The Peterson Institute’s Misguided Tariff Panic
The Peterson Institute for International Economics is once again warning that Donald Trump’s tariff proposals would spell economic disaster. But their latest analysis, rather than proving their case, actually demonstrates how minimal the effects on the U.S. economy would be. If anything, their own numbers show that tariffs disproportionately harm China while having only a rounding-error effect on U.S. GDP and inflation.
The Peterson Institute claims that a 25 percent tariff on all goods from Mexico and Canada would reduce U.S. GDP by $200 billion over Trump’s second term:
For the duration of the second Trump administration, US GDP would be around $200 billion lower than it would have been without the tariffs.
That sounds significant—until you do the math. Spread over four years, this amounts to an annual impact of just 0.71 percent of GDP. If we assume the economy grows at 2 percent annually, the relative impact is even smaller—about 0.66 percent over four years. That’s well within the range of normal economic fluctuations and far from an economic catastrophe.
Moreover, their model ignores the dynamic effects of tariffs. If tariffs lead to greater domestic production, supply chain reshoring, and reduced reliance on China, the long-term benefits could outweigh any short-term drag on growth. But the Peterson Institute, as always, assumes free trade is an unqualified good and refuses to acknowledge potential upsides.
A 10 Percent Tariff on China? A Bigger Problem for Beijing
Peterson also analyzed a 10 percent tariff on China, with assumed retaliatory measures:
If the US imposed an additional 10 percent tariff on China and China responded in kind, US GDP would be $55 billion less over the four years of the second Trump administration, and $128 billion less in China.
Let’s put that in perspective. A $55 billion hit spread over four years is just $13.75 billion per year—a mere 0.05 percent of annual U.S. GDP. That’s statistical noise. Meanwhile, China’s economy would take a $128 billion hit, more than twice the U.S. loss despite having a much smaller GDP (U.S. nominal GDP is around $28 trillion while China’s is $18 trillion). If the goal of tariffs is to weaken China’s economy and bargaining power, these numbers suggest they would be highly effective.
Their assumption of tit-for-tat retaliation is also suspect. China has retaliated before, but it has fewer tools at its disposal. The U.S. imports far more from China than China does from the U.S., making an exact reciprocal response impossible. In past trade wars, China has had to resort to targeting politically sensitive sectors like agriculture rather than delivering proportionate economic blows.
The Inflation Panic Doesn’t Hold Up
Peterson also warns of increased inflation: “Inflation would increase 20 basis points in the US, and after an initial dip, 30 basis points in China.”
A 20 basis point increase? That’s just 0.2 percent—hardly the kind of inflation surge that justifies panic. And this assumes that businesses will pass all costs directly to consumers rather than absorbing some of the tariffs through lower profit margins, cost-cutting, or diversifying supply chains. In Trump’s first term, tariffs were imposed on hundreds of billions of dollars of imports, yet consumer inflation remained well within historical norms.
When Peterson combines the tariffs on Mexico, Canada, and China, they conclude that U.S. GDP losses would be somewhat larger:
The damage is worse for the US than any of the previous scenarios, basically because the possibilities for substituting trade between Mexico and China are reduced, generating larger GDP losses and higher inflation.
But again, by their own admission, we’re talking about GDP reductions in the range of 0.7 percent over four years—a drop in the bucket compared to overall economic growth. And the supposed inflation effects remain minor.
Trade Wars Are Good—And Easy To Win
Even if we take the Peterson Institute’s analysis at face value, it doesn’t support their conclusion that tariffs would be an economic disaster. Instead, it reveals that:
- The impact on U.S. GDP is minuscule, with a 0.7 percent effect over four years.
- China suffers far more than the U.S., with GDP losses more than double those of the U.S. from a 10 percent tariff.
- The inflationary impact is trivial, at just 0.2 percent.
- Their retaliation assumptions are flawed, as China lacks the ability to respond proportionately.
The Peterson Institute’s analysis is not a serious indictment of tariffs—it’s an unintentional case for their effectiveness. Trump’s tariffs may not be cost-free, but they’re far from the economic calamity that the free-trade establishment wants us to believe.
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