Trump Economic Policies Impact: PIIE Analysis of Tariffs, Deportation, and Fed Independence

PIIE’s Landmark Economic Analysis of Trump Policies

In September 2024, the Peterson Institute for International Economics (PIIE) published one of the most comprehensive quantitative analyses of Donald Trump’s proposed economic agenda. Working Paper 24-20, authored by economists Warwick McKibbin, Megan Hogan, and Marcus Noland, uses sophisticated macroeconomic modeling to project the impact of three cornerstone policy proposals: mass deportation of unauthorized immigrants, sweeping tariff increases, and the erosion of Federal Reserve independence.

The paper’s central finding is both striking and counterintuitive: every single policy examined reduces US GDP and increases US inflation. The very policies designed to protect American workers and reduce reliance on foreign production end up hurting the sectors they claim to support — particularly manufacturing and agriculture. In the most severe combined scenario, the United States would experience GDP losses comparable to the COVID-19 pandemic, but without the subsequent rapid rebound.

This analysis carries particular weight given PIIE’s reputation as one of the world’s leading independent economic research institutions. The working paper has become a touchstone for economists, policymakers, and business leaders seeking to understand the potential consequences of these policy directions — making it essential reading for anyone tracking global economic risk. Complex economic research like this is exactly the kind of material that benefits from Libertify’s interactive approach to document engagement.

The G-Cubed Model: Methodology and Baseline Projections

The PIIE analysis relies on the G-Cubed Multi-Country Model, a sophisticated intertemporal general equilibrium model that covers 19 sovereign economies, 4 regional groupings, and the rest of the world across 6 economic sectors. This model captures the complex interactions between trade, investment, exchange rates, and monetary policy that determine how economic shocks propagate across the global economy.

Before modeling Trump’s proposed policies, the researchers establish baseline projections for the US economy through 2040. These baseline assumptions include average annual real GDP growth of 1.9%, employment growth of 1.5%, inflation at 1.9%, a 10-year nominal interest rate of 5.4%, and a real interest rate of 3.4%. These projections represent the expected trajectory of the US economy absent the proposed policy changes, providing the benchmark against which all scenario results are measured.

The model’s strength lies in its ability to capture feedback loops that simpler analyses miss. For example, when tariffs raise input costs for manufacturers, this not only increases prices but also reduces investment, which lowers productivity growth, which further reduces GDP. These second-round effects often exceed the direct impact of the initial policy change, which is why the results are more severe than many intuitive estimates suggest.

Mass Deportation and the US Labor Market Impact

The PIIE paper examines two deportation scenarios based on different estimates of the unauthorized immigrant workforce. The smaller scenario involves the removal of 1.3 million workers, while the larger scenario models the deportation of all 8.3 million unauthorized workers estimated by the Pew Research Center.

The unauthorized immigrant workforce is not evenly distributed across the economy. Agriculture relies most heavily on unauthorized labor, with 14.6% of its workforce in this category. Manufacturing employs 5.7%, the services sector 4.3%, and mining 3.3%. This concentration means that deportation impacts are highly sector-specific, with agriculture and food production bearing disproportionate costs.

In the smaller 1.3 million deportation scenario, US potential labor supply falls by 0.8% by 2028, real GDP drops 1.2% below baseline, and cumulative GDP losses through 2040 reach $4.5 trillion. Inflation rises by 0.35 percentage points in 2025 and 0.54 percentage points in 2026 as employers compete for scarce labor and pass higher costs to consumers.

The full 8.3 million deportation scenario produces far more dramatic results. Labor supply contracts by 5.1%, GDP falls 7.4% below baseline by 2028, and cumulative losses reach a staggering $28.1 trillion through 2040. Inflation surges by 3.5 percentage points by 2026, with the overall price level rising 9.6% above baseline by 2028. Agricultural employment collapses by more than 16%, and the economy effectively experiences zero growth over the four-year period — a scenario that would constitute the most significant self-inflicted economic contraction in modern US history.

Universal Tariffs and Their Effect on Trade and Inflation

The second major policy examined is a universal 10 percentage point increase in tariffs on all imports. The PIIE analysis models this scenario both with and without retaliation by trading partners — a critical distinction that roughly doubles the negative impact on the US economy.

Without retaliation, the universal tariff reduces US GDP by 0.36% by 2026, appreciates the US dollar by 5.4% against all currencies, and raises inflation by 0.6 percentage points in the first year. The CPI price level rises 0.8% above baseline by 2028, and cumulative GDP losses through 2040 total $576 billion. Notably, the tariff does virtually nothing to improve the US trade deficit — the exchange rate appreciation offsets the intended reduction in imports, and the trade balance actually worsens by 0.1% of GDP by 2030.

