The Hidden Damage from Tariffs

By Dominic Pino

Thursday, August 21, 2025

 

Tariffs are a particularly destructive form of taxation that distorts market efficiency, raises prices, and reduces output. As you’ve no doubt heard many times by this point in Donald “Tariff Man” Trump’s presidency, economic theory demonstrates each of these effects clearly.

 

But maybe you think economists don’t know what they’re talking about and all those supply-and-demand graphs are witchcraft. What nonmarket reasons are there to oppose tariffs?

 

For one, they feed the swamp. Tariffs are a full-employment program for Washington attorneys and lobbyists. Analysis of lobbying disclosure forms by Advancing American Freedom (AAF) found that spending on tariff lobbying surged from $1.3 million in the second quarter of last year to $8.8 million in the second quarter of this year. That’s on top of $4.9 million in spending on tariff lobbying in the first quarter of this year, suggesting that more people are realizing that lobbying can pay off.

 

The number of tariff-lobbying disclosures has more than tripled since last year, AAF found. The average value of a tariff-lobbying contract has more than doubled. Cha-ching for D.C. steakhouses.

 

Who can afford to pay lobbyists? The big businesses that are probably going to make it anyway. If politicians create a system where a business can potentially make a $10 million or $100 million tax expense go away by paying some lobbyists $400,000 to knock on officials’ doors, the businesses that can afford it will do so. That’s a bargain, if you have the money, and worth a try even if it has a low probability of success. If your tax expense is only $400,000 to begin with because you buy far less than larger companies do, lobbying wouldn’t help.

 

What does help is being politically connected to Trump. A 2025 paper in the Journal of Financial and Quantitative Analysis found that during Trump’s first term, companies that donated to Republicans were more likely to receive tariff exemptions. It also found that companies that hired revolving-door lobbyists who had worked in the first Trump administration were more likely to receive exemptions.

 

If you care about manufacturing, you should care about small businesses. Ninety-eight percent of manufacturing companies in the U.S. have fewer than 500 employees, according to the Small Business Administration. They employ 4.8 million workers and are concentrated in the Midwest. Many of them import inputs for domestic production.

 

For example, MISCO is a small manufacturing company founded in 1949 that produces loudspeakers in Minnesota. It has major customers in Canada. A made-in-America company that exports: Trump’s ideal.

 

To build its speakers, MISCO imports some parts from China. The tariffs on those parts are now high enough that it makes more sense for the company to contract with a factory in China to build the speakers and ship directly from there to Canada. The re-shoring policy is causing off-shoring.

 

Other countries such as Canada and Switzerland have unilaterally removed all tariffs on manufacturing inputs. Canada did so under its last Conservative Party government. Trump singles out vital inputs such as steel, aluminum, and copper for tariffs alongside his country-based tariffs that include a host of inputs. About half of U.S. imports are inputs to domestic production.

 

In abolishing its tariffs on manufacturing inputs, the Swiss government cited reduction of businesses’ administrative burden as a reason for the policy. That burden can be substantial, and again it harms smaller companies more than larger ones. Any government policy that spurs manufacturing companies to pay attorneys, accountants, or brokers is going to harm smaller ones more than larger ones.

 

If you think Trump’s tariffs are hard to follow by watching the news, imagine having to actually pay them and possibly face penalties for doing it wrong. U.S. importers are hiring more customs brokers, the dictionary definition of “middlemen,” to figure out what they owe and help with the paperwork to pay the government. Reuters reported in June that brokers were raising their fees to compensate for the additional complexity.

 

Raising taxes isn’t really Trump’s thing, as his legislative legacy consists almost entirely of (1) a tax cut and (2) making that tax cut permanent. Yet the White House is bragging about the new revenue from tariffs and has baked it into its budgeting assumptions.

 

That wasn’t wise, because the tariffs are unconstitutional, and the Supreme Court might order that the money be refunded. Taxing imports is an enumerated power of Congress; according to Court precedent, it can’t be delegated to the executive branch without legislated limits. Trump is claiming unlimited tariff authority: He says he can set them for any country, at any rate, for any period of time, and modify them at will, under an emergency powers law that doesn’t include the word “tariff” and has never before been used to levy them.

