Like many recent contests, the 2024 presidential election positioned several philosophical and practical differences against each other. Naturally, a (mainly) two-party system produces two different political visions. Yet even amid otherwise polarized political parties, they share at least one idea: Both Republicans and Democrats seem to embrace the use of tariffs in international trade. Now the administration of President-elect Donald Trump appears poised to make tariffs a defining part of its foreign policy. And yet the people who study the flow of money and advise on policy — economists — generally argue against the effectiveness of tariffs. Somewhere, there’s a breakdown between these experts, policymakers and, to some degree, the American electorate. I talked with two economists about how tariffs work, their disposition toward them, and why they carry so much momentum right now. —Aaron Cline Hanbury
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Both political parties right now seem to embrace the use of tariffs when it comes to international trade, and President-elect Trump’s administration appears poised to make tariffs a defining part of its foreign policy. From an economic perspective, what does this mean?
Douglas A. Irwin: It depends on the type of tariffs that might be imposed by the Trump administration. If higher tariffs are imposed just on goods from China, the price of iPhones and other electronics will rise, but we’ll start importing more from countries like Vietnam. If higher tariffs are imposed on all imports from all countries, like a 20 percent across-the-board tariff that Trump spoke about during the campaign, the price of all imports will be higher, unless some goods are given exemptions (such as for coffee and bananas, which we don’t produce at home). In general, higher tariffs mean less trade, including fewer exports as other countries retaliate by imposing tariffs of their own against American goods. Most economic estimates of the impact of Trump tariffs suggest that it will reduce GDP by 0.2 to 0.4 percent, a small but negative effect.
Greg, you’ve referenced that many (if not all) of the desired outcomes of tariffs can be accomplished more effectively through other means. Can you explain that?
Gregory Phelan: Let me start with an analogy. Suppose we want to build a train, which will help basically everybody. There is some town that is disconnected from big cities, and a train would connect it and make it easier for people to commute, make it easier for people to visit the town, etc. Overall it would be great for the town. But there are some people who suffer: the people who live along the train tracks. Right now they have a quiet backyard, and building the train will decrease their property value. So what’s the solution if you want to help those people? Do you not build the train? Or do you compensate those people for the lost home equity? Obviously the latter is the right policy.
The biggest complaint people have about globalization is that it has led to a decline in U.S. manufacturing jobs. This is the “giant sucking sound” Perot predicted would be a result of NAFTA. With free trade, it is much less expensive to produce stuff abroad, where labor is cheap. So factories close and move to Mexico, and so on, leaving people who used to have good jobs without them. What’s the solution? One solution is to stop globalization. If we make it really expensive to import goods, then companies won’t set up factories abroad, and they’ll keep building in the U.S. Thus maintaining those jobs. But the real problem is that manufacturing here is not profitable. Labor costs are incredibly high relative to other countries. That’s a feature, not a bug, by the way. We want to live in an economy in which people are paid well. But there are lots of people, primarily men, without the appropriate training to get other jobs. So the solution is job training so they can get non-manufacturing jobs.
There’s been some pushback lately — a possible over-correction — to the idea that college is the ideal route for everyone. Could this idea of training circle back to a college-or-bust mentality?
Phelan: The solution might not be advanced degrees — college isn’t for everybody — but maybe they can get training to enter service sectors that are growing, or perhaps even coding. There are jobs, but there is a mismatch in skills.
This is the same problem as when a new technology comes around that replaces a previous skill. It used to be important to know how to sew by hand. Then came the sewing machine. If you made your living as a seamstress, you needed to learn the new technology (maybe that required training) or you might have needed to find a new job altogether. Or, it used to be important to have a secretary who could type for you. Then we have computers so anyone can type. If you worked as a typist, you needed a new set of skills.
Now administrative assistants do a lot more than type. Computers have expanded what an assistant can do, even as they have made a previous task obsolete. But if the “down and out” secretaries rose up and said, “impose tariffs on computers so nobody can use them, so we can keep our jobs,” that would be misguided.
Irwin: As someone said, everyone wants progress, but no one wants change.
So there’s a level of consensus among economists that tariffs won’t achieve their intended ends. Why?
Irwin: Tariffs are one policy instrument that people would like to achieve many objectives: increasing revenue, reshoring jobs, reducing the trade deficit, punishing other countries for various offenses, and more. It is hard to achieve so many things with just one policy, and it is not clear that tariffs will help achieve any of them. It is a poor way of raising revenue (in comparison to other broader-based taxes), won’t help close the trade gap (which is determined by macroeconomic factors), and probably won’t help create new jobs. For example, studies of the tariffs on steel suggest that more jobs were lost in steel-using sectors (such as automobiles and equipment producers, whose costs went up) than were created in the steel industry itself.
