Making America great again? The economic impacts of Liberation Day tariffs

On April 2, 2025, President Trump declared “Liberation Day,” announcing broad tariffs to reduce trade deficits and revive U.S. industry. We analyze the long-term economic impacts of these tariffs. If trading partners do not retaliate, the tariffs could decrease the U.S. trade deficit and improve its terms of trade, yielding modest welfare gains when tariff revenues reduce the income tax burden for American workers. However, reciprocal retaliation results in net welfare losses for the U.S. economy. We derive the unilaterally optimal tariff policy and find that the USTR proposed tariffs, based on bilateral trade deficits, diverge markedly from the optimal design. The optimal tariff is 19%, uniformly applied across all trading partners, and determined solely by the aggregate trade deficit, rather than bilateral imbalances. Under optimal foreign retaliation to the USTR tariffs, U.S. welfare declines by up to 3.38% when accounting for input–output linkages, while global employment contracts by 0.58%.