The proposed increases in tariffs on imports from Canada, Mexico, and China have raised significant concerns about their potential impact on the U.S. economy.
According to a recent analysis derived from the theoretical framework set forth by Rodriguez-Clare, Ulate, and Vasquez (2025), these tariff changes could have far-reaching effects on employment and income across various sectors and states.
Specifically, the analysis focuses on a 25% increase in import tariffs on goods from Canada and Mexico, a 30% increase on Chinese goods, and a 10% increase on imports from all other countries.
Given the current uncertainties surrounding future tariff implementations and retaliations from other countries, the model assumes these increases will persist for four years with retaliatory measures equally matched by affected countries.
The results of the model-based analysis indicate that while the U.S. manufacturing sector may experience an increase in employment due to these tariffs, the overall impact on U.S. employment levels could be negative.
Employment in the manufacturing sector may rise; however, this does not compensate for job losses in the services and agricultural sectors, leading to an overall decline in U.S. employment.
By the year 2028, real income for the nation is projected to fall by approximately 0.4%, despite the temporary boost in manufacturing jobs.
The analysis also highlights the redistributive effects of tariff-generated revenues, showing that 31 U.S. states might see an increase in real income of up to 1.7%, while the remaining 19 states would experience declines in real income, some exceeding 2%.
The framework employed for this analysis takes into account detailed trade patterns across 87 regions, including all 50 U.S. states, 36 partner countries, and a composite region for the rest of the world.
It encompasses 15 sectors, including 12 manufacturing sectors in addition to home production, services, and agriculture.
The model addresses the dual roles individuals play in the economy as both consumers and producers.
Consumers make decisions based on income and prices, while producers allocate their time between labor market participation and home production.
Factors influencing sector choices include individual skills, the costs associated with switching sectors, and anticipated income levels within each sector.
Total income calculations encompass not only wages but also potential fiscal benefits from tariff revenues.
A key aspect of this model is the assumption that migration between states is minimal in response to trade-induced job disruptions, consistent with findings from studies such as those by Autor, Dorn, and Hanson (2013).
However, the model allows for individuals to shift between sectors within a state, which impacts labor allocation patterns following tariff increases.
Moreover, the model considers the costs associated with inter-regional products transfer and recognizes that industries rely on intermediate inputs from other sectors, which can affect overall production efficiency.
Initial findings illustrate that U.S. employment could decline by as much as 0.2% from the implementation of the tariffs through 2028.
This reduction in employment is influenced by an increasing allure of home production activities amidst rising tariffs.
Compounding these effects is reduced demand owing to lower overall spending power as employment declines.
Increased foreign input costs due to tariffs further exacerbate the inefficiencies in production and labor demand.
An expenditure-switching dynamic occurs as imports become more expensive, allowing domestic production to substitute for more costly foreign goods, which results in a temporary uptick in manufacturing employment.
As a net importer in manufacturing, the U.S. sees this expenditure-switching effect dominating against the backdrop of reduced demand and increased cost of inputs.
Thus, an increase in manufacturing employment could peak at 1.1% by 2027, even as the service and agricultural sectors face job losses of 0.3% and 1.8%, respectively.
Analysis of real value-added by sector reveals that manufacturing may see an increase of up to 0.2%, while services and agriculture are expected to decline by up to 1.3% and 2.8%, respectively.
Cumulatively, real value-added across sectors could drop by as much as 1.2% during this timeframe.
However, the increasing revenue from tariffs mitigates the decline in real income, positioning it as a 0.4% reduction by 2028.
A notable advantage of the employed framework is its ability to analyze state-specific responses to tariff changes.
Preliminary assessments indicate that states like Texas, California, and Michigan may suffer the largest declines in real income, whereas states like Colorado, Wyoming, and Oklahoma could benefit.
These disparities are largely due to the varied integration of states into global supply chains, with less affected states typically experiencing more favorable outcomes from the tariffs.
Although the findings suggest a 0.4% drop in national real income, the true picture can vary extensively, highlighting shifts from an increase of 1.7% in some states to reductions greater than 2% in others.
Importantly, these results should be interpreted with caution, as they reflect potential consequences of tariff expansions rather than deterministic predictions of future occurrences.
The tariffs that are ultimately enacted may differ substantially from those under discussion.
The model’s simulations are based on predetermined levels of tariffs set as of late May 2025, assuming a four-year duration alongside similar retaliatory tariffs imposed by affected nations.
Changes in trade policies and geopolitical dynamics likely influence the actual impacts these tariffs may have in reality.
It is essential to recognize that the model utilized is abstract and requires numerous assumptions to maintain internal consistency.
Alternative scenarios examined by Rodriguez-Clare, Ulate, and Vasquez (2025) highlight the variability in results stemming from different assumptions.
Additionally, the framework does not capture the impacts of tariffs on overall inflation but focuses instead on relative price shifts across different U.S. sectors.
In conclusion, the quantitative analysis of proposed tariff increases unveils significant implications for the U.S. economy.
The scenario suggests an overall reduction in employment and value-added, albeit with varying effects across states.
However, due to the nature of the U.S. as a net importer, the manufacturing sector shows potential for temporary job growth amid these tariff policies.
Ultimately, the analysis underscores the importance of understanding regional and sectoral dynamics when assessing the broader implications of tariff changes on the U.S. economy.
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