Doug, will you explain the lesson of the “chicken war”?
Irwin: The “chicken war” was a trade spat between the United States and Western Europe in the mid-1960s. Europe put duties on imports of American chicken, so the United States retaliated by imposing 25-percent tariffs on imported trucks. Neither country changed its policy as a result of the trade dispute, so Europeans pay more for chicken and Americans pay more for trucks. The lesson is that countries tend to retaliate when you impose trade barriers, and that once in place, trade barriers are hard to remove.
The economics seem clear and fairly objective. Why don’t policymakers — and to some degree, public perception — agree?
Phelan: There has definitely been a move away from listening to economists for advice. I saw a report in the Wall Street Journal recently that said the top posts in Washington have gradually moved away from economists and toward lawyers. I think there is a broader question about economists having lost authority, in the same way that many institutions and elites have. I, obviously, think that’s a mistake. But I think it speaks to the point of how elites often say, “This move is for everybody’s good, and we can help those adversely affected along the way,” and then the government doesn’t help those adversely affected along the way. So people are just not interested in listening.
Even recent Nobel laureate Angus Deaton seems to have had a crisis of faith in economics, and he now thinks that basically everything we believe as a profession is wrong. He’s been doing research on the deaths of despair and I think that’s affected him. I saw an interesting debate between him and Larry Summers, and basically Summers said, “You’re right that the deaths of despair are horrible, but you are wrong to conclude that this means economics as a profession needs to be thrown out. I’m sympathetic to Larry on this point, but I think a lot of people think, let’s just do things our way.”
Irwin: I actually think that the (negative) message about tariffs is getting heard by policymakers. But there is one person who is impervious to the message: President-elect Trump. This passage from Bob Woodward’s book Fear has always stuck with me:
Cohn and Porter hoped signing the memo authorizing a 301 investigation would divert Trump from imposing steel and aluminum tariffs immediately.
Whenever either of them would challenge Trump’s conviction on the importance of trade deficits and the need to impose tariffs, Trump was immovable. “I know I’m right,” he said. “If you disagree with me, you’re wrong.”
One has to differentiate between tariffs on China — which command wide support and on which economists have less to say because national security interests are involved — and generalized tariffs on steel and all other goods from all other sources, including allies. What the public says depends on what you ask them. If you ask them whether they support tariffs to reduce imports and shift demand to domestic producers, a fair number — perhaps even a majority — will say yes. If you add that this will increase the prices of those goods, support drops considerably.
Remember, we don’t need tariffs for consumers to buy American. They can do that on their own.
Phelan: Another example is how those on the extremes have embraced Lina Kahn’s philosophy at the Federal Trade Commission. In the past, conservatives would have hated her approach, becuase it’s extremely unorthodox and has no economic merit. But people seem less interested in that. Economics is not good at predictions (that’s not it’s main point), but it is very good at explaining how things work: how incentives matter, how things change in equilibrium. We ignore those points at our own peril.
When it comes to tariffs, are economists also unified across ideological spectra, or are there ways in which an economist’s political views shape how he or she would view tariffs?
Irwin: Professional economists have a fairly uniform way of analyzing tariffs regardless of ideology. Their political views might be important in assessing which considerations deserve weight in determining whether tariffs should be used as a policy instrument in particular cases (e.g., national security considerations, effect on manufacturing jobs, impact on income distribution, etc.) But on the whole, economists view international trade as beneficial, and tariffs reduce trade. Think of what would happen if we raised tariffs to 30 percent, then 40 percent, then 50 percent and kept on going, squeezing out trade. Countries, like people, do not thrive in isolation, cut off from others. I live in the small state of New Hampshire. Almost everything my family consumes — from cars to clothes to food — is not made in New Hampshire. If New Hampshire were cut off from trade with the rest of the country or the rest of the world, our standard of living would decline precipitously. The one million New Hampshire residents will not get rich just trading with one another because our market is too small for specialization. Economists have known this since Adam Smith wrote The Wealth of Nations in 1776.
We know cheaper isn’t always better. In the same way we might say, for example, that you just have to pay more for ethically sourced coffee or chocolate, could someone make a similar case for trade tariffs?
Phelan: That makes me think of a few things. First, how the CEO of Nike famously refused to visit their factories because he didn’t want to know about the labor conditions. But, I don’t think this is the way anybody is really thinking about tariffs broadly. Certainly if we are going to hit every good from Canada with a tariff, it can’t be because we think everything made in Canada is done so unethically. I’m not sure tariffs at the country level, or even at the industry level, really affect this issue.
Second, this is what treasury sanctions are for. The treasury explicitly targets foreign actors doing things the U.S. doesn’t like and hits them with financial sanctions. Often related to terrorism, etc. That strikes me as a more targeted way to approach issues like that.
