The Trump-WSJ Tariff Debate Pt 2
An old debate is again rearing its head; while the WSJ is prone to exaggeration, it is nothing compared to Trump's delusion.
*** In 2023, one of this blog’s first posts detailed a feud between President Trump and the Wall Street Journal about the legacy of the president’s tariff policy. Today, I’m reposting that blog due to its renewed relevance. The only caveat I’d add for the present day is that given the more general and untargeted nature of Trump’s tariffs this time, the negative effects of his tariffs are likely to be significantly larger and force targeted countries (which includes far more than just China this time) to band together and reduce their reliance on American markets. More original content will be coming soon; grad school has dominated my schedule recently. Thanks for your continued support.***
For the last few weeks, Trump and The Wall Street Journal have been in a tiff over the consequences of the former president’s tariff policy. The incident began when the Journal’s editorial board published a piece called “Trump Courts a Global Trade War,” leveling three critiques of the former president’s tariff policy. First, they argue that Trump’s tariffs cost the United States jobs. Second, they contend that the burden of the tariffs were heavily borne by American consumers. And third, they argue that the trade deficit, despite Trump’s fixation on it, is a poor metric for judging the health of the economy. We’ll revisit each of these charges shortly.
A week later, Trump responded in a letter to the editor contesting all three of these criticisms. He argued that there was almost no inflation while he was in office, that he reduced America’s trade deficit with China before the pandemic hit, and that the “best way to stop this hemorrhaging of America’s lifeblood is a simple but powerful tariff on most foreign products.” Not content to let the spat die there, the Journal published a collection of letters from readers yesterday all of which communicate the same message: tariffs cannot both protect domestic jobs and have no impact on prices.
Now, let’s wade through the evidence for each of the major issues under debate here.
First, the Trump administration’s tariffs did cost the United States far more jobs than they saved. A Federal Reserve analysis found that while the tariffs boosted employment by 0.3% in industries exposed to trade with China, they reduced overall manufacturing employment by 1.1% (1.8% if you include the impact of retaliatory tariffs against the US). This result is not particularly surprising because, as the Journal points out, “more companies buy metal than sell it.”. So while Trump’s tariffs on steel may have protected the jobs of some steelworkers, they also took away the jobs of workers in industries that use steel as an input like the auto industry. In fact, the imposition of Trump’s tariffs coincide with a marked slowdown in the growth rate of American manufacturing jobs.
Source: The Wall Street Journal
Trump attributes these bad numbers to “corporate-funded studies” that are presumably influenced by their bias against tariffs. These sorts of studies definitely exist. (For instance, you should probably take The US-China Business Council’s study on the effects of tariffs with more than a grain of salt). But even impartial analysts can’t find the manufacturing job growth Trump’s suggesting. That’s likely why he fails to cite a source of his own.
The tariffs also resulted in lackluster job performance because of their limited reach and non-targeted nature. While Trump increased the trade-weighted average tariff rate on Chinese goods from 2.7 percent to nearly 10 percent, the trade-weighted average tariff rate on all countries barely ticked up a full percentage point. As a result, firms producing in China may have been incentivized to leave China, but they were not necessarily incentivized to come back to the United States; locating in any other low-wage country would’ve permitted them to avoid tariffs at far less cost. In fact, the rate at which US jobs were outsourced hardly budged under Trump. While there is no complete data on outsourcing, the Labor Department keeps records on the number of workers included in petitions for government aid because they lost their jobs due to trade. Under Obama’s second term, 209,735 workers were covered by such petitions; under Trump, 202,151.
That said, while the tariffs did not do much to create or protect American jobs, they did slightly reduce the dependence of America on China with regard to certain goods. We’ve become significantly less dependent on the Chinese for auto parts, hardware, furniture, and semiconductors, all goods that Trump raised tariffs on. However, we are no less dependent on the Chinese for laptops, computer monitors, toys, and phones, all products which avoided the wrath of Trump’s tariffs.
