A recent interaction on the topic of tariffs with someone I respect due to their outstanding work in regard to climate caused me to revisit earlier research on the effect of tariffs. I was reminded that, as is often the case, something that has superficial appeal almost always turns out not to have the alleged beneficial effect. And the interaction reminded me that even people who may be smart in one area have a seemingly inescapable unwillingness to read and analyze the full evidence, which is so easily available today, on other topics. A lesson for us all on the need to question our own biases and beliefs and be truly open to new evidence and to the possibility our prior conclusions were in error.
The authoritative work on tariffs is this paper from 2018, done in the context of Trump proposing higher tariffs, which other nations would undoubtedly respond to. The paper covered tariff actions in 151 countries from 1963 to 2014, looking both at the effect on the overall economy and on specific industries. The primary findings were that “tariff increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity. Tariff increases also result in more unemployment, higher inequality, and real exchange rate appreciation, but only small effects on the trade balance.” They also noted that tariff increases have more adverse impact on advanced economies than on poor countries. This paper is frequently cited and I can find no significant rebuttals regarding the data source, the analytic methods or the math. (NBER Paper)
The person claiming high tariffs would be great for manufacturing went on to make a number of statements which revealed a general ignorance about how business and trade actually function, including failing to mention the role of currency exchange rates in trade balances and the ultimate fate of dollars which do go overseas–i.e., they come back in foreign private investment in the US, including purchase of our ever-swelling pool of federal debt. Both the inflationary effect of high tariffs and the beneficial effects of cheaper foreign products in terms of freeing up money for purchase of other goods and services were ignored or misunderstood. And perhaps most importantly, trade deficit amounts in regard to a country were treated as money going to a country, even while using examples of a US owner moving a plant from the US to Mexico. Obviously the ownership of the plant doesn’t change and the revenue from US sales is still going to a US company. There are situations where a foreign government (think Mexico’s Pemex) or company may own a plant selling goods to the US, but the trade balance itself tells us nothing about where the revenue from sales ultimately ends up, particularly for imports to the US, which often come from foreign plants owned by US companies. There may be a concern about lost jobs in this scenario, but not lost revenue.
Business and trade is very complicated. Attempting to isolate the effect of one change in the system is hard. There are consequences to the consequences. But there are some basics. If there is international competition with a domestically produced good or service, a tariff on the foreign good will generally raise its price. But it also can encourage the foreign producer to become even more efficient, lowering its costs per unit to enable the same pricing even after the tariff. Exchange rate changes which accompany protectionist actions also facilitate a lower price for foreign producers. Now our domestic producers, with little incentive to be more efficient, are even less competitive compared to the foreign producers. And a tariff that raises the price of a foreign-produced good or service just creates an umbrella for domestic producers to raise prices, which they do. Assuming the same income level for consumers, higher prices means fewer units purchased, which means lower production and fewer jobs. More room for domestic producers might entice new domestic entrants, which could increase competition and keep prices down but it is just as likely that everyone uses the foreign price as a floor. But the net effect appears to be that tariffs, as the study above demonstrates, generally mean lower consumption and production, fewer jobs, higher prices for consumers and less efficient domestic producers.
And of course, nothing occurs in isolation. If the US hikes tariffs on a specific country or all countries, there of course will be retaliation. A lot of US jobs are tied to exports and foreign business. Many of these are in very well-paying industries like finance or high-tech. How much sense does it make to trade the possible gain of a few lower-paying manufacturing jobs for the loss of much better paying jobs? The trade balance tells you nothing about this problem, because across industries there is wide variation in the role of labor in producing the good or service. Financial services are almost all labor, so losing even half the financial services revenue compared to manufacturing reveue is a much bigger hit to jobs.
