Boosting American industry is a policy objective shared by many lawmakers and is a key issue at debate in the Build Back Better Act as well as other year-end legislation. Missing from the debates is how the tariffs put in place by the Trump administration, and largely maintained by the Biden administration, are negatively affecting U.S. manufacturers. If policymakers want to boost U.S. industry, and help relieve inflationary pressures, ending the tariffs should be an obvious starting point.
The Trump administration increased import taxes on washing machines and solar panels, steel and aluminum, and a wide range of goods from China for a total of nearly $80 billion in new taxes annually. According to the Trump administration, the tariffs would revive the manufacturing sector and create jobs in the United States—misguided promises that a wide range of analysis indicates has not been upheld.
The idea of policies like tariffs (or quotas) is for the government to help domestic industry by shielding it from foreign competition, thus allowing it to grow. Such protection, however, backfires. Tariffs are ultimately paid for in large part by consumers and businesses in the domestic economy, can lead to stagnation as protected industries are shielded from competitive pressures, and invite retaliatory tariffs from other nations that come with additional costs.
The bevy of research showing widespread harms from the Trump tariffs should be a red flag for the Biden administration’s choice to keep them in place, or even double down on the approach. To wit, the increase in Trump’s 25 percent chassis tariffs to 246 percent in May (which has contributed to the current shortage that’s gumming up America’s ports) and the recently announced doubling of tariffs on Canadian lumber (which will further strain the housing market).
According to research from Fernando Leibovici of the St. Louis Federal Reserve, every industry within the U.S. manufacturing sector makes intense use of intermediate inputs—goods used in the production process to make a final good. On average, U.S. manufacturing firms source 22 percent of their intermediate inputs internationally. By raising prices of intermediate inputs, Leibovici argues that the new U.S. tariffs are likely to have a significant negative impact on the manufacturing sector, with the potential to “force U.S. manufacturers to raise prices, thus hurting consumers and leading to cuts in production. Moreover, some firms might not be able to compete in this alternative environment and might have to shut down.”
Federal Reserve economists Aaron Flaaen and Justin Pierce took a comprehensive look at the effects of the new tariffs on employment, output, and producer prices in the U.S. manufacturing sector. They took care to measure the benefits of tariffs to protected companies, and the costs of tariffs to companies that faced higher input prices or other distortions. On net, they found a decrease in manufacturing employment due to the tariffs: the positive contribution from protected industries (0.3 percent) was significantly outweighed by the effects of rising input costs (-1.1 percent) and by retaliatory tariffs (-0.7 percent). They found that manufacturing industries more exposed to tariff increases experienced relative reductions in employment, showing that “tariffs have been a drag on employment and have failed to increase output.”
Other estimates similarly suggest that saving a relatively small number of jobs in a protected industry comes at a very high cost. Gary Hufbauer and Euijin Jung of the Peterson Institute for International Economics estimated that the Trump administration’s steel tariffs would expand steel employment by about 8,700 jobs, but at an average cost of about $650,000 per job—about 11 times greater than the average wage earned by steelworkers, indicating a high level of inefficiency and economic loss. Their estimates do not attempt to measure employment loss in downstream industries but they note that “job losses probably exceed jobs created by a large magnitude.”
St. Louis Federal Reserve economists Ana Marie Santacreu and Makenzie Peake evaluated how exposure to trade at the onset of the trade war was correlated with employment and output growth to evaluate the effects of changing U.S. trade policy. Their empirical analysis shows that states more exposed to U.S. tariffs on imports from China experienced lower increases—or even decreases—in employment and output, providing additional evidence that exposure to tariffs played a role in reductions in employment and output.
In a National Bureau of Economic Research paper, Mary Amiti, Sang Hoon Kong, and David Weinstein quantify the impact of U.S.-China tariff announcements on investment. In their sample of firms, they find that U.S. and Chinese tariff announcements lowered aggregate equity prices by $1.7 trillion, which they estimated to result in a 1.9 percentage point decline in investment growth of listed firms over two years.
Beyond the direct effects of tariffs on employment and output, the uncertainty created by erratic trade and tariff policy has its own negative effects. Research by Federal Reserve economists Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo shows how trade policy uncertainty like that brought about by the Trump administration’s actions can reduce investment and economic activity. They find the recent shock of uncertainty in 2018 predicts a decline in the level of aggregate investment of between 1 and 2 percent and that uncertainty about trade has reached levels not seen since the 1970s.
If all the evidence on the contemporary damage of tariffs was not enough to dissuade policymakers from continuing the Trump administration’s damaging tariffs, a new paper from Harvard economist Lydia Cox provides additional warning of the long-term damage that comes from temporary tariffs.
Cox studied the steel tariffs that were put in place under the Bush administration and quickly reversed thereafter, finding that “even temporary tariffs can have cascading effects through production networks when placed on upstream products…upstream steel tariffs have highly persistent negative impacts on the competitiveness of U.S. downstream industry exports.”
When tariffs are put into place, it disrupts established trade flows, but when tariffs are lifted, trade patterns do not automatically snap back in place. One of Cox’s findings is that “declines in the competitiveness of U.S. exports due to the tariffs are highly persistent—global market share remains depressed relative to pre-tariff levels for at least 8 years after the tariffs are lifted. Likely a result of this loss in market share…steel-intensive industries suffered persistent declines in employment in response to relatively high steel tariff rates.”
Economists since the 18th century have been making the argument that protectionist trade policies can only backfire. As lawmakers today look for ways to boost American industry and reduce costs for consumers, they should pay attention to the mountains of evidence that the Trump-Biden tariffs have harmed American consumers and businesses. Removing the tariffs is perhaps the most readily available, timely, and effective means to support U.S. industry and jobs while lowering costs for consumers. It would be a nice Christmas gift.
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