Trump, Tariffs, Tax cuts what?

This article is my attempt to better understand how tariffs work, whether they benefit an economy, and the repercussions of reciprocal tariffs. Are these measures truly advantageous for economic growth, or do they create unintended consequences?

This video [2] by Khan academy served as a key reference for me, and I kept revisiting it to gain more clarity on this subject.

Who Benefits from Tariffs?

A fundamental question when discussing tariffs is: Who ultimately gains from the additional money collected?

• Is it the government? (not all governments work for the people you know)

• Do the country’s subjects benefit? This is either through increased income, tax cuts, better infrastructure

• Or do big multinational corporations absorb the profits?

Perhaps the most divisive question is whether tariffs increase or decrease wealth inequality. Here, I would like to reference Thomas Picketty’s book Capital in the Twenty-First Century whose thoughts align with economic policies that reduce wealth inequalities while keeping a capitalistic economy in place to spur growth. If they reduce the wealth gap, one might argue they are a masterstroke—even if they temporarily disrupt the market. But do they also reduce a nation’s overall wealth in the global context? At first glance, tariffs seem to increase a nation's wealth by keeping money within domestic markets. However, geo-economics is rarely that straightforward.

Impact of Tariffs on Importers

Let’s examine what happens when a tariff is levied on an imported good.

Consider a bottle of wine imported from France to the U.S., now subjected to a 50% tariff. Suppose the French producer sells the bottle for $100. A U.S. importer or distributor (a separate entity from the producer) purchases it at that price but must pay an additional $50 tariff, bringing the total cost to $150.

Now, if the distributor sells this wine in the U.S., its retail price must be at least $150 to break even.

• Before the tariff, if there were no import duties, and the distributor applied a 25% profit margin, the bottle would retail at $125 (not accounting for logistics and distribution)

• Suppose 10,000 bottles were sold per day, generating $250,000 in profit.

However, with the 50% tariff, the price rises to $150, which reduces demand. Let’s assume demand drops to 5,000 bottles per day while maintaining the same profit margin. In this scenario, the new selling price must increase to $200 per bottle to compensate for the lower sales volume.

In reality, importers often suffer greater sales losses due to price sensitivity where consumers feel betrayed by a sudden surge in prices switching over to a different brand or product. Suppose sales fall further to 4,000 bottles per day, bringing their total profit down to $200,000—a $50,000 loss. This "deadweight loss" represents the economic inefficiency caused by tariffs—something that could have been avoided had there been no import restrictions.

Impact on Local Wine Producers

Tariffs undoubtedly benefit local producers by limiting foreign competition, allowing them to gain a larger share of the market. However, this does not fully compensate for the deadweight loss that occurs due to reduced overall economic activity.

Looking at this from a macro perspective, if consumers spend less on wine due to increased prices, they have more disposable income to invest elsewhere. However, within a closed economic system local producers reap the rewards of tariffs, while the government and corporations benefit financially.

Yet, the U.S. stock market has reacted negatively despite expectations that local producers would gain. Why?
The issue arises when local producers depend on imported raw materials—such as glass bottles, corks, and barrels—which also become more expensive due to tariffs. In such cases, tariffs fail to provide an actual advantage to local producers which we will go through in more detail in the next section.

Tariffs create a negative feedback loop, permeating the entire economic landscape. When one country starts a trade war, a domino effect ensues, triggering global economic disadvantages (manifesting as more deadweight loss).

Why Is the U.S. Stock Market Reacting Negatively to Tariffs?

It is strange that the U.S. stock market is declining despite expectations that local producers should benefit from tariffs. If foreign competition is reduced, shouldn’t domestic goods sell more, and local businesses thrive?

The issue lies in the hidden costs of tariffs. Many local producers depend on imported raw materials—for example, in the wine industry:

• Glass bottles, corks, and barrels are often imported.

• If tariffs are applied to these essential inputs, the cost of production for locally made wines also rises.

• As a result, domestic wine producers lose their competitive advantage, making tariffs self-defeating in such cases.

This highlights a counterintuitive consequence of tariffs: while they may protect certain industries, they can also hurt them indirectly by raising costs.

The Negative Feedback Loop of Tariffs

A major issue with tariffs is their negative response cycle that permeates the entire economic landscape.

• One country imposes tariffs.

• Another country retaliates.

• This trade war escalates, leading to global economic disadvantages.

• Ultimately, both domestic and foreign markets suffer.

This cycle creates a domino effect where no one benefits in the long run—instead, the entire world economy slows down. The economic term for this inefficiency is "deadweight loss", meaning a loss in total economic welfare that could have been avoided had the tariffs not been implemented.

How Is the Income Distributed?

We established that tariffs benefit corporations, their shareholders, and the government. But do these benefits trickle down to the masses?

Revisiting my earlier question—if a government policy worsens wealth inequality, it is not a good policy. I believe a capitalist economy works, but not at the cost of disenfranchising and depriving the lower-income population.

• The lower income groups are left with less disposable income as tariffs may increase the costs of essentials like food, housing, and transportation. There is a reactionary trickle effect that happens where for example a grocery chain owner sees that the costs of purchasing an AC unit has increased or the cost of electricity has increased which they then put on the products in store which squeezes the average person purchasing his daily amenities.  