Agriculture is a particularly bad example to use to understand the effect of protectionist measures. It is a protected sector in every country, partly due to voting power of farmers, partly due to campaign contributions and lobbying, but also due to legitimate national security concerns in every country about food sources. The US, for example, has a plethora of tariffs, subsidies, special tax treatments and other measures that protect farm income and limit imports. Our So trying to explain the impact of tariffs by using agricultural products is extremely difficult, given all the other complex protectionist measures.
A common and better example for shifting of production overseas is autos. It is said that the US lost a lot of car manufacturing jobs due to cheap labor overseas. Labor is only about 7% of the cost of a car. Some car production moved overseas, but labor costs weren’t the likely reason. Some went to Asia or Mexico in part because of desire to serve new and growing markets. A lot moved because the regulatory regime in the US imposes more costs on manufacturers and inhibits their ability to be innovative and improve productivity. Eventually a number of foreign manufacturers did build plants in the US, generally highly automated. While some jobs are created, the revenue from selling the cars built in these plants goes overseas. Regulations in the US contribute to twice or more of the labor costs per car. If we want to increase manufacturing, we need to greatly cut regulations and the cost of compliance. It isn’t just the regulations, it is all the record-keeping and reporting to demonstrate compliance that drive up costs.
Meanwhile, what is most noticeable about the US economy is that despite the alleged millions of jobs which have excaped overseas, most often said to have gone to Mexico and China, total jobs have continued to grow and unemployment has stayed low. The chart below says it all. You don’t see a negative effect of either NAFTA, started in 1996, or China’s entrance into the WTO, which occurred in 2001. The big negative impacts occurred in 2008, when the financial crisis around housing occurred, and in 2020, due to the stupid lockdowns enacted during the epidemic, and to some extent around 2000, when we also had a financial crisis tied to the collapse of the tech bubble. So the plain evidence is that these trade events caused no meaningful overall job loss or unemployment in the US. Financial crises have the biggest impact on employment.
There has been a lot of wailing about loss of manufacturing jobs, as though they offer some special route to success for working people. These jobs are often physically taxing, tedious, and have some safety risks. Yep we lost manufacturing jobs, but look what we gained. It is a fantasy that a ton of manufacturing will return to the US or that it will bring millions of jobs. Manufacturing today is and should be highly automated. That automation leads to tremendous productivity which is the real key to economic growth and better living standards for everyone. What we should be concerned about is how to keep growing industries with high-paying jobs.
Go look at this chart on changes in manufacturing and other jobs over the last 40 years. Yes, manufacturing jobs are down. But look at the growth in other industries. This particular chart runs from 1979 through 2019, during most of the recent trade actions, but the trend would stay the same, subject to epidemic disruptions, up to the current day. Manufacturing was down about 7 million jobs, but other well-paying manual labor employment was up substantially more, including construction at around 3 million and trade, transportation and utilities at over 9 million. Trade includes all those dockworkers with very high pay, all linked to imports and exports. Financial services employment rose almost 4 million while business and professional services jobs grew by 14 million. Health services and education soared by over 17 million. These jobs are all on average much better paying than manufacturing ones. (BLS Article)
The person supporting high tariffs and saying they would bring manufacturing plants and jobs back to the US cited Erik Reinert’s work as support for that. Reinert is a Norwegian economist whose primary focus is how to make poor countries wealthier. He is essentially a global redistributionist and is a bizarre choice to cite for the proposition that the US should have higher tariffs. In fact, he thinks the developed nations, particularly the US, should sacrifice their self-interest and well-being by accepting protectionist policies from poor countries while allowing them to flood products and services into ours. Read his book How Rich Countries Got Rich and Why Poor Countries Stay Poor if you want to see his views for yourself.
Here is the key quote, in regard to what Reinert thinks the vision is for economic success–“world prosperity requires that manufacturing industries and advanced service sectors are distributed to all nations.” He makes it clear that this means that the US and other developed nations should literally cede business to poorer countries. He doesn’t like traditional aid to poorer countries but it is fine for developed nations to reduce their own well-being by tolerating unfair competition from developing nations and not being able to sell to those nations. See in particular Appendix V where he lays out explicitly that poorer countries should refuse to take any imports from other countries but should sell as many goods as possible to other countries. You will note that if all countries adopt this approach, the first part makes the second part impossible and in reality makes every country poorer. Somehow that approach seems at odds to me with the Trumpian notion of America First, which I tend to agree with economically, but maybe that is just me being rational.
