CONGRESSIONAL BUDGET OFFICE Phillip L.
Swagel, Director
U.S. Congress
Washington, DC 20515
December 18, 2024
Honorable Chuck Schumer Honorable Sheldon Whitehouse
Majority Leader Chairman
United States Senate Committee on the Budget
Washington, DC 20510 United States Senate
Washington, DC 20510
Honorable Ron Wyden
Chairman
Committee on Finance
United States Senate
Washington, DC 20510
Re: Effects of Illustrative Policies That Would Increase Tariffs
Dear Leader Schumer, Chairman Whitehouse, and Chairman Wyden:
You asked about the budgetary, economic, and distributional effects of
policies that would raise tariff rates on goods imported into the United
States. Specifically, you asked the Congressional Budget Office to estimate
the effects of permanently increasing the existing rates of duty on imports
from all countries by the equivalent of 10 percent of the value of goods and
the effects of permanently increasing the existing rates of duty on imports
from China by 60 percent of the value of goods. You also asked CBO to
estimate the effects of combining those two policies—a 60 percent tariff on
imports from China and a 10 percent tariff on imports from the rest of the
world. In each case, the increased tariffs would apply to all goods imported
after December 31, 2024, including imports that are currently subject to a
zero percent duty rate and imports from partners in current trade
agreements.
I am writing with our preliminary assessment of the effects of higher tariffs
under those policies.
www.cbo.gov
Honorable Chuck Schumer, Honorable Sheldon Whitehouse, and
Honorable Ron Wyden
Page 2
Budgetary Effects
CBO estimates that each of the policies would increase federal receipts
from customs duties. The policies also would reduce U.S. imports and,
consequently, reduce customs user fees. Those fees are recorded in the
budget as offsetting receipts (that is, negative outlays). Thus, the reduction
in such fees would result in a small increase in federal outlays. The net
result of those two effects would be a decrease in the deficit.
Under the long-standing convention of holding the size of the economy
unchanged when estimating budget effects, CBO estimates that the policies
would have the following effects over fiscal years 2025 to 2034:
• A uniform increase in tariffs of 10 percent of the value of goods
would decrease deficits by $2.2 trillion.
• An increase in tariffs of 60 percent of the value of all goods
imported from China would decrease deficits by $0.8 trillion.
• The combination of a uniform increase in tariffs of 10 percent plus
an additional 50 percent on goods imported from China would
decrease deficits by $2.9 trillion.
Under the rules of the House of Representatives, those policies would be
considered major legislation. When practicable, estimates of the cost of
major legislation must incorporate the budgetary effects of changes in
economic output, employment, capital stock, and other macroeconomic
variables. After incorporating those economic effects, estimates of the
budgetary effects of the policies over fiscal years 2025 to 2034 are as
follows:
• A uniform increase in tariffs of 10 percent of the value of goods
would decrease deficits by $2.1 trillion.
• An increase in tariffs of 60 percent of the value of all goods
imported from China would decrease deficits by $0.7 trillion.
• The combination of a uniform increase in tariffs of 10 percent plus
an additional 50 percent on goods imported from China would
decrease deficits by $2.7 trillion.
Honorable Chuck Schumer, Honorable Sheldon Whitehouse, and
Honorable Ron Wyden
Page 3
Those estimates are preliminary and are relative to CBO’s economic and
budget baseline projections from June 2024. 1 The reduction in deficits
would result almost entirely from decreases in primary deficits (that is,
deficits excluding net outlays for interest on the public debt). The estimates
reflect CBO’s expectation that an increase in tariffs by the United States
would prompt other countries to retaliate with equivalent tariffs on exports
from the United States.
Economic Effects
CBO expects that the increases in tariffs on U.S. imports and matching
tariffs imposed by trading partners on U.S. exports in retaliation would
reduce the size of the economy in relation to CBO’s baseline projections.