 

The U.S. Court of International Trade has already ruled them to be unconstitutional in a unanimous decision by three judges, two appointed by Republicans (one by Trump himself). The Court of Appeals for the Federal Circuit is working through the case now, and the Supreme Court could rule in the fall.

 

The emergency that Trump claims as justification for tariffs is the existence of the trade deficit. Never before in American history has a national emergency been declared over a national accounting statistic. Even if you think tariffs are great, this is not a good way to do them.

 

If national accounting statistics can be national emergencies that unlock presidential powers, future Democratic presidents are going to have a lot of fun writing executive orders to lower the Gini coefficient, a measure of income inequality. There’s plenty of economic research to back up claims that income inequality is harmful to the country (much of it is bunk, but it nonetheless exists) — far more than there is research that says the same about the trade deficit. A presidentially decreed wealth tax or inheritance tax could follow the model of Trump’s presidentially decreed import taxes.

 

Taxes also interact with other taxes, especially in the United States, where every citizen lives in more than one tax jurisdiction. The spring 2025 Fiscal Survey of States, a report by the National Association of State Budget Officers, noted that many states revised their revenue estimates downward for fiscal year 2026 in part as a result of Trump’s tariffs. Trying to predict exactly how the tariffs will affect state finances is basically guesswork, as the tariffs have changed so frequently and are at levels not seen in nearly 100 years. But they certainly aren’t going to help.

 

Slower economic growth hurts state revenue across the board. Tariffs can hurt state corporate-tax collections by reducing profits. They can hurt state income tax collections by reducing jobs or hindering wage growth. They can hurt sales tax collections by reducing consumption.

 

They’ll hurt budgets more in states where imports are a higher share of the economy. Those aren’t the rich states on the coasts. According to the Tax Policy Center, the five states where imports equaled more than 20 percent of GDP in 2023 were Michigan, Indiana, Kentucky, Tennessee, and Mississippi. Those were all states Trump won in 2024, and nine of the ten legislative chambers in them are controlled by Republicans (the Michigan Senate being the only exception).

 

Indiana, Kentucky, and Mississippi have scheduled income tax cuts for this year or next year. Those were based on revenue projections that didn’t include the effects of tariffs. They might have been a fine idea at the time, but thanks to Trump’s actions, they might no longer be. Other states could miss revenue triggers for scheduled cuts, forestalling tax relief that would have come about if not for tariffs.

 

That’s not good for Republican politicians in those states, who can be accused by voters of promising tax relief and not delivering, or of cutting in ways that damage public services more than expected. States have to balance their budgets (they can’t print money the way the federal government can), and because of federal trade policy, Republican legislators might have tougher choices than they expected in budget season.

 

Foreign governments, and not just adversarial ones, are also facing tough choices because of tariffs. Prime Minister Narendra Modi of India must be wondering what happened to his once strong relationship with Trump: the imposition of an extra 25 percent tariff as punishment for buying Russian oil takes the U.S. tariff on his country’s goods to 50 percent. That’s higher than the 30 percent rate the U.S. has kept in place against Chinese goods during the twice-extended “truce,” even though China buys more Russian oil than India does.

 

Pakistani goods face only a 19 percent tariff, even though Pakistan is much closer with China than India is. It is an avid participant in the Belt and Road Initiative, receiving over $60 billion in investment in an economic corridor connecting the two countries. China is also Pakistan’s largest arms supplier. But Pakistan nominated Trump for the Nobel Peace Prize and made a handshake deal about cooperating on oil development, both of which likely helped the country secure a lower rate.

 

Trump’s decisions aren’t being made on national security grounds, or even on trade deficit grounds when he doesn’t feel like it. The U.S. has a trade surplus with Brazil, yet Brazilian goods face one of the highest tariff rates because Trump is upset with the current government’s treatment of former President Jair Bolsonaro — which has nothing to do with U.S. national security or protecting the U.S. economy. One of the largest U.S. imports from Brazil is coffee, which for the most part does not grow in the U.S.

 

Even if the economic theory on the effects of tariffs is wrong, the way that Trump is carrying out his tariff policy is harmful. The normalized corruption, bureaucratic make-work, constitutional vandalism, downballot damage, and diplomatic head-scratchers are in themselves bad for the country. Add to all this that the economic theory on the effects of tariffs is not, in fact, wrong, and the “golden age” looks anything but.