The Real Problem with Tariffs

We are entering a golden age of tariffs. Once upon a time, tariffs were among the most divisive aspects of American and global politics. Then came the end of World War II and 75 years of nearly unbroken movement toward free trade around the world. Now, with the first Trump administration’s China tariffs, the Biden administration’s continuation of those policies, and the tariffs of Trump II, that period appears to be at an end.

The past nearly two months of Trump tariff policy have been anything but smooth or coherent. In fact, they have been chaotic and inconsistent, with bold announcements one day of tariffs on Mexico, Canada, China, and Colombia, followed by reversals or partial reversals the next. Promised future dates have been revised just as quickly.

And yet, there is one fatal flaw that no one is adequately highlighting: the stated goal of the tariff regime is not just to eliminate trade deficits but to bring most manufacturing of goods purchased in the United States back to the United States. However, tariffs of 25% are far too low to make that happen. In short, beyond the various other flaws of the tariff strategy, if the goal is to reshore manufacturing, the tariffs aren’t nearly high enough.

And there’s little ambiguity that this is the goal. Commerce Secretary Howard Lutnick said just a few days ago, “We want factory production in America. We want employment to blossom in America. We’re going to bring factories back to America.” That goal, in and of itself, has widespread resonance. Senators Bernie Sanders and former Senator Sherrod Brown, both staunch and progressive Democrats, have echoed similar sentiments for years. The erosion of Rust Belt and Midwest manufacturing plants over the past few decades certainly coincides with the growing arc of free trade, though it also coincides with the increased prevalence of automation and robotics. The result is that reshoring U.S. manufacturing has broad popular support.

Making that happen, however, would take far more than 25% tariffs. It would require a concerted, focused, and strategic industrial policy implemented by the federal government and carried out over at least five years—likely closer to ten. It took more than 30 years, from the signing of the first NAFTA agreement in 1994 to China’s accession to the World Trade Organization in 2001, through the subsequent years of foreign investments in China’s infrastructure and supply chains, as well as the buildout of integrated supply chains in North America between Canada, the United States, and Mexico. There was also the ancillary buildout of supply chains in other countries worldwide. That process didn’t just take years; it took trillions of dollars in capital—much of it private, but some coming from governments, such as China’s.

There are no exact figures on how much money it cost to build today’s globally dispersed supply chains. Foreign direct investment into China alone between 2010 and 2023 was nearly $2 trillion—and nearly that much in the decade before. Add in the money spent on building the integrated North American supply chains, along with what China, the EU, and Japan spent on constructing global supply chains, and the total likely exceeds $10 trillion.

It might not cost quite that much for the United States to build an entirely internal manufacturing ecosystem, but given the elevated cost of doing anything in the U.S., the figure would certainly be close. Let’s say there were universal 25% tariffs on every dollar of U.S. imports. The United States imported about $4 trillion in 2024, though some of that consists of services, which are not subject to tariff duties. Goods accounted for about $3.5 trillion. A 25% tariff on all of that—higher on aggregate than any set of tariffs currently being considered—would raise only about $900 billion a year.

Now let’s say that every penny of that is diverted into a U.S. infrastructure and reshoring fund, allocated entirely to rebuilding supply chains in a focused, disciplined, and strategic fashion—locating factories near rail lines and ports, ensuring good road and transportation access, and securing proximity to various raw materials. And let’s say doing that would cost $5-$10 trillion dollars. Where is the money going to come from?

Companies cannot and will not spend those trillions. A 25% tariff is just enough to cause companies financial pain but nowhere near high enough to make their current supply chains untenable. More to the point, if their profit margins are dented by having to pay those tariffs—along with decreased American demand—they absolutely won’t have the cash or borrowing power to build new domestic supply chains.

So, for the policy as stated to work, the Trump administration would need much higher tariffs—perhaps 100% to 200%—combined with a massive public spending program to both cushion the blow of lost access to goods and fund the extensive rebuilding project that would be required.

I don’t know if I’ve missed something, but I haven’t heard that this is the administration’s plan.

Tariffs are Like a Knife in a Gunfight by Zachary Karabell (2018)

If it were the stated plan, it would at least be coherent and defensible. It would recognize that no amount of tariffs alone will lead to massive reshoring; that no amount of tariffs alone will generate sufficient capital to make significant reshoring possible; and that without the government instituting a Manhattan Project-like spending program with focus and urgency, reshoring will, at best, be haphazard and inefficient—making barely a dent in the overall status quo.

So, the problem with tariffs relative to the goal is that they are far too low and lack an overall plan. The issue with tariffs is also that there is no scenario in which substantial reshoring is possible without significantly larger government debt, much higher costs of goods, and far less employment than promised. Because even if those factories were built, they wouldn’t employ many people due to the onward march of robotics, automation, and AI.

We are left, then, with tariff theater rather than tariff policy. And tariff theater, combined with the mercurial on-again, off-again nature of tariff threats, is not enough for reshoring—but it is enough to tip the economy into recession and send the markets into a panic. That isn’t an optimistic take on the current situation, at least not in the short term. But it is an analysis that leads ineluctably to the conclusion that this tariff war will end simply because it has to—because there is no feasible strategy, and because even this administration isn’t immune to public backlash.