With retaliation, the damage roughly doubles. GDP falls 0.9% by 2026, inflation rises 1.3 percentage points above baseline, and the trade balance effects remain minimal. This finding underscores a fundamental challenge with tariff policy: exchange rate adjustments and retaliatory measures tend to neutralize the intended trade effects while imposing real costs on domestic consumers and producers.

Perhaps most tellingly, durable manufacturing — the sector tariffs are ostensibly designed to protect — experiences a 2.7% decline in output in the first two years. This occurs because tariffs raise the cost of imported inputs that US manufacturers depend on, making them less competitive globally while simultaneously raising prices for domestic consumers. Agriculture also suffers a 2.4% output decline as retaliatory tariffs from trading partners target American agricultural exports.

The China-Specific Tariff Scenario at 60 Percentage Points

The PIIE paper separately models a targeted 60 percentage point tariff on Chinese imports, reflecting Trump’s campaign rhetoric about imposing punitive trade restrictions specifically on China. This scenario produces a complex set of results that highlight the interconnected nature of the global trading system.

Without retaliation, the China tariff reduces Chinese GDP by 0.9% below baseline by 2026, while US GDP falls by a smaller but still significant amount. The renminbi depreciates by 10% in real effective terms as China’s export competitiveness declines. US inflation rises by 0.4 percentage points, and cumulative US GDP losses through 2040 reach $618 billion.

With Chinese retaliation, the impact on the US economy more than doubles. GDP losses accelerate, inflation rises to 0.7 percentage points above baseline, and the bilateral trade effects are partially offset as Chinese production shifts to other markets and third countries benefit from trade diversion. US employment falls 0.23% below baseline as the combined effects of higher input costs and lost export markets ripple through the economy.

A critical insight from this analysis is that targeted tariffs on a single country are less effective than they appear because global supply chains redirect around bilateral restrictions. When the US imposes tariffs on Chinese goods, production often shifts to Vietnam, Mexico, or other countries rather than returning to the United States. The World Trade Organization has documented this trade diversion effect extensively, confirming that bilateral tariffs rarely achieve their stated objectives of reshoring production.

Erosion of Federal Reserve Independence and Capital Flight

The third policy scenario — erosion of Federal Reserve independence — produces the most alarming long-term consequences. The PIIE paper models this as a shift in monetary policy that prioritizes short-term economic stimulation over price stability, combined with a risk premium increase reflecting reduced investor confidence in US institutions.

The results are severe. Inflation increases by 2.8 percentage points in 2025 and 3.2 percentage points in 2026, with persistently elevated inflation of approximately 2 percentage points above baseline continuing indefinitely. By 2040, prices across the US economy are roughly 41% higher than they would have been under independent monetary policy. Cumulative GDP losses through 2040 reach $2.5 trillion.

The mechanism driving these results involves a dangerous feedback loop. When markets lose confidence in the Fed’s commitment to price stability, investors demand a 2 percentage point risk premium on US assets. This triggers capital flight as international and domestic investors seek safer returns elsewhere. The resulting dollar depreciation — 17% in the first year — raises import costs and feeds further inflation, while the loss of investment reduces productive capacity.

Paradoxically, the dollar depreciation does improve the trade balance significantly, with the deficit shrinking by over 5% of GDP in 2025. However, this improvement comes at an enormous cost: it represents not a competitive gain but rather a collapse in domestic purchasing power and investment that reduces demand for imports. The report notes that durable manufacturing production falls 3% below baseline in 2026 and 4% in 2027, again contradicting the notion that these policies would benefit American industry. For professionals navigating these complex macroeconomic scenarios, interactive analysis tools can make the data significantly more accessible.

Combined Policy Scenarios: The Low and High Cases

The most impactful section of the PIIE analysis examines what happens when all three policies are implemented simultaneously. The researchers construct two combined scenarios: a “low” case with moderate implementation (1.3 million deportations, tariffs without retaliation, and Fed erosion) and a “high” case with aggressive implementation (8.3 million deportations, tariffs with retaliation, and Fed erosion).

The low combined scenario reduces US GDP by 2.8% below baseline by 2028, with cumulative GDP losses of $1.5 trillion over the first four years. Inflation peaks at 4.1 percentage points above baseline in 2026, pushing the actual inflation rate to approximately 6%. Employment falls 2.7% below baseline, and the dollar depreciates by 8.6%. Prices rise 20% above baseline by 2028.

