Impact on China's economy: Trump's re-election and threat of 60% tariffs could shake up trade relations.

Former U.S. President Donald Trump is considering the implementation of a 60% tariff on all imports from China if he is re-elected. This plan was reported by The Washington Post (WP) citing its sources. According to these sources, Trump is preparing for a new extensive trade war with China.

Trump has already publicly supported downgrading China’s trade status with the U.S., which would lead to a significant increase in tariffs between the two countries. WP reports that federal tariffs on Chinese imports could exceed 40%. Privately, Trump has discussed with his advisors the possibility of a fixed 60% tariff on all Chinese imports.

In reality, such a drastic increase in tariffs would dramatically reduce trade with China (as intended), leading to much lower revenues than the static figure suggests. Assuming elasticities consistent with trade literature, we estimate that this tariff increase would reduce imports from China by approximately 85%. Despite the much higher tariff rates on remaining imports, tariff revenue from Chinese goods would fall from about $65 billion to $55 billion in FY 2035 under this scenario.

If Chinese imports were entirely replaced by domestic production, the Treasury would absorb nearly all of that revenue loss. Conversely, if replacement goods were imported from other countries subject to Trump’s proposed 10% baseline tariff, tariff revenue in FY 2035 from both Chinese imports and their replacements would grow to above $100 billion.

When considering impacts on individual and corporate income taxes and payroll taxes, on a conventional basis, we estimate the policy could generate as much as $300 billion in new revenue over a decade or lose as much as $50 billion, depending on the share of Chinese imports replaced with domestic versus foreign goods.

These figures would be lower when incorporating macroeconomic effects. For example, if the tariffs and responses reduced economic output by about 1% – consistent with a similarly sized universal baseline tariff – the policy could result in a loss between $200 billion and $500 billion over a decade.

Impact on Tariff Revenue from Chinese Imports According to President Trump’s Proposal:

*Notes: Conventional estimates assume tariffs would reduce import levels consistent with an import elasticity of 1.7 and that roughly half the tariff revenue would be subject to income and payroll tax revenue offsets. Under the "High" scenario, an elasticity of 1.7 is applied to diverted trade as well, but aside from a 10% universal baseline tariff, we assume no additional costs in changing the source of imports from China to other countries.

It is important to note that even tariffs that do not reduce deficits could theoretically have other benefits – including reducing economic reliance on China, supporting some domestic industries, and strengthening national security.

However, while some tariff increases can significantly bolster revenue and reduce debt, very large increases are likely to diminish and even reverse these fiscal gains. In this particular case, we estimate that a 60% tariff on all imports from China would generate less than $300 billion and could actually result in a revenue loss.

The U.S. presidential election will take place in 2024. Candidates who have announced their intentions to run include Joe Biden, Donald Trump, Robert Kennedy Jr., the nephew of former President John F. Kennedy, and others. On January 21, Florida Governor and Republican Party member Ron DeSantis announced his decision to withdraw from the presidential race and stated he would support Trump in the upcoming election.

This situation suggests that trade relations between the U.S. and China could become a major topic in the upcoming presidential election, with potentially far-reaching consequences for the global economy.