CBO further expects that the increases in tariffs would make consumer
goods and capital goods (physical assets that businesses use to produce
goods and services) more expensive. Those increases in costs would put
upward pressure on inflation over the first few years in which the tariffs
were in place.
Effects on the Size of the Economy. The proposed changes in tariffs
would affect U.S. economic activity in several ways:
• They would make consumer goods and capital goods more
expensive, thereby reducing the purchasing power of U.S.
consumers and businesses.
• They would increase businesses’ uncertainty about future barriers to
trade and would reduce returns on new investments, especially for
businesses that use imported goods in their production process. As a
result, some U.S. businesses would delay or forgo new investments.
In addition, by increasing the cost of operations, tariffs might
encourage businesses to make costly adjustments to their supply
chains.
• They would reduce productivity by limiting competition from
imports and causing resources to be used less efficiently than they
otherwise would have been used.
1
Congressional Budget Office, An Update to the Budget and Economic Outlook: 2024 to 2034
(June 2024), www.cbo.gov/publication/60039. For more information about how CBO projects
tariff revenues, see Congressional Budget Office, “How CBO Projects Tariff Revenues”
(October 2024), www.cbo.gov/publication/606926.
Honorable Chuck Schumer, Honorable Sheldon Whitehouse, and
Honorable Ron Wyden
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• They would prompt retaliatory tariffs by U.S. trading partners,
which would reduce U.S. exports by making them more expensive
for foreign purchasers.
All of those effects would lower U.S. output. In the other direction, U.S.
consumers and businesses would replace certain imported goods with
goods produced in the United States, which would offset some of that
decline in output.
The increase in duties collected from the higher tariffs would also reduce
the budget deficit. The resulting reduction in federal borrowing would
increase the funds available for private investment, thereby increasing
output and offsetting a significant portion of the output-reducing effects
described above. That effect would be strongest for the two policies that
involve a uniform increase in tariffs of 10 percent of the value of goods.
For both of those policies, the reduction in real (inflation-adjusted) output
before accounting for that effect is nearly twice as large as the net effect
reported below. In other words, for those two policies, the increase in the
funds available for domestic investment resulting from lower budget
deficits provides a substantial offset to the agency’s estimate of how much
those tariffs reduce real output.
CBO estimates that on net, the policies would have the following effects on
real gross domestic product (GDP) in 2034:
• A uniform increase in tariffs of 10 percent of the value of goods
would decrease real GDP by 0.3 percent.
• An increase in tariffs of 60 percent of the value of all goods
imported from China would decrease real GDP by 0.3 percent.
• The combination of a uniform increase in tariffs of 10 percent plus
an additional 50 percent on goods imported from China would
decrease real GDP by 0.6 percent.
Honorable Chuck Schumer, Honorable Sheldon Whitehouse, and
Honorable Ron Wyden
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Those estimates of the effects of the changes in tariffs on real output are
within the range of estimates from other economic analyses. 2
Effects on Prices. In CBO’s assessment, the tariff policies and the
associated retaliation by U.S. trading partners would lead to increases in
consumer prices. The changes in tariffs would raise the cost of imported
goods. Prices for foreign and domestic substitutes would also rise as
consumers and businesses replaced imports that were subject to tariffs with
those substitutes. In addition, tariffs on inputs used by domestic businesses
would lead to higher prices for the goods and services that they sell.
The changes in tariffs would partially offset that upward pressure on
domestic prices in two ways. First, the changes would cause the value of
the dollar to rise in foreign exchange markets, which would dampen the
increase in the cost of imported goods and reduce the cost of some
imported services. For example, a stronger dollar would reduce the price of
foreign travel. Second, retaliatory tariffs would drive down the prices of
some domestically produced goods in export-oriented industries. In
particular, by reducing foreign demand for agricultural exports, retaliatory
tariffs would lead to lower prices for certain food products.