The high combined scenario is devastating. GDP falls 9.7% below baseline by 2028, meaning the US economy would actually be more than 1% smaller in 2028 than in 2024. Cumulative GDP losses over four years reach $6.4 trillion. Inflation peaks at 7.4 percentage points above baseline — approximately 9.3% — approaching levels not seen since the early 1980s. Employment drops 9% below baseline, the dollar depreciates 17.7%, and prices rise 28% above baseline by 2028.

The researchers note that this high scenario is comparable in severity to the COVID-19 pandemic in terms of economic output loss, but with one critical difference: unlike the pandemic, which saw a sharp V-shaped recovery, the economic damage from these policies would persist because they represent permanent structural changes to the economy rather than temporary disruptions. There is no vaccine for bad economic policy.

Manufacturing and Agriculture Under Economic Pressure

One of the most striking findings of the PIIE analysis is the consistent damage to durable manufacturing across every scenario examined. This finding directly contradicts the central economic narrative of the Trump platform: that tariffs, immigration restrictions, and loose monetary policy will revitalize American manufacturing.

The mechanism is straightforward but powerful. Tariffs raise the cost of imported inputs that US manufacturers depend on — raw materials, components, and intermediate goods. Mass deportation reduces the available workforce and drives up labor costs. Loose monetary policy initially stimulates demand but quickly triggers inflation that erodes the purchasing power of both workers and businesses. The net result is that manufacturing faces higher input costs, scarcer labor, and an inflationary environment that discourages the long-term investment necessary for industrial expansion.

Agriculture faces an even more concentrated impact due to its heavy reliance on unauthorized immigrant labor. In the full deportation scenario, agricultural employment falls by more than 16%, a shock that would cascade through food supply chains, increase food prices, and potentially require unprecedented levels of food imports to maintain domestic food security. The USDA has documented the critical role of immigrant labor in American agriculture, and the PIIE analysis quantifies what that dependency means in policy terms.

Mining, another sector that relies on physical labor and faces significant trade exposure, also suffers across scenarios. The combined effect of labor shortages, higher input costs, and reduced investment creates a challenging environment for capital-intensive extractive industries that require long planning horizons and stable policy environments.

International Spillovers and Global Trade Realignment

The PIIE analysis does not limit its examination to the United States. The G-Cubed model captures how US policy changes ripple through the global economy, revealing both expected and surprising international spillover effects.

Canada and Mexico are the most vulnerable to US tariff increases due to their deep trade integration with the United States through USMCA (formerly NAFTA). Both economies experience significant GDP declines in tariff scenarios, with the damage amplified by their limited ability to diversify trade relationships quickly. China is most affected by the targeted 60 percentage point tariff, but production partially shifts to other developing economies, demonstrating the fluidity of global supply chains.

Perhaps the most surprising finding involves the erosion of Fed independence. When investors lose confidence in US monetary policy, capital flows out of the United States and into other major economies. Japan, Germany, Canada, China, and Mexico all experience GDP gains from this capital inflow. In other words, the erosion of US institutional credibility directly benefits competitor economies — a result that starkly contradicts the “America First” framing of these policies.

The paper also highlights that the United States accounts for only 16% of global GDP on a purchasing power parity basis (or 25-26% at current exchange rates). This means that isolationist economic policies impose large costs on the US economy while having relatively limited leverage over the rest of the world. Trading partners can and do find alternative markets and supply sources. The analysis available in Libertify’s growing interactive library helps business leaders understand these complex global interdependencies.

Policy Implications and the Path Forward

The PIIE analysis carries profound implications for policymakers, business leaders, and investors. The consistent finding that all three policy categories reduce GDP and increase inflation challenges the fundamental premises of the economic agenda they examine.

For business leaders, the message is clear: scenario planning must account for the possibility of significant macroeconomic disruption. Companies with supply chains dependent on imports, workforces with significant immigrant labor representation, or business models sensitive to inflation and interest rates need contingency plans. The high combined scenario represents a level of economic disruption that would stress-test even well-capitalized organizations.

For policymakers, the analysis reinforces the importance of institutions — particularly central bank independence — as economic shock absorbers. The finding that Fed erosion is the single most damaging policy for long-term price stability should give pause to anyone contemplating interference with monetary policy independence. The institutional framework that underpins the dollar’s reserve currency status and investor confidence in the US economy is not a constraint to be circumvented but a foundation to be preserved.

The paper also raises important questions about the distributional impacts of these policies. While the aggregate numbers are severe, the costs fall disproportionately on specific sectors (manufacturing, agriculture, mining), specific regions (border states, agricultural heartland), and specific populations (low-wage workers who face both competition effects and higher consumer prices). The irony that the PIIE authors identify — policies designed to help these groups would instead harm them most — deserves serious engagement from across the political spectrum.