Economist explains impact of Trump’s tariff plans

President Donald Trump’s recent announcement of sweeping tariffs on major U.S. trading partners sparked sharp reactions from foreign leaders, pundits, investors and others.

Monica Morlacco, assistant professor of economics at the USC Dornsife College of Letters, Arts and Sciences, explains the economic thinking behind the administration’s latest tariffs — now paused for 90 days (except on China) — and their potential impact on American consumers and industries.

In an earlier Q&A, she explained what tariffs are and how they’ve been used historically.

How were the tariff percentages for each country determined?

On April 2, President Trump announced new import tariffs on goods from approximately 90 countries. These tariffs — now paused for 90 days, except on China — were added on top of a 10% general tax already applied to all U.S. imports.

The stated goal was to reduce what’s known as a trade deficit, which occurs when a country buys (imports) more goods from another country than it sells (exports) to that country. If imports and exports are equal, trade is considered “balanced.”

There’s no inherent reason why trade must be balanced between every pair of countries. A country might import more than it exports for many reasons, not necessarily related to unfair trade — like if another country can grow food more cheaply because of its climate.

Still, the U.S. government argued that trade deficits were a problem and that raising tariffs would help fix them. The logic: If imported goods become more expensive due to tariffs, U.S. imports would decline and trade would become more balanced.

Officials said they used the following formula to determine tariff rates:

Here, ϵ is the so-called “trade elasticity,” which measures how sensitive imports are to price changes. They used a value of 2, based on some studies. This formula was meant to set the tariff at a level that would eliminate the trade deficit. However, many economists have argued that this approach lacks a sound economic rationale.

How will these tariffs impact consumer prices, and when might increases occur?

Tariffs are taxes placed on goods entering the country. When the government imposes a tariff, it increases costs for U.S. consumers and businesses that rely on imported products.

The impact on consumer prices depends on several factors — such as whether the item is a finished product or a component used in producing other goods — and how much of the added cost is passed on to consumers. This “tariff passthrough” plays a key role in how tariffs affect the market. For example, U.S. manufacturers that rely on imported steel to produce cars or appliances will face higher component costs, which can lead to higher prices for the final products. Studies of past tariff episodes show that companies typically pass on a large share of these increased costs to consumers.

The timing of price increases varies. It depends on how long companies can draw from existing inventories and how soon they need to restock at the higher, post-tariff prices. For frequently restocked items, price hikes may appear within weeks or months. For others, it may take longer to see the effects.

Overall, tariffs tend to raise prices and reduce product variety — particularly for goods primarily produced abroad.

Which industries are expected to be most affected by the tariffs?

Industries most affected will be those heavily integrated into international trade, particularly those that depend on imported inputs. These include electronics, energy, food processing, transportation equipment, machinery, and manufacturing.

Around 50% of value added in the manufacturing sector involves global value chains — production processes where inputs are sourced from multiple countries. Many products rely on these imported components or raw materials. With the imposition of tariffs, these inputs become more expensive, raising production costs for U.S. firms.

Industries that are more import-intensive or deeply embedded in cross-border supply chains will experience the most significant impact.

What are the potential long-term economic effects of these tariffs?

In the long term, the main concern may not be the tariffs themselves but the climate of uncertainty they create. Tariffs often trigger retaliation from trading partners, leading to extended negotiations and rising diplomatic tensions. That uncertainty can escalate into a costly trade war — one that disrupts global supply chains and rattles investor confidence.

When faced with an unpredictable policy environment, companies may delay investment and hiring decisions, adopting a “wait and see” approach. This hesitation can lead to a slowdown in business activity and economic growth.

Although the direct impact of tariffs may be modest — since international trade accounts for a relatively small share of the U.S. GDP (gross domestic product) — the broader shift toward protectionism and rising geopolitical tensions could have more significant economic consequences over time. Reduced international cooperation, disrupted supply chains and lower investment could all weigh on long-term growth.