Yasuhiro Kobayashi/Yomiuri Shimbun via AP Images
An auto assembly line at a Honda factory in Ohio, January 29, 2025. A mixed production of EV, HV, and gasoline vehicles is scheduled to begin in the second half of 2025.
A significant cost from two months of incoherent Trump tariff policy could be the broad discrediting of an economic tool that actually can be extremely valuable. The president-who-cried-tariff threats and on-again, off-again levies—often targeting the wrong countries and goals—have generated unnecessary economic damage and political pushback.
Contrary to what has been drilled into many of our heads, tariffs can be effective. Indeed, some tariff uses are unavoidable if we are to replace a trade regime that had caused real damage to many. But will the “reciprocal tariff” plan the administration plans to unveil on April 2 be designed to do that? The 25 percent tariffs on automobiles announced on March 26 hint that we may begin to see a more trade-focused approach to tariff use, but that alone does not a strategy make.
Few contest that we have a problem. Being unable to get medicine, masks, car parts, baby gear, and more during the COVID crisis made many more Americans aware we no longer make much here nor have diverse import sources. Corporate-led hyperglobalization had concentrated production in too few firms in too few countries, especially China.
Breadbasket America has even become a net food importer, with food trade deficits in four of the last six years, reaching a record $39 billion in 2024. We now export soy, corn, and wheat commodities and rely on imports for what we actually eat, including the vast majority of beef, vegetables, seafood, and fruit.
That our current trade regime has failed is not news in communities across the nation that thrived on manufacturing, a significant share of it unionized, and built the American middle class after World War II. By the mid-1970s, however, specific U.S. government decisions, many at the behest of powerful U.S. commercial interests, began to erode America’s productive capacity. Being the world’s reserve currency means that, unlike the currencies of other countries, the U.S. dollar does not devalue to correct trade imbalances. Instead, an overvalued dollar gives imports a huge advantage over even the most capable U.S. domestic producers both in the U.S. market and in export markets. The push by Wall Street and multinational corporations to deregulate international investment flows facilitated the offshoring of production to low-wage countries. In 1975, the United States slid into a persistent trade deficit with the world. By the late 1970s, America was losing manufacturing capacity and jobs, albeit slowly.
But in the decades following Congress’s enactment of the 1990s North American Free Trade Agreement (NAFTA), World Trade Organization (WTO), and then China’s WTO entry, the United States lost 90,000 American factories and five million net manufacturing jobs, pushing the trade deficit to a record $918.4 billion by 2024. Seeking to avoid just such an outcome, economic populists among Democratic members of Congress led the 1990s fight for balanced trade and against NAFTA and the WTO—battles, unfortunately, that they lacked the votes to win.
As macroeconomic theory predicts, decades of large chronic global trade deficits have both deindustrialized America and fueled income inequality.
Unless you spend time in factory towns, it is hard to understand how devastating and lasting the fallout from these trade policies has been. These are our fellow Americans, 63 percent of whom could not cover a $500 emergency expense, who have an eight-year shorter average lifespan than college-educated Americans, and whose deaths of despair—from suicide, alcoholism, drug overdoses—have since 2021 decreased overall U.S. life expectancy for the first time ever.
These are horrifying facts. But your econ professor’s voice echoing in your brain tells you that trade deficits are not a problem: Even if some people lose jobs, we all benefit from access to cheaper imported goods. Except that the guru of modern trade economics, Nobel laureate Paul Samuelson, revealed in a 2004 paper that as higher-wage American jobs—from skilled machinists to union auto- and steelworkers to computer programmers to accountants—began to be offshored, American workers now lose more in wages than they gain from cheap imports.
As macroeconomic theory predicts, decades of large chronic global trade deficits have both deindustrialized America and fueled income inequality. Instead of productive investment in making goods in the real economy, we mainly produce dollar-denominated assets purchased with the billions of dollars foreigners earn by selling us imports. This has been extremely profitable for the financialized aspects of the U.S. economy and wealthy investors. It’s been a disaster for most Americans.
Tariffs can help fix this mess, but only if they are used strategically.
