Economic theory suggests that U.S. tariff increases should strengthen the U.S. dollar, and history supports this as well. When tariffs increase, demand for foreign goods decreases because they’ve become more expensive. This decreased demand reduces the outflow of dollars to foreign markets, thereby increasing the dollar’s value via artificial scarcity.
Yet, since the Trump Administration’s “Liberation Day” tariff hikes, the dollar has fallen by as much as 7.31% on the U.S. Dollar Index (DXY), which measures the dollar’s value relative to a basket of other advanced economies. A weakened dollar reduces Americans’ purchasing power and places upward pressure on import prices, holding back economic growth.
Uncertainty and Deficit Policy
The Trump Administration released its Liberation Day tariffs in April 2025. The goal was to impose reciprocal tariffs that counteracted other countries’ taxes on U.S. imports. To implement tariffs, the International Emergency Economic Powers Act of 1977 (IEEPA) was invoked. After nearly one year of imposition, the presidential tariffs were struck down by the Supreme Court.
Uncertainty seems to be a keystone of the Trump Administration’s trade policy strategy. Leaving governments and investors guessing about tariff rates, trade policy, and U.S. international intervention has eroded confidence in the dollar’s reliability. For example, tariff rates were repeatedly negotiated to benefit the U.S., and, even after the Supreme Court struck down IEEPA tariffs, the Trump Administration implemented others at lower rates. Additionally, until the Supreme Court struck down the Liberation Day tariffs, they would have been the largest tax increase as a percent of GDP since 1993. With tariffs diminishing U.S. business profits and disincentivizing investment, investors are increasingly preferring overseas alternatives to U.S. assets, thereby decreasing demand for the dollar and, in turn, weakening it.
Harms of the Weaker Dollar
Yet, Trump has welcomed the decline of the dollar with open arms; he and his Administration feel as though it is still strong and will continue its dominance in global markets. Proponents argue that a weaker dollar will make American-made products cheaper for foreign purchasers, benefiting U.S. manufacturing. However, U.S. manufacturing employment has declined since the Liberation Day tariffs were announced. A weaker dollar can also boost foreign tourism, but tourism has instead declined. Worse, a weaker dollar tends to raise prices by making imports more expensive, as the dollar has less purchasing power for foreign goods.
A weaker dollar makes foreign assets more attractive, driving investment away from the United States. This can lead to higher prices for families and reduce overall economic growth, benefiting only small subsets of the population.
Harms of Tariffs
If U.S. tariffs typically strengthen the dollar, then foreign tariffs will weaken it. Retaliatory tariffs in response to Trump’s policies are likely to offset increases in the dollar caused by Trump’s tariffs. Additionally, tariffs reduce profits for U.S. companies that source inputs from overseas. The manufacturing sector, which Trump touts will benefit from tariffs, imports about 30% of its inputs from overseas.
In its latest budget and economic outlook, the Congressional Budget Office estimates that economic and productivity growth would have been higher if tariffs had never been imposed. Instead, tariffs have increased costs, reduced investment, and decreased productivity.
How Much Are Taxpayers Paying?
A significant portion of American spending is on foreign goods and services. Imports account for about 14% of U.S. GDP. Nearly 90% of tariff costs have fallen on U.S. firms and consumers. With the costs of both imports and U.S.-made products increasing, consumers mostly foot the bill. Consumers are estimated to have paid 70% of the tariff costs, and the average family is estimated to have paid over $1,700 in tariff costs since Trump took office. This amounts to over $231 billion in increased tariff costs borne by consumers.
Fortunately, partly due to deregulatory and pro-energy development policies from the Administration, inflation has typically hovered below 3% since Trump took office in 2025, not a dramatic change. However, the Producer Price Index (PPI) was 4% year over year in March, while the Consumer Price Index (CPI) was only 3.3% year over year at that time. When data shows producers experiencing much higher inflation than consumers, more aggregate inflation in the near future is likely. Additionally, tariffs are targeted at specific goods and services, meaning isolated products will see more dramatic price increases.
For example, beef prices increased by about 15% year over year. Trump imposed 50% tariffs on Brazilian beef and a 10% tariff on Australian beef. With U.S. beef markets already restricted, there was no supply to fill the gap between U.S. demand and the lack of imports, driving prices up dramatically. The price of electronic components and accessories increased about 17.9% year over year, due to tariffs on many East Asian countries that supply them. It is estimated that the 25% tariffs on foreign automobiles would lead to a 13.5% increase in car prices. Domestic cars aren’t immune to price increases either, since their manufacturers import a large share of their vehicle components.
Conclusion
The Trump Administration’s policies on the dollar and trade have left U.S. families and businesses footing the bill. While many analysts have pointed to increased costs due to tariffs, the lower value of the dollar has added even more to the cost of imports. The combination of reduced trust in the dollar and higher tariffs leads consumers to pay more while slowing economic growth.
Tariffs and a weaker dollar directly counteract the pro-growth policies of the Trump Administration. If the goal is to optimize healthy and prosperous growth, this is a hindrance.