Reinert also illustrates the dangers of economic historians writing too close in time to events. He uses Greece as an example of a country that should follow his advice and claims that as of 2019 its problems were due to not doing so. Five years later Greece is an enormous economic success story, having pulled itself out of the gutter by doing the opposite of what Reinert prescribed. Argentina is on the same path to revitalizing its economy. And Reinert’s claim that the US and other countries became wealthy by engaging in protectionist behavior has been strongly rebutted in a recent paper. (NBER Paper) Reinert is an example of someone who has a particular ideological bias and tries to make history and current events fit that ideology. As is usually the case, history isn’t interested in complying.
There is also concern about whether certain groups have not fared well under free trade, particularly poorer people. In fact they are beneficiaries, as it lowers the price of many goods for them. What I would be more concerned about is the general decline of personal responsiblity in the United States, and the lack of governmental incentives and penalties for failing to take personal responsiblity. Work hard in school, study, learn a trade, learn a profession. Work hard at a job, strive to do your best, achieve promotions and raises. That is largely up to the individual and that is the formula for financial success in life. Do the opposite and yep, things will suck.
Our educational system hasn’t helped, with its turn to ideology and indoctrination, its demonization of males and its favoring of individuals who are deemed to be “oppressed”. Real learning and achievement by merit, rather than by which race, ethnicity, religion, sex or sexual orientation you have or which of 267 gender identities you adopt, have fallen by the wayside, making it harder for many to obtain an education which leads to a good job. Foreign companies bringing manufacturing plants and other jobs to the US often complain about the inability to find qualified engineers and other staff. This is a failing of our educational system, which prioritizes creating social justice warriors over graduating people ready to do real jobs.
A political aside–I think it highly unlikely Trump will impose tariffs anything like what he has at times suggested. In his first term, tariff imposition was far less than he initially said he would implement and was primarily used as a negotiating tool. Trump knows he won because of economic issues, especially inflation, and he isn’t going to do anything that might cause a resurgence of inflation; severely damage exports, which support a lot of jobs in the US; or that otherwise causes a slowing of economic growth. He is primarily a negotiator and deal-maker and his threats about tariffs should be viewed in that context.
I am obviously strongly in favor of having every American have access to the best possible job and to good pay and benefits, which lead to a better quality of life. Free trade is one of the best ways to help achieve this. But it also needs to be trade in which all parties play by the same rules. I believe China in particular has not played by the rules, it has manipulated currency exchange rates, stolen intellectual property, provided massive subsidies to some industries and engaged in other supposedly forbidden protectionist behaviors. So I have no problem with taking steps to punish China, or other nations, for these behaviors.
The misbehavior of one nation, however, has no bearing on whether trade, when everyone does play by the rules, is beneficial for economic growth of all nations. It is and the economic history of the United States over recent decades is solid evidence that it has been good for us. Don’t listen to those who have no real understanding of trade or economics and who fall for the seductive siren song of high tariffs and protectionism.
The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry. Mr. Roche is available to assist health care companies through consulting arrangements through Roche Consulting, LLC and may be reached at 
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That was an intellectual tour de force that compelled me to rethink my beliefs about tariffs. I think your final couple of paragraphs, however, pretty well summarize my strongest beliefs about tariffs – that Trump used them as a negotiating tool and that it is OK to use specific tariffs for countries that abuse it. But by and large, I thank you for opening my eyes to the complexity of a tactic that I had oversimplified in my mind earlier.
You don’t have to drive far to see the abandoned factories and machine shops that created the American dream. Tariffs helped make us independent of Britain and nurtured our domestic industries.