One long-standing use, with WTO blessing, is to penalize trade cheating, such as dumping goods below their cost of production, and to countervail the unfair economic benefits of foreign government subsidies to their own producers that would otherwise crush domestic producers in the U.S. American shrimpers trawling the Gulf of Mexico have tariffs against India, Vietnam, and other countries where shrimp is grown in unsanitary ponds with subsidies and horrific labor conditions. If you do not want solar panels made by forced labor or believe we should again produce this technology that we developed and then produced, until decades of predatory trade practices wiped out the U.S. industry—today, 80 percent of worldwide solar panel production is in China—you’d support the high Chinese solar tariffs that President Biden imposed.
But such tariffs must be levied on specific goods and countries on a case-by-case basis, after proving damage in a costly, slow process. Even then, enforcement can be circumvented by moving targeted goods through other countries, which then requires filing another case if we’re to level the playing field.
To get ahead of systematic trade cheating and overproduction in a sector and/or to develop domestic production capacity important to economic and national security, tariffs are sometimes imposed on specific good from all countries, like the Trump and the Biden administrations’ steel and aluminum tariffs.
A related strategy, adopted by the Biden administration, is to pair the defensive use of tariffs with other industrial-policy tools. For example, the Inflation Reduction Act created demand with consumer tax credits to incentivize purchase of U.S.-made EVs and solar equipment and stronger Buy American procurement to boost government purchases. The IRA and the CHIPS and Science Act also incentivized construction of manufacturing facilities with production tax credits and other government inducements for private-sector investment.
By 2023, the Biden administration’s big-tariffs-plus-industrial-policy strategy had delivered the highest rate of investment in American factory construction in 30 years. Perversely, the Democrats did not tout this achievement. And now, President Trump stands to gain credit when these new plants start hiring, even as he threatens to kill the CHIPS and IRA programs that created those jobs, though he has no plans of his own for industrial policies.
The most controversial tariff use is trade balancing. This requires targeting mercantilist countries such as China, Vietnam, Taiwan, Japan, Korea, and Germany that have chronic trade surpluses with the world, some extremely large. These countries employ policies to boost their exports.
What is sometimes referred to as Germany’s export obsession—44 percent of its production is for export in contrast to 20 percent in the United States—is promoted by government policies that suppress domestic consumption and target income distribution away from workers and toward export industries. (As well, a significant advantage for Germany is that its exports are denominated in euros, a currency representing a mix of economies of varying strengths so that it has a significantly lower value than Germany’s economic strength would bestow on a free-standing deutsche mark.)
China is the global leader in “beggar thy neighbor” policies combining suppression of wages and currency manipulation with massive government subsidies for factory land and construction, electricity and water, and goods shipping to generate huge volumes of goods at unmatchable prices.
Decades of trade agreements, lawsuits, and WTO cases have not altered this conduct. The resulting global overcapacity eventually wipes out industry after industry in countries worldwide. After creating and then leading production in microchips, personal computers, and solar panels, the United States produces almost none of these goods while China floods the world market with them. Today, Mexico, the European Union as a bloc, Brazil, South Africa, and numerous others have tariffs on Chinese imports to address this problem.
Tariffs are needed because it is not possible for global trade deficit countries to export their way to balance. The Trump administration seems split on this: Treasury Secretary Scott Bessent says that the pending reciprocal tariffs plan is about getting other countries to lower their tariff rates. National Economic Council director Kevin Hassett says the plan is meant to raise U.S. tariffs targeting countries with the largest trade surpluses to keep unfair imports out. Which will happen? Stay tuned.
Tariffs on China made sense, but Trump refused to end a trade scam that allows billions of dollars of Chinese imports to evade tariffs.
But if global deficit countries united to raise tariffs on all goods from the global surplus countries, it would force the mercantilists to consume more of what they produce, which would be a win for their own consumers and help rebalance trade. Such international coordination is unlikely to come from the go-it-alone Trump administration. Given the size of its economy and its deficit, however, the United States acting alone could force some rebalancing by phasing in tariffs on mercantilist countries’ imports and adding a surcharge on foreign investment inflows of dollars earned from imports sales. A 2019 bill sponsored by Sens. Tammy Baldwin (D-WI) and Josh Hawley (R-MO) proposed the latter.
