Donald Trump’s tariffs — the cornerstone of his economic agenda — are closely linked to inflation, revenues, spending and the reshoring of manufacturing. They are the key to assessing Trump’s economic impact, but they come with profound uncertainty.
Tariff barriers, tax cuts and industrial deregulation started in Donald Trump’s first term, but now he has upgraded his economy policy in both intensity and scope. Specifically, he has introduced “reciprocal tariffs” in a move to aggressively expand the levies. He signed the so-called Big Beautiful Bill, intending to make a profound fiscal adjustment, and he comprehensively relaxed industry restrictions and regulations. All of these things have garnered widespread attention and sparked heated debate.
Trump’s tariff policy, the cornerstone of his economic agenda, is closely linked to inflation dynamics, government revenues and spending and the reshoring of manufacturing. It is the key to assessing the overall impact of his economic policy.
Tariff-induced inflation
Whether tariff-induced inflation is temporary or persistent is a central question as one evaluates the economic impact of Trump 2.0. The administration claims that raising tariffs will trigger a one-time price shock but not sustained price increases. As evidence, they cite the 2018-19 China-U.S. trade war, in which tariffs made a relatively small inflationary impact. As consumers looked for alternatives, businesses optimized their supply chains, and as the currencies of exporting countries depreciated, price pressure was partially offset. Back then, tariffs only caused a brief price shock. The impact on final product prices lasted only four quarters.
However, the current tariff policy is fundamentally different from that of 2018 and poses a greater risk that inflation will continue well into the future.
First, the scale of the policy shift is unprecedented. Unlike the localized and modest tariff hikes of 2018, the current policy marks Washington’s departure from a century of low tariffs and entry into an era of steady high tariffs. While small increases can be absorbed by market mechanisms, large tariff increases risk destabilizing the existing economic system.
Second, geopolitical factors have added a new layer of uncertainty. Tariff wars driven by geopolitical competition are more likely to provoke tit-for-tat retaliation, leading to repeated tariff revisions and prolonged enforcement of tariff policies. In the end, businesses will find it difficult to hedge against price pressures through supply chain management or cost controls, allowing inflationary pressures to accumulate.
Third, the offsetting effect of exchange rates has significantly weakened. In the past, part of the inflationary impact of tariffs was offset by the depreciation of currency in exporting countries. However, many of these currencies today are already undervalued, and domestic economic constraints leave little room for further devaluation to cushion the impact of tariffs.
Fourth, the inflation expectations of the American public have risen. — and expectations tend to be self-fulfilling. If the public widely anticipates continued price increases, companies will preemptively raise prices and workers will demand higher wages, fueling a wage-price spiral and turning temporary inflation into persistent inflation.
Tariffs vs. tax cuts
Doubting that long-term tax cuts are sustainable, Trump's second administration has linked tax cuts to tariffs. Trump claims that the additional revenue generated by tariffs will provide room for expanded tax cuts by creating a healthy situation in which tariffs protect domestic industries and tax cuts boost domestic market momentum. Regarding policy implementation, Trump’s so-called reciprocal tariffs and industry tariffs have been rolled out, leading to a significant increase in tariff revenue. In fact, it has reached new highs in recent months. According to the U.S. Treasury Department, as of Aug. 29, U.S. tariff revenue had reached $183.56 billion for the current fiscal year.
Meanwhile, Trump pushed Congress to pass the One Big Beautiful Bill Act, initiating massive tax cuts. According to the Congressional Budget Office, tax cuts will cost $4.5 trillion over the next decade while spending reductions will amount to only $1.2 trillion over the same period, thus adding $3.3 trillion to the deficit.
Since tariff revenue is affected by the international trade environment and corporate adjustments, it is far less stable than other sources of revenue. The recent surge in tariff income is likely to wane. According to the Peterson Institute for International Economics, a 10 percent tariff rate would generate $1.58 trillion in net federal revenue over a decade (2025-34). However, this figure falls far short of the projected $3.3 trillion increase in the fiscal deficit, indicating that tariff revenues cannot sustainably support large-scale tax cuts.
Meanwhile, tariffs tend to weaken the stimulus effect of tax cuts. High tariffs raise import costs not only by reducing corporate profit margins and discouraging investment but also by pushing up domestic prices and reducing consumers’ spending power. They ultimately offset the positive effects of tax cuts on economic growth. Over time they constrain the long-term growth of revenues and make filling the fiscal gap more challenging. In short, while tariff revenue may partially fill the fiscal gap during a period of modest tax cuts, they are unlikely to compensate for the shortfall caused by tax cuts in the long run.
Reshoring manufacturing
The Trump administration has made the reshoring of manufacturing a central economic objective, attempting to use policy tools such as tariffs to encourage companies to bring production back. While trade agreements secured under tariff pressure have generated investment commitments worth hundreds of billions of dollars, these investments will take years to materialize, and their ultimate effectiveness will depend on the stability of the domestic investment environment.
The time frame for supply chain adjustment varies significantly across different industries. Some can complete the process within months, while others require several years. In the textile industry, for example, supply chains tend to shift swiftly because of the large number of upstream suppliers, shorter seasonal contracts and fewer regulatory barriers. In stark contrast, the automotive sector is the slowest to adapt. The three major American carmakers — Ford, General Motors and Chrysler — have already signed binding contracts with parts suppliers extending to 2028, making short-term relocation difficult. Further, in the aerospace and pharmaceutical industries, stringent safety and compliance requirements and complex regulatory approval processes mean that even if relocation begins, it may take years to complete the construction and commissioning of new facilities.
It’s true that tariffs can boost the development of key high-tech manufacturing industries, but the likelihood of reshoring low-tech manufacturing to the United States is extremely low. According to Apollo Consulting, the average annual salary for U.S. manufacturing workers exceeds $70,000, compared with around $13,000 in China and around $2,300 in India. This significant wage gap means that, for most products, it may still be more cost-effective for U.S. companies to produce overseas and absorb tariff costs than relocate operations domestically and pay higher wages. Even when some companies do choose to build new factories at home, they are likely to adopt highly automated production models, resulting in a lower-than-expected number of new jobs.