There ain’t no such thing as “free trade” China practices mercantilism as does much of it world-and played us for fools.
Look at the industrial ruins around you, Kevin. It was never free.
Thanks for a really clear explanation. I would add that the study on tariffs begins in 1963. Different world, different trade environment. Energy in the US was cheap and reliable, and CCP was not running the world. Tariffs are a good threat to make open markets fair markets. It’s hard to compete with CCP slave labor and coal fired energy. Our government is the biggest handicap of all. Regulations tie up more and more resources and energy is becoming expensive and unreliable. The CCP is burning more coal than ever and it takes the US years and years to build a stinkin nat gas plant not to mention nukes. Energy not tariffs is the place to start the return to competitiveness.
it should be thought of as “tariffs on whom?” rather than just tariffs. for some reasons, unbeknownst to me, a whole bunch of people secure in their sinecures and palaces on the eastern seaboard thought it a great idea to hollow out the industrial base of the US. it caused devastation to large swaths of the country, particularly in the upper midwest, you know, the rust belt. I know Ricardo, that the gains from trade outweigh the losses, comparative advantage, et al. But a nation’s leaders have to look at more than just the economic theory and some research. it’s not like the EU is a trade problem, and that’s why ricardo’s examples involved european countries, with, you know, comparable standards of living, etc. We can trade with canada, japan, korea, et al., and there’s no need for tariffs. but when an adversarial country’s goal (um, China) is to use economic tactics to weaken you, then tariffs are more about national defense.
europeans at the time of ricardo always considered the un- and under-developed nations to be sources of raw materials, not trade partners and certainly not where you produce your nation’s most vital products. (such as things vital to your defense, intelligence, etc. China controls most of the rare earths, not to mention lithium, which is another story…)
nobody hollowed out the US industrial base, and if you look at the charts I included, please show the devastating rise in unemployment at the time of either NAFTA or China coming into the WTO. it isn’t there, it isn’t there because we benefited from that and we moved on to an even more advanced, high-paying economy, one which isn’t subject to traditional notions of trade. Hard to move all those finance or software or health care jobs somewhere else. Read more that doesn’t support some simplistic notion about our economy or economic position. And China controls certain metals because our regulations won’t let us mine for them and make constructing smelters and refineries absurdly expensive. Presumably Trump will change that. We have sources, it just isn’t economical to exploit them in the current environment.
It is undoubtedly true that, currency effects aside, tariffs create economic inefficiencies. And if that were the whole of the story, well, the above analysis would mean something.
But it isn’t. Right now, China and Russia can independently handle a war effort, because they produce or directly control most if not all of the requisite manufacturing components and large scale / scalable manufacturing capabilities.
Meanwhile, the US, due to corporatist greed and academic sophistry, has to import mass inputs into heavy manufacturing, components (including processed metals, microchips, etc.), not to mention medicines and clothing. In short, China and Russia can plunge the US into depression via distrusting international trade (where, if the Houthis can divert from the Suez, think of what the PLA or Russians subs can do) while the US cannot build or supply its allies with replacement armaments because we don’t produce the steel or process it, nor the chips, etc.). You don’t think that isn’t factored into whether or not China invades Taiwan?
Meanwhile, EU and Chinese neo-mercantilism is just predatory monopolistic behavior on the international scale, between nations. Non-industrial jobs have very elastic supply curves… hooray, we have traded needed jobs for jobs fillings luxury wants … but in a recession environment, no one needs the advertising firms or HR or to eat out or put on a play or to teach gender studies, or economics for that matter…. And so that country is destroyed, while the country that actually makes necessities takes all the wealth of the end-of-empire formerly decadent basket case.
