Image Source: PexelsThat’s my name for Trump’s 10% universal tariffs plan augmented with additional 60% on Chinese-made imports. h/t to Torsten Slok for the CBO letter. I show implied effects on PCE deflator inflation, and GDP relative to January 2025 CBO projection.
Figure 1: PCE deflator (bold black), CBO January projection (light blue line), CBO implied PCE deflator under Trump 10/60 plan (orange square), WSJ mean November survey forecast (red triangle). Source: BEA via FRED, January 2025 CBO projection, CBO letter, WSJ, and author’s calculations.Interestingly, the January 2025 WSJ survey mean indicates a PCE level about the same as the CBO implied level — although this combines the tariff, deportation, and trade policy effects.What about GDP? I show the CBO projection, and the implied deviation.
Figure 2: GDP (bold black), CBO January projection (light blue line), CBO implied PCE deflator under Trump 10/60 plan (orange). Source: BEA via FRED, January 2025 CBO projection, CBO letter, and author’s calculations.While CBO mentions in its letter the impact of uncertainty, it does not apparently incorporate them into the estimated effects.
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.
Under Trump 1.0, EPU and trade policy uncertainty rose when the Section 232 and Section 301 tariffs were announced. Now, uncertainty is elevated even before the inauguration.
Figure 3: EPU (blue, left scale), Trde Policy Uncertainty (brown, right scale). Source: https://policyuncertainty.com, https://www.matteoiacoviello.com/tpu.htm. More By This Author:Administration Forecast Vs. FT-Booth, SPF Vs. NowcastCBO, Biden Administration, IMF And Other ForecastsReconciling The CES NFP With CPS Employment Adjusted To NFP Concept
