Tariffs to Cut 0.1% From GDP Each Year, CBO Says
The Congressional Budget Office says that the fact that the administration imposed additional tariffs on 12 percent of all imports will reduce GDP -- after adjusting for inflation -- by about 0.1 percent each year through 2029, assuming all the tariffs stay on. The projection also assumes that the 10 percent tariffs on about $200 billion in Chinese imports do not rise to 25 percent. "Tariffs reduce domestic GDP mostly by raising the prices paid by U.S. consumers and businesses, which reduces the purchasing power of domestic consumers and increases the cost of business investment," the CBO wrote in a report released Jan. 28. They said reduced exports, due to retaliatory tariffs, also contribute to the economic drag, though both are partly offset by increases in domestic production.
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The full cost of the tariffs is not borne by U.S. consumers and businesses, CBO said, but it said that foreign producers' willingness to absorb the costs will decline over time. Capital goods, not including autos, make up about 20 percent of the goods hit with additional tariffs; industrial supplies and materials are the second-largest group, at close to 15 percent. In materials and industrial supplies, about $75 billion in imports were affected, and almost a third of that is steel imports.
The estimates do not bake in business sentiment, the report said. "Recent changes to trade policy may signal a fundamental shift in global trade policy and an increased risk of erosion of the rules-based global trading system that would significantly increase the risks associated with investment in the United States and abroad. If investors lose confidence in stable international trade and economic relationships, then that increased uncertainty may delay investments or discourage them entirely, leading to less economic activity both in the United States and abroad. The slower economic growth of U.S. trading partners resulting from that uncertainty could also spill over into the U.S. economy through a decrease in demand for U.S. exports. CBO has not incorporated any adjustments to its economic forecast as a result of that increase in trade policy uncertainty but is closely monitoring data for signs of such an effect."