Opinion | Trump’s Tariffs May Not Do What He Thinks

Donald Trump first rode to the presidency on a complaint that “We don’t make anything anymore.” That isn’t right — American manufacturers sold more than $7 trillion of goods in 2024 — but it’s true that the sector has been in a funk for the past quarter-century, threatening both our national security and an important foundation of our prosperity.

Since 2000, production has fallen between 10 percent and 30 percent in many strategically significant industries, including machinery, electrical equipment, chemicals and metalworking. While output has held up better in some other categories, such as motor vehicles, aircraft, pharmaceuticals and semiconductors, the modest growth in U.S. production has been dwarfed by the surge in both domestic and global demand. If current trends continue, even those industries that survived the losses of prior decades could end up displaced by producers in hostile countries.

Trump has pledged to fix this. As the co-author of a book laying out how the global trading system has failed many workers in the U.S. and elsewhere, I’m sympathetic to this goal, and I think it's one worth pursuing.

But if Trump is serious about this, he needs to think harder about the tools he wants to use. Several of the policies Trump and his advisers have floated — primarily universal tariffs — risk making things worse, or, at best, will do nothing to revive American manufacturing or improve the lives of its workers. Prosperity is not zero-sum, and just because we inflict pain on trading partners doesn’t mean we’ll benefit. More likely, punitive measures will backfire.

Start with Trump’s latest threats to hike tariffs across the globe.

Tariffs are taxes paid by importers on goods coming across the border. They can make U.S.-made goods look relatively cheaper — to Americans, anyway — compared to foreign-made goods. In theory, that would boost employment, wages and profits for American manufacturers compared to a world with no tariffs. But those gains would only come at the cost of forcing American consumers to spend more money to buy the same (or fewer) goods, which would mean there is less money available for everything else.

The net effect depends on how easily American workers and factories can ramp up production of goods that are currently imported. For goods where U.S. demand is relatively low but domestic capacity is rising rapidly thanks to government subsidies, such as battery electric vehicles, the benefits of tariffs could outweigh the costs. At the other extreme would be tariffs on imports of goods where demand is strong and domestic capacity is extremely constrained, such as coffee beans. There, tariffs would be closer to a sales tax that takes money from American consumers to reduce the federal budget deficit. In the middle are goods that Americans could make more of, but only by moving workers and machines away from other activities: more U.S.-made T-shirts, but fewer childcare workers.

Unfortunately, the incoming administration does not seem to appreciate these nuances. Instead, they care more about the overall size of the trade deficit, which is the difference between what Americans sell to the rest of the world and what Americans buy from the rest of the world. To be fair, the deficit in manufactured goods is worth about $1.2 trillion a year, or about $3,500 for every man, woman and child in the U.S. If that deficit disappeared and everything else stayed the same, the average American’s income would be almost 5 percent higher.

But closing that deficit unilaterally is more or less impossible without an act of self-harm.

Spending on manufacturing imports tends to track the business cycle and new orders for American-made goods. Imposing “universal” tariffs high enough to force those imports to fall by more than 40 percent to close the trade deficit would likely involve a severe economic downturn that hurts Americans more than anyone else. To avoid that pain, domestic production of those same goods would have to rise enough to cover the gap — and rise fast enough to prevent shortages and inflation. The experience of the pandemic suggests that this is not a realistic option.

The likelier outcome is that countervailing forces would prevent tariffs from doing much at all — just like the last time Trump was in office. Back then, there was a modest downturn in the manufacturing sector, not much change in inflation, no change in the trade balance, and an uptick in customs revenues.

The impact of these kinds of tariffs is limited because foreign producers can respond to tariffs by lowering their prices. That hurts their profits, but it helps them retain market share. Similarly, American wholesalers and retailers can sacrifice some of their margins to shield consumers from the full impact of higher import prices.

Another counterintuitive impact is that the dollar tends to become more expensive in response to the imposition — or threat — of new tariffs. The reason is that tariffs increase the attractiveness of investing in the U.S. to make goods for the American market, and decrease the appeal of investing abroad to make goods for export to the U.S. Unfortunately, the rising dollar also means that goods made in the U.S. become more expensive for customers in the rest of the world. The net effect is that tariffs often hit exports more than imports, even when foreign trade partners fail to retaliate.

The bigger threat to U.S. manufacturers is the incoming administration’s pledge to end industrial subsidies for semiconductors, electric vehicles and other high-value sectors established under the Biden administration. Many businesses have committed to invest substantial sums to build up America’s manufacturing capacity on the assumption that they would be supported in their efforts with cheap financing and guaranteed revenues. Those commitments might get revoked if the government introduces too much regulatory and financial uncertainty. Slashing subsidies might “save money” in a narrow sense, but at the cost of harming American manufacturing and national security.

A better approach to boosting manufacturing through industrial policy starts with recognizing that U.S. producers face two related problems. First, there is not enough spending on manufactured goods globally, be it from consumers, businesses or governments. Sustaining a sophisticated and diversified manufacturing sector in any country is harder than it should be because there is not enough revenue to go around. That is compounded by the second problem, which is that making things in the U.S. is relatively less profitable than making things in places where governments give businesses cheap land and cheap financing while squeezing workers and consumers.

Ideally, leaders in key foreign economies such as China, Europe and Japan would find ways to increase the spending power of their own consumers. That would raise living standards abroad, boost global manufacturing demand and also make American manufacturers more competitive in both the U.S. and the rest of the world.

Failing that, Americans should try to ensure that choices made abroad do not end up undermining the survival of our own industrial base. Tariffs or quotas limiting certain imports might be necessary, along with restrictions on foreign investments into the U.S. and other interventions to prevent the U.S. dollar from becoming too expensive. But the federal government should also guarantee sufficient spending on a broad mix of American-made goods.

Keeping the subsidies for semiconductors and electric vehicles put in place in 2021-2022 and spending more on defense are good places to start, but not enough. Policymakers should get creative and avoid simplistic solutions. Slapping tariffs on other countries’ goods and gutting his predecessor’s achievements might delight Trump in the moment, but they’ll only make it harder for him to make American manufacturing great again.