How America learned to love tariffs

Mr Golden is, to be sure, an outlier within the Democratic Party. A rather more consequential Democrat, Kamala Harris, has derided Mr Trump’s universal tariff as a “national sales tax". But the inconvenient truth for Ms Harris is that she, too, has endorsed tariffs, albeit of a more limited sort. In fact, the day after Mr Golden published his bill, higher tariffs on a number of Chinese imports, drawn up months earlier by the Biden-Harris administration, went into effect. A levy of 100% will, for instance, now apply to any Chinese electric vehicle (EV) entering America.

As American politicians resort ever more readily to tariffs, the range of rationales they offer has grown. To make sense of their thinking, it is useful to examine their justifications in turn. There are five in all—and each of them is flawed.

Start with the most aggressive defence of tariffs: that they encourage more manufacturing at home and thereby strengthen the economy. “America must once again become a nation of producers, not just consumers," says Mr Golden. Or as Mr Trump puts it: “Under my leadership, we’re going to take other countries’ jobs."

But there is scant evidence of general tariffs providing such a lift to manufacturing. The share of factory jobs in the American economy has actually fallen since Mr Trump first introduced tariffs as president in 2018. One explanation is that although tariffs may have discouraged some imports, they have probably also weighed on American production. To the extent that domestic firms replace foreign counterparts, tariffs draw scarce resources—both capital and labour—away from competitive firms and push them towards more protected ones. These downsides would be more extreme in the case of universal tariffs, especially if Mr Trump opts for one as high as 20%, as he has suggested, taking America back to Depression-era tariff levels (see chart).

A second justification for tariffs is that they can serve as a big revenue stream for the government. As Mr Trump is fond of saying, tariffs “will bring in billions of dollars", which can be used both to pay down the federal deficit and lower income taxes. Strictly speaking, that is true: customs duties do generate revenue. America imported about $3trn-worth of goods last year. A simplistic conclusion would thus be that Mr Trump’s 20% tariff can raise about $600bn per year—enough to pay for many of the tax cuts that he wishes to make.

The trouble is that this is a static picture. When tariffs are increased, imports fall, lowering potential government revenue. Besides, retaliation from foreign governments would add to the headwinds for domestic producers now facing higher input prices. An analysis by the Penn Wharton Budget Model, a non-partisan research group, found that an all-out trade war would lead to a 5% decline in American GDP within a couple of decades—a recipe for lower government revenue.

A third rationale is that tariffs bolster America’s clout in trade negotiations. This is an argument that Robert Lighthizer, United States Trade Representative (USTR) under Mr Trump, made when hammering out a deal with China in 2020. It is also one that Katherine Tai, USTR under Joe Biden, has cited as a reason for keeping the tariffs on China in place.

But the leverage from tariffs is not what it is cracked up to be. Consider the results from six years of tariffs on Chinese products: China has only become a more formidable exporting power during that time. More philosophically, the tariffs-as-leverage claim is contradicted by the arguments that they boost both manufacturing and government revenues. If tariffs are just used as negotiating leverage, the implication is that America ought to reduce them when trade deals are reached. But if tariffs are in place because American officials truly believe they are good, why would they ever lower them?

Another justification, which has more credibility among policy types in Washington, DC, is that, if well targeted, tariffs can meet national-security needs. When it recently increased levies on Chinese EVs, semiconductors and solar modules, the Biden administration said that China’s clout in such industries created unacceptable risks for America’s economic security.

America and other countries do have reason to fret about Chinese dominance of critical technologies, not least because of China’s willingness to block exports during international spats. But using tariffs for national-security goals poses problems. Invoking security becomes a convenient excuse for protectionism, as when the Trump administration placed tariffs on steel and aluminium imports from the EU and Japan. Moreover, a tariff is not exactly a robust defence against a true security threat. “If something is really dangerous, you should probably ban it rather than tax it," says Ed Gresser of the Progressive Policy Institute, a think-tank.

A final defence of tariffs is a more limited version of the first supposed rationale. Rather than saying that tariffs benefit the economy as a whole, advocates say they are needed to support the growth of specific sectors. The Biden administration has, for instance, argued that its new China tariffs are protecting the very sectors that the government has been trying to cultivate through its big investments.

That may sound sensible, but at its core this is an empirical question. A recent paper by two economists at the Federal Reserve found that Mr Trump’s targeted tariffs did not work as intended. Looking at manufacturing industries such as household appliances and car parts, they found a small jobs boost from the import protection conferred by tariffs. But this was more than offset by drags from both retaliatory tariffs and higher input costs.

An expensive fling

It would be a mistake to assume that all American politicians are seduced by the fallacious logic behind tariffs. Jared Polis, the Democratic governor of Colorado, has criticised the tariffs on China as a regressive tax on consumers, though that is a rare view nowadays given widespread concerns about China. More common is opposition to Mr Trump’s universal-tariff proposal, even within his own party. Several prominent Republicans have signalled their disagreement with the idea.

Ultimately, though, Congress has ceded tariff authority to the White House. A victorious Mr Trump ought to be able to crank up tariffs by executive fiat, with only courts to stand in his way. Republicans in Congress would instead focus on delivering tax cuts. “As long as they’re getting wins in other places, that’s where they’ll put all of their attention," says Paul Winfree of the Economic Policy Innovation Centre, a think-tank. America’s love affair with tariffs may end up being as much about convenience as conviction.

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