Can Tariffs be a Good Thing?

Economic

Summary:

Now there is little doubt that Trump is going to impose much higher tariffs perhaps with the aid of Congress.

In a day-after-the-election briefing to a group of business executives on what the trade policy of a second Trump presidency might look like, the question was asked, “What would an example of a good tariff be?”

The answer is the same one that the 16th century Swiss physician and alchemist Paracelsus gave about dosages of medicine—given in moderation and for the right purpose, they can help heal. Given in excess, they become a poison.

Special additional tariffs are part of current trade remedies, adopted as a matter of national policy and embedded in domestic US law and international agreement. They are recognized therefore as “good” by Congress even if hardly ever welcomed by the measures’ opponents. Additional tariffs are mandatory to offset dumping (sales at less than fair value) and foreign subsidies where material injury is found. And where there is serious injury, the president is given discretion to impose additional tariffs under a safeguard provision. The policy behind the use of these remedies is not just one of equity. The provision of trade remedies may well have been necessary to allow a system of generally open trade to survive with sufficient domestic political support.

There is a second grouping of tariffs (and subsidies, which are another form of protection) that was considered good by the Biden administration and perhaps by a majority in Congress. These measures were selective. A key US national security objective during the Biden administration was to assure that the United States had the ability to manufacture leading edge semiconductors. This was done through subsidies in the CHIPS Act and through tariffs imposed under separate presidential authority. Similarly, climate change and geopolitics were seen during the Biden White House as worthy objectives for support. This accounts for the current additional tariffs and subsidies for batteries, electric vehicles (EVs), and the like.

The use of tariffs (and subsidies) is not free of controversy, however. The tariffs on EVs and batteries slow the ability of the country to meet climate objectives. At the other extreme, whether climate change is seen as a problem or even acknowledged by the next administration is unknown.

President Trump went far beyond suggesting the selective use of tariffs in his campaign. He spoke very often of imposing a blanket tariff of 10 or 20 percent on all imports, with a 60 percent tariff on Chinese imports. The blanket tariff of 10 or 20 percent would not readily be avoided unless an adequate domestic supply of the goods in question can be produced domestically at a higher price due to the tariff or a sufficient bureaucracy is installed from which to seek exemptions from the tariff.

It is clear that several of those likely to have a major role in the incoming Trump administration, as well as the president-elect, consider this to be a good use of tariffs. Others, outside the new administration, will continue to disagree—including nearly all economists, many US businesses dependent on imports for necessary inputs, and all US trading partners.

It is widely agreed that the high tariff signed into law in 1930 by President Herbert Hoover was a colossal error. Thirteen presidents, from Franklin D. Roosevelt up to and including Barack Obama, accepted the premise that lowering tariffs and conducting trade based on agreed rules would increase global economic activity and generally benefit the US. That policy ended with Donald Trump and was not revived by Joseph R. Biden Jr. High tariffs may now be tried with the announced goals of reining in the US trade deficit and raising US manufacturing employment. Trade deficit reduction, if it occurs, might be achieved at a lower level of economic activity at home and abroad. In that case, manufacturing employment could actually decline. A blanket tariff will clearly generate upward price pressure and lower consumption of imports. That much is sure.

The American people have not been told that they will bear the cost of the tariff (in fact, they were told foreign exporters would pay it) nor that they should consume less. The blanket tariff is a way to lower consumption without admitting that this is what is going to take place. No US administration has sought to impose a value added tax (a national sales tax) because of its domestic unpopularity. There was no mandate from the election to make consumption less attractive, and even less possible for those at the lower end of the economic scale.

It has been claimed that a blanket tariff will cause the shifting of production to domestic factories. It is not at all clear, however, that this works. US production of steel and aluminum did not increase because of the Trump tariffs of 25 and 10 percent, respectively. Nor is it credible that goods that now are almost entirely sourced abroad, like shoes and clothing, will substantially return to being produced domestically. Does a 10-20 percent tax bring about a recapture of industries lost when competitive advantage has shifted abroad? And where would the additional resources come from to make these new goods, if not from sectors that are already producing needed goods and services, including for export industries. The economy is at full employment. It is true that a 10-20 percent cost advantage solely due to the tariff might be sufficient to determine future investment decisions about plant locations. But the US would have to be closer to being cost competitive for the product in question for that to take place, and tariffs would make the US a less competitive base for exports.

Winning the popular vote by a wide margin, reelected President Trump will consider that he has a clear mandate to make greater use of tariffs. A cautionary note should be sounded, however, due to the UK’s experience with Brexit. Brexit made trade far more difficult between Britain’s largest trading partner, the EU. The Conservative government sold Brexit as a cost-free stroke of good fortune. It wasn’t. In June 2016, 51.89 percent of the British electorate had voted for Leave compared with 48.11 percent for Remain, a margin of 3.78 percentage points. This year, the political party responsible was resoundingly beaten at the polls. Current polling (as of May 2024) shows that now over 55 percent think leaving was a mistake versus 33 percent that it was the right thing to do. Nonetheless, there are immense obstacles to Britain now returning to the EU. Some damage cannot easily be undone.

In the 2024 US presidential election, the vote for Trump was 50.3 versus 48.1 percent for Kamala Harris. This is a similar margin to the other major economic vote of our time, Brexit. Now there is little doubt that Trump is going to impose much higher tariffs perhaps with the aid of Congress. The 2026 mid-term election may show what voters think of an abrupt and substantial tariff imposed by President Trump early in 2025. Even if they change their minds, some of the resulting damage to the world trading system and the US economy will be hard to undo.

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Can Tariffs be a Good Thing?

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