Making America Great Again? The Economic Impacts of Liberation Day Tariffs

On April 2, 2025, President Trump announced “Liberation Day,” imposing broad tariffs on imports to reduce trade deficits and revive U.S. industry. We analyze the long-term economic effects of these tariffs, finding that while they may improve U.S.’s terms of trade if trading partners do not retaliate, any welfare gains vanish under reciprocal retaliation. Assuming no retaliation, we derive the optimal U.S. tariff rate, which is approximately 25% and uniformly applied across all trade partners. This optimal structure stands in stark contrast to the USTR’s proposed tariff schedule, which varies by trading partner and is based on bilateral trade deficits. When trading partners retaliate optimally against the USTR-proposed tariffs, the U.S. experiences a welfare loss of nearly 1%, while partner countries offset virtually all the initial losses. The resulting tariff war, however, reduces global employment by 0.5%. Although the tariffs do succeed in reducing the U.S. trade deficit, the resulting deadweight losses underscore the inefficiency of using protectionist trade policy as a tool for deficit reduction.