Understanding Trump’s Tariffs: It’s Just 1% of the Economy

Wall Street needs to regain its composure.

The tariff policies introduced by Trump represent a strategic bet on the ability of tariffs to reshape the global economy, favoring the United States over China and other nations that pursue harmful economic practices.

Regardless of their effectiveness, Wall Street insiders are convinced that these tariffs pose a greater threat than the pandemic, which brought the economy to a halt, or the 2009 financial meltdown that left 10 million people jobless.

As of now, there have been no tangible consequences—merely conjectures about potential outcomes.

Wall Street has a history of overreacting, both positively and negatively. In evaluating the prospective effects of Trump’s tariffs, one must begin with the fundamental calculations.

If implemented, these tariffs would comprise a mere fraction of the US economy—around 1% of total economic activity.

Furthermore, should these tariffs be enacted, the revenue generated would flow not to corporate profits but to the US Treasury, yielding approximately $300 billion annually.

With an annual GDP of $28 trillion, the United States remains the leading global importer, but this is primarily due to its position as the most powerful economy worldwide.

In reality, our imports represent a significantly smaller portion of the economy than many assume: about $3 trillion in goods annually, which constitutes about 11% of our GDP.

These imports mainly consist of finished products and components we use to manufacture other goods (for example, a car’s windshield wiper).

In comparison, nations like Aruba rely on imports for 77% of their economies, while Albania stands at 44%.

A 20% tariff on 50% of our total imports would equate to roughly 1% of the US economy.

It’s noteworthy that we currently face a $2 trillion budget deficit, which is nearly three times the trade deficit.

Additionally, we’ve experienced a significant 20% inflation rate under President Biden, and the Inflation Reduction Act cost trillions.

These issues are far greater shocks to our economy than the proposed tariffs.

We export roughly $2 trillion in goods, primarily raw materials like soybeans and oil, which are essential for other nations—far more crucial for them than our need to reconfigure the manufacturing of completed products.

This is why many countries are eager to establish new trade agreements and lower their tariffs.

China stands to lose the most in a trade conflict, with exports accounting for about 20% of its economy, meaning its exports are a more significant concern compared to ours.

China employs tens of millions in its export sector and cannot afford to lose all those jobs.

Generally, the American public is providing Trump with an opportunity to evaluate how his policies will unfold. His approval ratings in recent polls suggest mild support among people for reciprocal tariffs, as they recognize the importance of fair trade.

People specifically believe that China is exploiting the United States through unfair subsidies to its industries.

Wall Street is treating Trump similarly to how it reacted to Liz Truss’s brief tenure as Prime Minister of the UK, where markets responded harshly to her proposal of tax cuts to invigorate the economy.

In that case, the Conservative Party retreated from Truss’s policies, replacing her with a new Prime Minister who advocated for austerity measures, pleasing the markets, though the public ultimately rejected them in a landslide due to stagnant economic performance.

Truss’s approach may have been valid, but Wall Street refused to allow its execution. Conversely, Trump is confronting Wall Street by urging patience.

Wall Street thrives on stability and predictability; fear, uncertainty, and doubt characterize its nature.

Trump relishes these elements, particularly as tools for negotiation.

It is therefore unsurprising to witness their clash—but Wall Street does not hold exclusive rights to dictating the correct policy.

If Trump successfully encourages numerous countries to renegotiate their trade agreements with the US and reduce overall tariffs, he can consider his efforts a triumph.

Ultimately, the effectiveness of his policies remains to be seen, and Wall Street must maintain perspective.

Mark Penn is the CEO of Stagwell, INC., and Chairman of the Harris Poll. He has served as a key adviser and pollster for both Bill and Hillary Clinton from 1995 to 2008.