CBO estimates that on net, by 2026, the policies would have the following
effects on prices as measured by the price index for personal consumption
expenditures (PCE):
• A uniform increase in tariffs of 10 percent of the value of goods
would increase the level of the PCE price index by roughly
0.6 percent.
2
For example, see Erica York, “Revenue Estimates of Trump’s Universal Baseline Tariffs” (Tax
Foundation, blog entry, November 6, 2024), https://tinyurl.com/3f377cst; The Budget Lab, Fiscal,
Macroeconomic, and Price Estimates of Tariffs Under Both Non-Retaliation and Retaliation
Scenarios (October 16, 2024), https://tinyurl.com/8ydenrb5; International Monetary Fund, World
Economic Outlook: Policy Pivot, Rising Threats (October 2024), Box 1.2,
https://tinyurl.com/52vthpzm; Warwick McKibbin, Megan Hogan, and Marcus Noland, The
International Economic Implications of a Second Trump Presidency, Working Paper 24-20
(Peterson Institute of International Economics, September 2024), https://tinyurl.com/yd8hdkfj;
Committee for a Responsible Federal Budget, “Donald Trump’s 60% Tariff on Chinese Imports”
(blog entry, April 10, 2024), https://tinyurl.com/4ry8cw7z; and Committee for a Responsible
Federal Budget, “Donald Trump’s Universal Baseline Tariff” (blog entry, September 11, 2023),
https://tinyurl.com/3f29zevb.
Honorable Chuck Schumer, Honorable Sheldon Whitehouse, and
Honorable Ron Wyden
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• An increase in tariffs of 60 percent of the value of all goods
imported from China would increase the level of the PCE price
index by roughly 0.4 percent.
• The combination of a uniform increase in tariffs of 10 percent and
an additional 50 percent on goods imported from China would
increase the level of the PCE price index by roughly 1 percent.
CBO expects that after 2026, the tariffs would not have additional
significant effects on prices.
Distributional Effects
The tariffs would reduce average real income by decreasing aggregate
output and raising prices, but the effects on income would not be the same
for all households. The effect on income from changes in output would
depend in part on the industries in which workers in different households
were employed. Industries that produce goods that compete with imports
would probably expand, whereas industries that chiefly produce exports or
source a large share of their production inputs from abroad would probably
contract. Workers in expanding industries may see their income grow, and
workers in contracting industries would probably see their income decline.
The extent to which changes in prices affected households' purchasing
power would also vary. Tariffs tend to put more upward pressure on the
prices of goods than on the prices of services. Because households at the
lower end of the income distribution spend a greater share of their income
on goods, they would experience the largest declines in purchasing power.
CBO is still evaluating how higher prices from tariffs would affect
households across the income distribution.
Finally, the effects of the tariffs on households would depend on each
household’s level of wealth and the types of assets they hold. The dollar
value of U.S. holdings of foreign assets would likely decrease because
changes in tariffs would increase the value of the dollar in foreign exchange
markets. That reduction in U.S. wealth would likely be concentrated at the
top end of the income distribution. 3
3
For a detailed discussion, see Dorian Carloni, How Nominal Foreign Currency Depreciation
Against the U.S. Dollar Affects U.S. Wealth, Working Paper 2018-05 (Congressional Budget
Office, June 2018), www.cbo.gov/publication/53931.
Honorable Chuck Schumer, Honorable Sheldon Whitehouse, and
Honorable Ron Wyden
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Basis of the Estimates
To estimate the effects of changes in tariff rates, CBO first collects data on
current imports of products that would be affected by the new rates. Next,
the agency uses its macroeconomic forecast of imports to project imports of
those products under current law. Then, CBO estimates how U.S. trade
flows would respond to changes in tariff rates by using elasticities drawn
from empirical research that describe the sensitivity of import flows to
changes in tariff rates over time. 4 After calculating the effect of tariffs on
imports, the agency uses the new tariff rates to estimate future revenues.
