Economists, the Trump Tariffs, and Alternatives

Economists from the Left and the Right have been highly critical of the system of tariffs imposed by President Donald Trump. 

Perhaps the most important part of the anti-tariff argument is that tariffs raise prices—the prices of imported goods and the prices of domestically produced goods that, without the tariffs on imported goods, could not be competitive. If domestically produced goods cannot compete with foreign goods without the tariffs, then, so the argument goes, we will do better accepting cheap foreign-produced goods and focusing our resources on goods we can produce more effectively.

But, alas, things are not so simple. 

The tariffs imposed by Trump are clearly damaging, and the damage has been exacerbated by the uncertainty created by their numerous changes. 

Yet, governments’ programs to support economic progress—"industrial policies”—have often played positive roles, and tariffs have frequently been part of these policies. There can be better tools than tariffs, tools that would have more equitable and more growth-effective outcomes. Circumstances have, however, sometimes required governments to use tariffs as an instrument in industrial policy. Tariffs, it turns out, can sometimes be useful policy tools, but they have their problems and are seldom, if ever, effective outside of a more comprehensive policy. (Of course, industrial policies are not always positive, as, for example, they can be used to support special interests. And currently, the Trump administration's promotion of fossil fuels and cryptocurrencies could be viewed as quite negative industrial policy.)

First, There Is History

In the 19^th century, the United Kingdom became the manufacturing center of the world and preached free trade around the globe. Actually, the United Kingdom didn’t just preach free trade. It also imposed free trade, using its military power to force other nations and its Indian colony to allow its manufactured goods to enter their markets without tariffs or other constraints. 

Yet, according to the World Bank, at the beginning of the 19^th century the United Kingdom’s average tariff on manufactures was 50%, which is high by almost any comparative standard. As the British historian Eric Hobsbawm in Industry and Empire puts it: “British industry could grow up, by and large, in a protected home market until strong enough to demand free entry into other people’s markets.” 

In the United States, again according to the World Bank, throughout the 19^th century  average tariffs were kept at 40%, and that average still stood at 38% in 1925. And, yet, by the middle of the 20^th century, as the United States replaced the United Kingdom on the world economic stage, its official credo became “free trade!”

It is worth pointing out that economic growth in both countries did not yield great improvements for the general population for quite a while, around mid-century in the United Kingdom and until after the Civil War in the United States. Nonetheless, it is hard to argue that the economic expansion of these two countries was substantially held back by tariffs. 

Second, Manufacturing Mattered

In the development of modern, highly productive economies, manufacturing has played an important role. Manufacturing stimulated technological innovation, the creation of a skilled and disciplined labor force, and the emergence of new economic activities. The rapid expansion of the textile industry in New England (with tariff protection) in the early 19^th century established “growth poles,” whereby factory towns spawned a demand for new machinery, maintenance of old machinery, parts, dyes, new skills, and equipment to move raw materials and products.

In the history of economic progress, other economic activity played important roles. Agriculture and financial services stand out. Nonetheless, progress in these activities, especially agriculture, was to a significant degree dependent on manufacturing. Consider, for example, the role of the tractor, mechanical harvesters, and irrigation equipment in the development of U.S. agriculture.  

So, manufacturing mattered in a variety of ways. It has been reasonable, then, for many governments, seeking to promote economic development, to support the advance of manufacturing. Indeed, even for economically advanced countries, in spite of the relative decline (in terms of share of GDP and employment) of manufacturing, it can be argued that manufacturing still matters.

But the Constraint of Trade

When, however, some countries have developed strong, mature manufacturing activities, the development of manufacturing firms in other countries faces a problem—namely, the new firms in those other countries cannot compete with imports coming from the more mature activities in the countries that got there first. Trade free from restrictions can become a constraint on manufacturing. Until the new industrial firms in the late developing countries have time to establish themselves and become more effective producers, they cannot survive the competition from the already advanced economies. They need some sort of protection in order to grow and prosper. 

The Costs, the Benefits, Who Pays, and Who Gains

That protection can be “negative” through limiting imports by tariffs or quotas. Or the protection can be “positive” through various support programs such as direct or indirect subsidies. Historically, governments have often turned to tariffs because they lack the resources for the support of programs that are central to positive forms of protection. Also, they see the tariffs as a form of revenue, and they are directly focused on the trade constraint that inhibits industrial progress.

Tariffs, however, have some real problems. There is the obvious problem that they lead to higher prices (as noted in the case of the current imposition of U.S. tariffs). Tariffs are taxes. Taxes are necessary and useful; in the case of tariff taxes, they may be useful to build the foundations of economic progress. Tariff taxes, however, are regressive; that is, they take a higher share of the incomes of the poor than of the rich. They are essentially taxes on people’s spending, and the poor spend a higher share of their income than do the rich. 

Subsidies to industries can serve the same purpose as tariffs, by giving new industries funds that allow them to match, or even undercut, the prices of competing imports. Moreover, subsidies are probably more easily withdrawn, when the time comes, than tariffs. Further, if a country has a progressive tax system, subsidies, unlike tariffs, provide a more egalitarian support for industrialization. Nonetheless, late developing countries often do not have sufficiently robust tax systems that would provide the resources for subsidies.  

And especially important, neither tariffs nor subsidies by themselves create effective industrial policy. Striking examples of what is needed for effective industrial policy have been demonstrated in the last 80 years in East Asia, especially with the cases of South Korea, Taiwan, Japan, and, of course, China. 

In all of these cases, protection (positive or negative) of industry was used, but was only one part of a more complex and extensive industrial policy, promotion of manufacturing in particular. That promotion has included, for example, subsidized loans and tax breaks for new businesses, government procurement, programs for worker training, and standards for maintaining government support (e.g., by holding firms to export success). Moreover, extensive support for general education played a foundational, long-run part in such promotion. And “free trade,” was certainly not part of policy in these cases of industrial policy success.

Industrial policy, including actions that restrict international trade, can also be useful in economically advanced countries. It can be reasonable for governments to provide support for certain technological advances or to respond to overriding concerns such as climate change. Indeed, the Biden administration introduced some such actions. Also, as I have noted in an earlier Left Hook Economics post, a progressive trade policy could benefit from some restrictions on international trade. 

The lesson of all this is that one should not jump from the widespread, legitimate condemnation of Trump’s tariffs by economists (and others) to an acceptance of free trade as a key to economic progress. Government programs, sometimes including direct constraints on international commerce, have had and can continue to have wide positive impacts on economic conditions. 

Arthur MacEwan is professor emeritus of economics at the University of Massachusetts Boston.