Notably, rebalancing trade, rebuilding manufacturing, and countering trade cheating were not among the stated goals for Trump’s tariffs. Instead, he threatened to tariff Denmark over Greenland lust, Colombia over not accepting handcuffed deportees, Canada over imagined undocumented migration and fentanyl smuggling, and Mexico over real immigration and drug issues. Trump’s tariffs have been used to bully allies about non-trade-related issues—including Canada, with which we have a trade surplus sans the crude oil shipped here to be refined in plants in northern U.S. states—even as his administration has ignored global surplus countries with which we have large trade deficits, including Vietnam, Germany, Taiwan, Japan, and Korea.
Tariffs on China made sense, but Trump refused to end a trade scam that allows billions of dollars of Chinese imports to evade tariffs. More than four million packages of imports ordered online mainly from China enter the United States daily, dodging tariffs and inspection. Stopping this flood of e-commerce shipments would also limit trafficking of fentanyl-laced pills and precursor chemicals from China. After initially closing this “de minimis” loophole for Chinese goods, Trump reversed course after a White House meeting with the CEO of FedEx, which profits from delivering these packages.
But even when properly targeted and enforced, tariffs only work if they are predictable and sustained. Companies won’t shift import sourcing to new countries, much less invest in domestic production capacity, unless they believe the market for domestic goods generated by protection will last long enough to earn a return on investment. Trump’s tariff roller coaster sends the opposite message.
Worse, the uncertainty is actually causing damage. Markets are reeling. Retailers are using the mere threat of tariffs as an excuse to price-gouge. This despite the most detailed National Bureau of Economic Research study of price impacts of Trump’s 2018 China tariffs showing that tariff costs were covered by the importing companies’ reduced profit margins, and not passed on to American consumers. (Tariffs are charged on a good’s wholesale price. So for sneakers that retail at $100, a 25 percent tariff means a U.S. retailer would pay $6 on top of the $24 wholesale price for the shoes, a cost that could easily be absorbed in the markup.)
Plus, tariffs alone will not achieve the goals downstream from balanced trade, such as revitalized American manufacturing and related job creation, or improved national resilience. Rather than building out the package of industrial policies needed to deliver these outcomes, Trump has focused on killing the CHIPS bill and clawing back IRA funds.
And for protection to translate into higher wages, not just gains for investors, stock buybacks must be banned in tariffed sectors, and unionization made easier. (After the loss of so many union jobs and related threats to offshore what is left when workers demand better pay, the wage “premium” for manufacturing relative to nonprofessional services jobs has declined.) As well, balanced trade must be accompanied by enforceable labor standards so that access to another country’s market is premised on workers being guaranteed the rights provided in the International Labour Organization core conventions to organize unions and bargain for better wages.
It also will require strong competition policy enforcement to avoid a wave of corporate price-gouging. (In 1971, when President Nixon imposed 10 percent across-the-board tariffs to force trade balance and currency revaluation deals, he deployed actual price controls on key products!)
These nontariff policy interventions are necessary so corporations that earned record profits under the old trade regime are the ones that pay for the necessary transition, rather than workers and consumers. With record-low corporate taxes and high profits, they can afford it. But Trump and the GOP-controlled Congress oppose such policies.
Instead of criticizing Trump’s misuse of tariffs, too many Democrats are attacking tariffs per se as a price-raising menace. CNN and MSNBC repeat this mantra. This is bad policy and bad politics, as Rep. Chris Deluzio (D-PA) recently described in a New York Times piece. Deluzio is the rare Democrat who increased his margin of victory in 2024, and in a swing western Pennsylvania district to boot.
Many voters like tariffs. In fall 2024, a Reuters poll found 56 percent of Americans nationwide were more likely to support a candidate calling for 10 percent tariffs. Another poll found that while 54 percent of all voters in Michigan, Wisconsin, and Ohio supported expanding tariffs and only 38 percent opposed it, support was even higher within the working class: 61 percent of non-college-educated voters favored more tariffs. This month, a CBS poll found that a majority of Americans thought the president should focus more on cutting prices, understood tariffs could raise prices, and despite that, still wanted tariffs against China.
Indeed, just as “NAFTA” has become a bad word for many Americans, the word “tariff” has taken on a symbolic positive value and is understood “as a sign of political solidarity.”
Yet another good reason to focus on how Trump proposes to use tariffs, not that he does.