That estimate of revenues is then reduced to account for the changes in
income and payroll taxes that are projected to result. 5 Finally, the estimated
revenues under the new tariff rates are compared with revenues projected
under current law.
To estimate the effects of higher tariffs on output, investment, and
productivity over the next decade, CBO further assessed how the tariffs
would change the costs of production for businesses, the incentives for
those businesses to invest in new capital, and the efficiency with which
productive resources are allocated across industries by using the Global
Trade Analysis Project (GTAP) model. 6 The agency also accounted for
how those tariffs would reduce federal borrowing and, as a result, would
increase the resources available for private investment. In addition, the
estimates reflect how the tariffs would alter the overall demand for goods
and services in the short term.
CBO’s estimates of the economic effects of tariffs also reflect how tariffs
would affect the prices consumers and businesses pay for goods and
services. To estimate price changes, the agency translates changes in
production costs across industries into changes in the prices of goods and
services, accounting for industries’ dependence on one another. 7 (A given
industry’s product uses other industries’ products as inputs; the price of the
4
Christoph E. Boehm, Andrei A. Levchenko, and Nitya Pandalai-Nayar, “The Long and Short
(Run) of Trade Elasticities,” American Economic Review, vol. 113, no. 4 (April 2023), pp. 861–
905, https://doi.org/10.1257/aer.20210225.
5
Congressional Budget Office, CBO’s Use of the Income and Payroll Tax Offset in Its Budget
Projections and Cost Estimates (October 2022), www.cbo.gov/publication/58421.
6
For more information about the GTAP model, see Erwin L. Corong and others, “The Standard
GTAP Model, Version 7,” Journal of Global Economic Analysis, vol. 2, no. 1 (2017), pp. 1–119,
https://doi.org/10.21642/JGEA.020101AF.
7
CBO used the Bureau of Economic Analysis’s Input-Output Accounts Data for 2023 to estimate
those price effects. See www.bea.gov/industry/input-output-accounts-data.
Honorable Chuck Schumer, Honorable Sheldon Whitehouse, and
Honorable Ron Wyden
Page 8
industry’s product therefore reflects production costs not only in that
industry but also in other industries.) The estimates of the effects of tariffs
on prices also reflect estimated changes in prices resulting from the higher
exchange value of the dollar.
Finally, CBO used its budgetary feedback model to estimate how economic
changes stemming from higher tariffs would affect federal spending and
revenues. 8 That model approximates the estimates that CBO would produce
with the wider suite of models that it uses to conduct dynamic analyses of
legislative proposals.
Uncertainty
The United States has implemented no increases in tariffs of this size in
more than 50 years, so there is little relevant empirical evidence on their
effects. As a result, CBO’s estimates of the economic effects of large
changes in tariffs are very uncertain. Nevertheless, the direction of the
estimated effects is consistent with previous experience. The actual effects
would depend on how businesses and consumers in the United States and
other countries responded to the higher tariffs and the extent to which
foreign governments responded with higher tariffs on U.S. exports. The
estimates reported above reflect the expectation that U.S. trading partners
would respond to the increases in tariffs with retaliatory increases of a
similar magnitude.
CBO’s analysis of the effects of increases in tariffs is preliminary, and the
agency continues to refine how it models the economic and distributional
effects of such changes.
8
For a detailed discussion, see Nathaniel Frentz and others, A Simplified Model of How
Macroeconomic Changes Affect the Federal Budget, Working Paper 2020-01 (Congressional
Budget Office, January 2020), www.cbo.gov/publication/55884.
Honorable Chuck Schumer, Honorable Sheldon Whitehouse, and
Honorable Ron Wyden
Page 9
Please contact me if you have additional questions or would like to discuss
these topics further.
Sincerely,
Phillip L. Swagel
Director
cc: Honorable Mitch McConnell
Republican Leader
Honorable Chuck Grassley
Ranking Member
Committee on the Budget
Honorable Mike Crapo
Ranking Member
Committee on Finance
