Kaushik Basu: Trump’s tariffs will only steepen America’s slide

It won’t. While Trump’s tariffs fly in the face of conventional economic wisdom—from Adam Smith and David Ricardo to John Maynard Keynes and Milton Friedman—his confidence may lead some to think there’s a hidden logic behind them. [Automobiles offer us a case study.] Presumably, the tariff on cars and trucks aims to incentivize automakers to establish factories in the US.

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But on closer inspection, it becomes clear that this rationale is deeply flawed. And while it will negatively affect many countries—especially Canada, Mexico and Japan—its most devastating impact will be felt in the US itself.

Trump’s critics rightly point out that the tariff will raise US car prices, but that is just one of its many drawbacks. Consider, for example, that industries like automobiles (and semiconductors) have substantial fixed production costs. Given that a sudden tariff reduction after these sunk costs—such as the cost of acquiring land, building factories and obtaining permits—have been incurred could lead to significant losses, investors would need to be assured that the tariffs will remain in place for at least 10-15 years. If the government could somehow signal to investors that the tariffs will remain in place for the foreseeable future, it is likely that new car factories will be established in the US, increasing demand for local labour.

But that may not be a positive development. Far from making American automobiles great again, the artificial boost in demand for traditional labour could harm the US economy’s long-term health.

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With the US market protected behind its tariff wall, domestic production would become increasingly costly, and countries with naturally lower labour costs, like China, India, Mexico and Indonesia, would be able to produce cars at much lower prices, thereby outcompeting the US and gaining a stronger foothold in the global market.

Trump’s desperate attempt to bring back auto manufacturing contrasts sharply with how the US handled the decline of its textile industry. In the early 19th century, the US was a leader in textiles, with cotton and woollen mills operating at full capacity. The textile and garment sectors continued to thrive well after World War I, with North Carolina in the lead. But as the US grew wealthier and labour costs increased, it gradually lost its comparative advantage and pivoted to sectors that required research and innovation—areas where it was well-positioned to lead. Today, the global textile industry is dominated by countries like Vietnam, Bangladesh and Turkey.

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Had the US decided to impose heavy tariffs on imported textiles and clothing in the second half of the 20th century to encourage domestic production, it might have remained a garment manufacturing hub. But this would have come at a steep cost: the US economy would not be where it is today. Instead, it would have large factories where workers toiled at labour-intensive jobs.

This is not to suggest that tariffs, when used strategically and sparingly, are not effective. Import duties may perhaps even be necessary in certain circumstances. But when they undermine a country’s competitive edge, as Trump’s tariffs undoubtedly will, they can only cause harm.

History offers valuable lessons on the dangers of hyper-nationalism and protectionist trade policies.

In the early 20th century, Argentina was growing rapidly and was among the world’s richest countries, surpassing Germany and France. Some even predicted that it would overtake the US economically.

Everything changed in 1930, when José Félix Uriburu led a military coup and declared himself president. Within three years, he restricted immigration and nearly doubled tariffs.

Meanwhile, the US was opening up its economy to both goods and people, investing in higher education and conducting cutting-edge research. The American economy surged while Argentina’s stagnated, dashing any hopes of rivalling the US.

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The takeaway is clear: Instead of clinging to outdated industries through protectionist trade measures, countries should embrace innovation. Yet, while technological advances create economic opportunities, they also tend to reduce the demand for labour.

The solution lies in redistributive taxation and profit-sharing to ensure that the benefits of growth are allocated equitably, rather than being hoarded by corporations and concentrated among billionaires.

To be sure, redistributive taxation is no easy feat. It must be carefully crafted to avoid discouraging innovation and distorting incentives. But it is far more desirable than Donald Trump’s misguided policies. And in an era of rapid technological change, it is absolutely essential. ©2025/Project Syndicate

The author is a professor of economics at Cornell University and a former chief economic adviser to the Government of India.