international analysis and commentary

The past and future impact of Trump’s tariffs

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As the November 2024 US presidential election nears, Donald Trump’s threats to impose a new round of harsh tariffs to favor American industry are beginning to draw attention. The trade war launched during Trump’s first stint in the White House is a fresh memory, and many of its effects are still with us. Indeed, Joe Biden has continued in the vein begun by his predecessor, not only maintaining the tariffs imposed on China, but also implementing new export controls, investment screening, and a broader industrial policy to encourage manufacturing in key technological sectors.

Construction spending by US manufacturers more than doubled from 2022 to 2023

 

American and foreign institutions alike have been forced to make peace with Biden’s form of protectionism – recently confirmed by the proposed tariffs on steel and aluminum – given the irrepressible drivers of this new policy.

Three major factors converged to generate the political conditions that have made greater state intervention and protection inevitable in recent years: the populist backlash against the loss of factories and jobs to lower-wage countries, the pandemic’s demonstration of the precarious nature of global trade and supply chains, and the strategic competition with China, which has reframed the debate over the control of digital technologies and their supply chains.

 

Read also: The US-China-Taiwan: a sticky economic triangle

 

This new political reality, however, has done little to dent the critical view of tariffs as a tool to protect domestic manufacturing, and the prospect of a new round of protections under a second Trump presidency – with his promise of adding a 10% levy on all imported goods – is already leading to worries about further distortions of global trade.

The Tax Foundation argues that such a tariff would “effectively raise taxes on US consumers by more than $300 billion a year,” not to mention the retaliatory tax increases which trading partners would inevitably apply. Furthermore, in late January, Michael Every, a global strategist at Rabobank, complained that Trump risks “structurally breaking the global system” in his goal to “reindustrialize the US in a neo-Hamiltonian manner.” Some supporters of today’s protectionism might agree that this is indeed the goal, but most economists worry about a potential reduction in global trade and the negative effects of measures that, at least according to prevailing theory, would reduce economic efficiency.

In this context, it is useful to look at a recent academic paper co-authored by David Autor, an economist who has done extensive work on the negative results of globalization and labor market changes for American workers. In 2017, Aspenia online published an article citing Autor’s work in light of the opportunity represented by the Trump Administration’s turn away from the free-trade paradigm of recent decades.

In January of 2024, Autor, who teaches at MIT and collaborates with the National Bureau of Economic Research, wrote a paper together with Anne Beck of the World Bank, David Dorn of the University of Zurich, and Gordon Hanson of Harvard, entitled “Help for the Heartland“. The study takes a fresh look at the effects of the trade war on employment in areas of the United States that received import tariff protection, as well as the political fortunes of Democrats and Republicans in areas that had suffered from a rapid growth of Chinese import competition in the 1990s and 2000s.

The results appear disappointing for those who have touted the new focus on protecting American industries and jobs: The conclusions of the study are that on balance import tariffs on foreign goods had no effect on US employment in the relevant sectors, while retaliatory tariffs did have a negative impact, in agriculture in particular. Essentially, the United States was unable to rapidly replace foreign goods whose prices had risen, while farmers did suffer from the higher prices for the goods they exported to China.

Given these results, it could be tempting to revert to the standard critiques of protectionism, pointing to the findings that despite all the promises, American manufacturing has not become “great again” as a result of the actions of the last two presidential administrations. Yet some caveats are in order: an important one is that we need to consider the timeframe studied. The Autor et al. paper only examined the first two years after the new tariffs, stopping in 2019, before the disruption of the COVID-19 pandemic.

It is certainly instructive to assess the immediate effects of the protectionist measures, which provide some useful data points. However, the inability of the US economy to quickly shift gears and benefit from a large rise in manufacturing employment should come as no surprise. Indeed, the authors themselves recognize the structural problem at issue, exemplified by the differences in the nature of goods exported and imported: “US exports to China are primarily agricultural products, which tend to have relatively high trade cost elasticities; US imports from China consist primarily of manufacturing goods, which tend to have relatively low trade cost elasticities.”

An obvious takeaway is that to produce more manufacturing goods, a country needs to have the ability to rapidly expand productive capacity. The reality of recent years shows that the United States has not been able to do so; first, because it’s not enough to simply put money into the coffers of large companies in order for them to invest (as occurred with Trump’s tax law), and second, because even when such investments are made, it takes time for them to come to fruition.

The authors point to this problem when they note that “it remains an open question whether import protection that failed to generate substantial job gains during the trade war might spur job creation over longer time horizons.” What might be required, they note, is “physical capacity building”.

From this standpoint, it is clear that the Biden administration has taken a significant step forward beyond Trump’s trade war, by reviving “industrial policy”, i.e. using government incentives to drive investment in specific areas of the economy. The most obvious regard advanced technologies, such as semiconductors, with numerous new factories under construction. Yet there are various other initiatives, not only divided by sector, but also by location, in line with the White House’s “place-based” approach that seeks to rebuild the communities most affected by factory losses as a result of globalization.

 

Read also: The Inflation Reduction Act and the rebirth of US industrial policy

 

The lesson that the administration has drawn is not the one preferred by many economists, i.e. that protectionism has been proven to be useless due to a lack of immediate job gains, but rather that a more comprehensive approach is needed to rebuild the productive capacity of the US economy. Limiting trade can increase costs for consumers and provoke retaliation by other countries that harm its output. Yet given the three fundamental factors that have driven the economic re-think in recent years – populism, the pandemic, and geopolitical competition – there is a political imperative to focus on ensuring that government can make a positive contribution to generating high-quality jobs, as well as keeping the country at the forefront of technological progress.

The political effects of such policies go beyond their measured impact on employment in the short term. Indeed, Autor et al. find that Republicans saw electoral gains in regions that had suffered from a rapid growth of Chinese import competition in the 1990s and 2000s, and whose industries now received a relatively large import tariff protection. Even though the impact of such protection was limited – although electoral gains were in fact larger in areas that saw “more favorable employment impacts” – a key element was the political solidarity that the trade war conveyed with voters in areas that had suffered from extensive job losses.

While it is again tempting to use such findings to paint the interventionist measures of recent years as mostly a political ploy, a smarter and more realistic approach is to think of how to develop a coherent policy aimed at promoting US manufacturing and progress in the sectors that have deep implications from a political, economic and geopolitical standpoint.

It is easy to disparage Donald Trump’s rudimental, rhetorically focused threats to double down on trade policy. It is harder, but will be much more fruitful, to consider how multiple interventions can work together to correct decades of neoliberal policies that have divided and weakened the United States, domestically and internationally.