Russia obviously can’t independently handle a war effort, since it has had to stoop to begging North Korea for help and is now the economic servant of China and has to find all kinds of sneaky ways to import Western technology. And the notion that Russia can do anything to the US economy is just laughable, we have no meaningful trade with Russia. And China, because of the trade deficit we run with them, is far more dependent on the US than we are on them. Every analysis of Trump’s proposed China tariffs shows a much bigger hit to the Chinese economy than ours. You need to develop a little more sophisticated analysis of the global intertwining and who gets hurt most by disrupting it.
You come across as a complete novice in this.
It’s slightly complicated, but not all of that.
The classic work on this is Ricardo’s “comparative advantage”, but the problem is it did not consider what happens taken to the extreme, it becomes unsupportable. In the meantime it does imply a flattening of advantage between the manufacturer and consumer – which in this case would mean reducing the US economy to slave labor to equal China’s.
I will assume this isn’t a serious comment and you didn’t even bother to read the material at the links I put in. I am well aware of Ricardo, Adam Smith and so on and so on. I am also aware of actual research and data on the impact of protectionist measures. You and others seem to think the US economy runs on manufacturing and that manufacturing is the peak economic sector. It doesn’t and it isn’t. We are very fortunate to have moved beyond manufacturing to much higher paying jobs, that are much harder to move overseas, look at that chart on the change in occupations over the last few decades. Who gives a crap about manufacturing when you rule world finance or software development or any other high tech, very high paying sectors. A yes there is always job dislocation when an economy moves to new focus. You do realize that at one point the majority of employment in the US was in agriculture? Are we wailing about losing all those agriculture jobs, many of which went to manufacturing. We have bigger economic and employment issues to focus on than bringing back manufacturing jobs, with the exception of ones clearly tied to national security. And China has more than enough of its own problems to deal with as its misguided effort to first try to have an export-driven economy and then an infrastructure-driven economy, all propped up and subsidized by the government, are collapsing into a debt cesspool. I think I understand business and economics just fine, way better than most people. And by the way, go re-read Ricardo, he did deal with the possibility that comparative advantage could get out of balance.
Tariffs are taxes. Taxes are theft. I don’t need a study to tell me that tariffs are bad, immoral, worse for the country that imposes them and worse for economically more advanced economies. It’s common sense.
Milton Friedman is probably one of the greatest economists to have ever lived, so it’s interesting to get his thoughts on tariffs. Below are a few quotes. He clearly agrees with you on this subject.
“The benefits of a tariff are visible. Union workers can see they are “protected”. The harm which a tariff does is invisible. It’s spread widely. There are people that don’t have jobs because of tariffs but they don’t know it.”
“For example, the supporters of tariffs treat it as self-evident that the creation of jobs is a desirable end, in and of itself, regardless of what the persons employed do. That is clearly wrong. If all we want are jobs, we can create any number–for example, have people dig holes and then fill them up again, or perform other useless tasks. Work is sometimes its own reward. Mostly, however, it is the price we pay to get the things we want. Our real objective is not just jobs but productive jobs–jobs that will mean more goods and services to consume.”
“Given that we should move to free-trade, how should we do so? The method that we have tried to adopt is reciprocal negotiation of tariff reductions with other countries. This seems to me a wrong procedure. In the first place, it ensures a slow pace. He moves fastest who moves alone. In the second place, it fosters an erroneous view of the basic problem. It makes it appear as if tariffs help the country imposing them but hurt other countries, as if when we reduce a tariff we give up something good and should get something in return in the form of a reduction in the tariffs imposed by other countries. In truth, the situation is quite different. Our tariffs hurt us as well as other countries. We would be benefited by dispensing with our tariffs even if other countries did not. We would of course be benefited even more if they reduce theirs but our benefiting does not require that they reduce tariffs. Self-interests coincide and do not conflict.”
The points about free trade are fine, but it appears to me that Trump ISN’T using tariffs as an income generator, but rather is using them as a negotiating tool. If he can threaten, for example, tariffs against Mexico and Canada. And then if the governments in question take actions – such as helping to reduce illegal US immigration – we clearly win. And in fact, we did clearly win on this specific example.