Trump tariffs and their effect on world trade and economy with particular reference to Sri Lanka – Part II

The Penn Wharton Budget Model (PWBM), a nonpartisan research initiative that analyses the economic impact of public policies, has conducted a detailed assessment of Trump's tariff plan. Their findings paint an even more concerning picture of the long-term economic consequences.

- BY M. U. M. ALI SABRY PRESIDENT'S COUNSEL

According to PWBM's analysis, Trump's tariffs (as of April 8, 2025) are projected to reduce long-run GDP by approximately 6% and wages by 5%. For perspective, this represents a more severe economic impact than would result from raising the corporate income tax from 21% to 36%, a change that would be considered highly distortionary by most economists. For a middle-income household, these tariffs translate to an estimated $22,000 lifetime loss in economic welfare.

The PWBM analysis highlights that many existing trade and macroeconomic models fail to capture the full harm caused by tariffs. Beyond their direct effects on prices and trade volumes, larger tariffs reduce the openness of the economy, including international capital flows. This is particularly problematic in the context of the United States' current debt trajectory, which is increasing faster than GDP. As foreign purchases of U.S. government debt decline due to reduced trade, American households must absorb more of this debt, diverting savings away from productive capital investment.

While the Trump administration has emphasised the revenue-generating potential of these tariffs, projected at $5.2 trillion over ten years on a conventional basis, the PWBM notes that this revenue comes at an extraordinarily high cost in terms of economic efficiency. The tariffs effectively function as a highly distortionary tax that reduces economic activity far more than alternative revenue-raising measures would.

Disruption of Global Supply Chains