Second, the costs of Trump’s tariffs do not appear to have significantly impacted American consumers. The US International Trade Commission found that nearly the entire cost of the tariffs were passed on to purchasers of imports. But the direct purchasers of the imports on the tariff list are typically firms who use them as inputs to produce final products. It is not evident these firms could pass on the brunt of these higher costs on to consumers (and the fact that several tariff-affected industries bled jobs is evidence that they could not). The Journal cites a Tax Foundation study placing the costs of the tariffs at $80 billion, but this analysis does not estimate the portion of that $80 billion borne by consumers rather than firms. Additionally, the fact that inflation was subdued during the Trump administration is further evidence that tariffs had a minimal effect on prices. This may just reflect the ineffectiveness of the tariffs; perhaps they were not high enough (or did not cover enough countries) to significantly drive up costs.
Third, Trump contends that the American trade deficit with China dropped for five consecutive quarters under his watch. This is true, but Trump was president for 16 quarters (12 if you exclude the pandemic). And while the bilateral trade deficit with China did decline under his watch by about 20%, it has since returned to its 2017 level despite Biden’s decision to keep Trump’s tariffs against China in place. More importantly, America’s total trade deficit has increased every year since Trump took office. While we may have become a bit less reliant on China, the benefits did not fall to American workers, but to Mexican and Vietnamese ones. That said, while our trade deficit is an important vehicle for exporting dollars to the world and maintaining relationships with our economic allies, the fortunes of the American middle class do not hinge on the balance of payments. The amount of investment in this country is only tangentially dependent on the trade deficit and the government has a multitude of more efficient ways to promote such investment in whatever industries it wishes (See the Inflation Reduction Act).
While the Journal is largely vindicated in their criticisms of Trump’s tariff policies, they too err on several points. They argue that the rising trade deficit with China is evidence that attempts to decouple from China are failing. But as we’ve seen, tariffs have helped America decouple from China with respect to certain goods and more general tariffs could help more broadly. Additionally, the Journal cites a NBER study to argue that tariffs played no great role in America’s economic development (That debate is far from settled.) and uses the overworked example of the Hawley-Smoot tariff to demonstrate the damage that can be caused by tariffs, despite Hawley-Smoot’s insignificant role in bringing on the Great Depression (See Eckes, 1999). Ironically, the NBER article cited by the Journal has a much more subdued take about tariffs. They find that “it is difficult to argue that the high- tariff policy [during America’s industrial development] was costly and inefficient”.
The extreme positions taken by Trump and the Journal are both wrong. Tariffs will never alone reinvigorate the American economy, nor will they doom us to another depression. The reality is a lot more boring. Despite all of the heated disputes surrounding them, Trump’s tariffs just didn’t have much of an impact. Aside from a brief reduction in the bilateral trade deficit with China and reducing reliance on China in some product markets, little changed. Outsourcing continued at its regular pace. Consumer prices didn’t rise appreciably. And the growth of manufacturing employment tapered slightly.
For tariffs to play a conducive role in boosting the economy, they’d need to be carefully targeted, avoid imposing costs on downstream domestic industries, and not provoke international retaliation that would soak up all of their benefits. Meeting all of these conditions at once requires extensive economic management and diplomacy, making tariffs probably only appropriate for very high-value infant industries and those deemed essential for national security purposes. Frankly, there are many more efficient ways of boosting job growth (tax credits, public investment, public works, etc.) that do not run into all of these same stumbling blocks.
Tariffs have been central to Trump’s identity as a populist. But after leaving the tariff issue aside, there’s nothing separating him on economic policy from the Wall Street Journal and the Republican establishment. They both believe in the gospel of tax cuts (mostly for the rich), deregulation, privatization, and union-busting. But American manufacturing has withered away despite America largely sticking to these policies for the last half-century. The Journal decides to merely look away and pretend that everything’s fine. Trump acknowledges that there’s something seriously wrong and harnesses that anger, but only to keep everything the same aside from bolstering the tariff rate by a few percentage points. It would be entertaining theater if it did not monopolize the time that should be given to discussing more serious proposals to revitalize the American economy.
Very clear analysis, great writing!