported steel in 2018 to protect U.S. producers.

In 2020, total U.S. steel employment was 80,000, still down from 84,000 in 2018.

In theory, without Trump's steel tariffs, employment figures could have fallen further, but economic studies of the steel industry after the tariffs still show no positive impact on employment.

Economists also found in the data that higher domestic steel prices after the tariffs led to lower employment in other steel-reliant manufacturing industries, including agricultural machinery maker Deere & Co.

Can the trade deficit be improved?

Trump has criticized the U.S. trade deficit, the difference between the value of all the goods imported and the goods exported in a given year.

"The trade deficit is hurting the economy badly," he said.

Before Trump took office in 2016, the goods and services deficit totaled $480 billion, or about 2.5% of U.S. GDP. After he imposed tariffs, the deficit grew to $653 billion, or about 3% of GDP, in 2020.

America's deficit trends at Trump era

Economists believe that part of the reason is that Trump's tariffs have increased the relative international value of the dollar (by automatically reducing the demand for foreign currencies in international trade), making U.S. exporters' products less competitive around the world.

Another factor in the failure to improve the trade deficit is that tariffs can sometimes be circumvented in a globalized economy dominated by multinational corporations.

For example, the Trump administration imposed a 30% tariff on Chinese imports of solar panels in 2018. Evidence provided by the U.S. Department of Commerce in 2023 showed that Chinese solar panel manufacturers had successfully circumvented the tariffs by moving assembly operations to countries such as Malaysia, Thailand, Cambodia and Vietnam and then shipping the finished products to the United States.

Some economists support Trump's tariff plan as a way to boost American industry, such as Jeff Ferry, chief economist of the lobbying group Coalition for A Prosperous America. But they are a minority in the industry. Oren Cass, director of the conservative think tank American Compass, believes that tariffs can encourage companies to keep more manufacturing operations in the United States, which is good for both national defense and supply chain security. Although the Biden administration has severely criticized Trump's proposal to extend tariffs, it has retained many of the measures he implemented after 2018. The authorities have also recently imposed new tariffs on imports such as Chinese electric vehicles, citing national security, US industrial policies and Beijing's unfair domestic subsidies.