Dumb Tariffs

Tariffs are dumb. Dumb, dumb, dumb, and dumber. That was true in 2017 when Donald Trump began discussing tariffs on China as a way of retaliating against what was seen as its unfair trade practices. It was true in 2018 when his administration levied the first round of 10 to 25% tariffs on Chinese goods, which, according to the non-partisan Tax Foundation, amounted to a nearly $100 billion tax on American citizens. It was true when the U.S. government then spent nearly $30 billion bailing out farmers for the income lost when China retaliated by halting purchases of U.S. soybeans. And it remains true as the Biden administration has largely continued those tariffs and added a few of its own on Chinese-made solar panels and electric vehicles. It will remain true if, as he promises as a candidate now, Trump proceeds to slap a much more aggressive set of tariffs not just on China but on manufacturers such as Deere that move any production out of the United States.

Leave aside for the moment whether any president could legally do what Trump intends with tariffs, or whether the president’s current authority under a few very old and obscure trade laws from the 1970s and 1980s (particularly Section 301 of the 1974 Trade Act) will be clipped by a Congress that will face howls of complaint from companies, workers and consumers who face sharply higher prices should such tariffs go into effect. The idea that 10-20% tariffs on all imported goods and a special 60% on Chinese goods will “restore” American manufacturing and that the cost of those tariffs will be born by foreign companies and countries is a complete and utter fiction.

It isn’t just Trump who is a proponent. J.D. Vance has been as well, as have an unlikely coalition of left-leaning politicians such as Ohio Democratic Senator Sherrod Brown, Pennsylvania’s John Fetterman and Vermont’s Bernie Sanders. Their argument for tariffs is little different from Trump. In a letter urging Biden to maintain the tariffs on China, that group of senators (minus Bernie) wrote: “Generations of free trade agreements that prioritize multinational corporations have devastated our communities, harmed our economy, and crippled our job market. Keeping the tariffs in place and increasing the tariffs where necessary maintains a critical piece of a pro-worker trade agenda. Any reduction in the tariffs allows China to gain a competitive advantage over hardworking Americans. American workers can compete with anyone if they have a level playing field, and now is not the time to roll back support. We strongly urge you to maintain or increase the tariffs to stand with American workers and hold China accountable.”

Great rhetoric. Lousy economics. The idea was, and still is, that if you increase prices on imported goods, domestic manufacturing will become more attractive. There is just about zero evidence of that. In fact, as one case of washing machines shows, when tariffs go into effect, prices rise and stay high because while tariffs can be levied almost immediately, creating new supply chains and new manufacturing plants takes years and billions upon billions of dollars of investment.

Even then, the cost differential of American wages, not to mention the cost of building plants in the US, are such that basic goods cannot be produced domestically at anywhere near the low-cost as abroad without substantial state and federal subsidies. The United States still excels at higher end manufacturing, even there however, subsidies are often needed. Hence the Chips Act, which will in the next few years lead to some US production of semiconductors in places such as Arizona (where Taiwan Semiconductor is building a plant) and upstate New York (where Micron is building a plant). What the Chips Act demonstrates is that the only way tariffs can possibly lead to a resurgence of American manufacturing jobs is for state and local governments to subsidize the construction of new plants, a cost many multiples greater than the amount of money gained from the tariffs.

And the tariffs, as most people other than politicians seem to recognize, are taxes paid by the companies or individuals importing the goods, not by the country that the tariffs target. China doesn’t pay those tariffs, nor do Chinese companies. Americans pay those tariffs to the federal government, which could then presumably use some of that money to subsidize the construction of new plants or to offset the extra costs that Americans bear. But tariffs are a domestic tax, and unless government then spends even more money to offset the burden of that tax (money that has to come from either deficit spending or…new taxes), tariffs don’t restore anything.

Read Tariffs Are Like a Knife in a Gunfight by Zachary Karabell (2018) HERE

Even sillier is the belief that American manufacturing is being hollowed out by foreign competition. Since the 1940s, manufacturing output has represented between 11-14% of overall GDP in the United States. The United States remains a powerful and dominant manufacturing economy. What has changed dramatically is the percentage of workers employed in manufacturing. That has gone from about 30% of workers in the 1950s to less than 9% today. And why? Because of automation.

The reality of automation replacing human labor never receives quite the focus as “China is stealing our jobs” does, or as John Kerry famously remarked when he ran for president in 2004, the “Benedict Arnold CEOs” who were shipping jobs overseas. Yes, many lower-skilled manufacturing jobs and basic goods such as furniture and toys and paperclips that were once made in the United States are now made elsewhere. But automation has led to a greater decrease in employment than anything else, which is why the recent longshoreman strike on the East Coast had as one of its demands a brake on the adoption of robotic cranes and equipment at ports that can replace human workers.

These are losing battles, akin to the proverbial effort of holding back the tide. We have unfortunately mis-learned the lessons of the 1990s. The neoliberal consensus of globalized trade did not harm average people unless you had a job in manufacturing. Globalized trade did lead to more goods at lower prices, but at the cost of lost jobs and stagnant wages in some industries. Rather than useless policies such as tariffs that do nothing to increase wages or create new jobs, we should be spending to cushion the blow to those whose lives are disrupted by technology and trade.

While U.S. trade with China has stagnated in the post-2018 tariff era, trade with third-party countries such as Vietnam that receive the same Chinese goods and then send them to the US has boomed. Tariffs have done nothing—and actually worse than nothing, because they have fed a story that is completely false about jobs, manufacturing, wages, and the future of the United States and the world.

There’s much more to be said here, and I will return to these questions in subsequent columns, but for now, let’s just repeat what we began with. Tariffs are dumb, and the sooner we realize that, the sooner we can turn to actual solutions to real problems.