• Wages in the U.S. have not kept up with inflation for the last 40 years, making it increasingly difficult for the average American family to maintain a middle-class lifestyle [7]. The wages have also disproportionately increased for different income groups where lower income groups have seen their wages increase by 17% in 40 years and 46% for high income groups when juxtaposed to 336% cumulative increase in inflation during the same time period warrants an article in itself. [8]

A household income of $70,000 to $100,000 was once considered comfortable for a family of four, but this is no longer the case. Meanwhile, the wealthy benefit disproportionately, as they have more disposable income to invest in tariff-advantaged industries.

Tariffs increase corporate profits, but that money is rarely distributed equitably. Most U.S. corporations reinvest profits into expanding factories and hiring more workers to stay ahead of the competition rather than increasing wages or distributing dividends to employees. As a result, income disparity only widens. Again, a company positioning itself this way is simply thinking of self-preservation in this dog eats dog world. This makes me think at what point does capitalism become untenable.

How Does the Government Use Tariff Revenue?

Ideally, tariff revenue should be reinvested into government programs to bolster social security, Medicare, and Medicaid. Trump's intention may be to use tariff revenue to fund tax cuts, which could stimulate the economy.

However, economic projections suggest that Trump’s trade war may reduce U.S. GDP by 0.4% [1], while the U.S. stock market has declined by nearly 10%—a far more negative reaction than anticipated. Global markets, except China, are also trending downward.

One of the strangest tariff policies has been on steel, aluminum, and copper imports. The U.S. has limited domestic copper production, so imposing tariffs harms industries reliant on these imports and reduces their global competitiveness. Reports [3] indicate that this has also led to job losses in these industries. Are Trump’s policies sound? With Elon Musk hovering around Trump and going through all these policies would he, being the smart person he is, not see this is disadvantaging local industries and putting a burden on the people?

Retaliatory Tariffs and Global Impact

Would it not be fair for Trump to raise tariffs in retaliation against countries that impose higher tariffs on U.S. exports?

For example:

• The U.S. levies a 3.3% tariff on Indian imports.

• India, in contrast, imposes a 17% tariff on American goods to protect its local industries.

This makes sense economically for India, as it is a weaker economy that needs protection. However, India must strategize carefully, as 18% of its exports go to the U.S. [4]—a significant portion of its economy. Similarly, China’s exports to the U.S. account for 16% of its total exports [5].

From the U.S. perspective, setting tariffs is advantageous in the short term, but this transactional approach could weaken its global alliances. The U.S. risks isolating itself, which could erode its superpower status—a concern made increasingly evident by recent policy announcements. With the BRICS getting more members in their council, the EU now showing complete solidarity with Ukraine, things are taking a turn surely albeit unfavorably to US.

Are Tariffs a Short-Sighted Economic Policy?

Ultimately, we will need to wait and see whether tariffs truly help the U.S. economy and whether tax cuts will materialize.

However, tariffs seem more reactionary than strategic. Instead of addressing fundamental economic weaknesses, they act as a temporary fix that does not bolster local industries or supply chains.

Tax cuts through Tariffs, in some ways, resemble populist giveaways—akin to the free TVs and motorbikes that Indian political parties distribute to gain votes. They create dependency rather than economic strength.

A More Humane Approach to Tariffs

What is the most effective way to address tariffs?

I believe tariffs are needed and self-protection is vital for any economy as it is essential to protect local industries that cannot compete with foreign giants. A McDonalds burger produced in India may be accounted in India’s GDP but it only serves US economic growth. It is more important to follow the money trail to know which country’s economy it is finally benefitting.

Nonetheless, governments should:

• Support local industries that struggle against foreign competition.

• Ensure that product prices remain reasonable to keep money circulating.

• Encourage strategic reinvestment of tariff revenue into infrastructure and innovation to boost local production rather than simply funding tax cuts.

Even if tariffs ultimately boost the economy, Trump’s aggressive, isolationist approach is questionable. For instance, antagonizing Canada—America’s largest export partner [6]—is counterproductive. Why alienate a key ally that is economically interdependent with the U.S.?

[1] Trump Tariffs: The Economic Impact of the Trump Trade War

[2] Trade and tariffs | APⓇ Microeconomics | Khan Academy

[3] How-the-Section-232-Tariffs-on-Steel-and-Aluminum-Harmed-the-Economy-2.pdf

[4] India Exports By Country

[5] China Exports By Country

[6] United States Exports By Country

[7] Chart: Growth in U.S. Real Wages, by Income Group (1979-2023)

[8] $1 in 1979 → 2025 | Inflation Calculator

Footnote (not exactly)
For a wine business to operate within US, the operations are quite complex. Looking at the simplified dependency diagram below where we have shaded the items in orange boxes as a partial dependency on imports (30% and below) and the boxes in red as a heavy dependency with imports varying from 30% and above. As one can note, reciprocal tariffs may create a retaliatory cycle with world leaders huddled in small private dens smoking cigars conniving on the next product to introduce a tariff on just to spite the US. 

Flow charts created using mermaid