Trump's true love: The protective tariff

Trump's tariff agenda in a second term would be much more far-reaching, and risky, than that in his first.

It’s time to start taking seriously how serious Donald Trump is about a protective tariff. You have to go back to Henry Clay in the 1820s through the 1840s to find a serious presidential candidate for whom a protective tariff so dominated a policy agenda.

A protective tariff may be the only true policy conviction Trump has. Cracking down on illegal immigration is often cited as another. However, it is clear that Trump is at least partially demagoguing on that issue to increase turnout among his low-propensity supporters. There’s not a similar marginal constituency riled by hyperbole about a protective tariff. The assumption should be that Trump means what he is saying on the subject.

In his first term, Trump increased tariffs on selected goods, such as steel, and applied a broader suite of increased tariffs on goods imported from China. In this election, he is proposing a universal tariff of 10% to 20% (Trump oscillates between the two) on all imported goods, and a 60% tariff on all Chinese imports. The current average U.S. tariff on imported goods is less than 3%, and roughly half of all imports enter the country duty free. 

In Trump’s first term, increased tariffs and the threat of them were mostly used as tactical leverage to gain trade concessions from other countries. In this election, Trump is touting a protective tariff as a sound element of political economy in its own right, not as a tactic to gain more favorable trade terms with other countries. That’s what makes Clay rather than McKinley the true historical precedent.  

During the protectionist era, Congress did the detail work on tariffs, specifying goods and applicable rates. In the free-trade era in the post World War II period, the details have largely been delegated to the president. Scott Lincicome, a CATO scholar writing for The Dispatch, recently analyzed the constraints, and lack thereof, that Trump would face under existing tariff authorization laws. In short, Trump would have a wide berth without clear and reliable brakes. 

Trump claims three primary benefits from a protective tariff: a revival of domestic manufacturing, more revenue for the federal government, and leverage in foreign policy conflicts. As an example of the latter, Trump says he would deter Chinese strongman Xi Jinping from invading Taiwan by threatening tariffs that would effectively block Chinese exports from the U.S. market.

Now, these things work at cross-purposes. To the extent tariffs induce domestic manufacturing to replace foreign imports, the revenue tariffs would produce shrinks, as does any leverage in foreign policy conflicts.

Anything tariffs could accomplish in any of those categories is modest, at best. U.S. manufacturing exports have steadily increased, while manufacturing employment has declined as a percentage of overall employment. Automation and productivity gains explain the declining role of manufacturing employment far more than increased international trade.

If Trump’s tariffs had a limited effect on imports, the annual revenue they would produce would still just be in the $250 billion range, which wouldn’t much repair a $2 trillion annual deficit and wouldn’t be much more than a rounding error in paying for all the tax cuts Trump is promising.

Xi is a nationalist first. He isn’t going to be deterred from his ambition of absorbing Taiwan, if he thinks the time is ripe, by economic considerations, however large. The rest of the world’s troublemakers – in Russia, Iran, and North Korea – don’t have enough access to the U.S. market to make a tariff threat any kind of deterrent. 

Trump’s tariffs would reduce the living standards of U.S. consumers. Imports would either cost more or be displaced by domestically manufactured goods that do not offer as optimal of a value proposition, either because of cost or quality. 

Honest advocates of protectionism, or some other form of industrial policy, acknowledge this. They say that the reduction in the value proposition for consumers is worth the societal benefit of  creating more manufacturing jobs, offering a better pathway to the middle class, particularly for men without college degrees. 

Such trade-offs are appropriate to weigh. The economic benefits of free trade aren't the only consideration for a policy mix. For example, I generally favor free trade, except with China. Due to geopolitical considerations, I think we should insulate our economy from Chinese influence to the extent possible, understanding the costs and difficulties of doing so. 

As a general matter, however, I’m skeptical that a protective tariff can produce significant gains in manufacturing as a percentage of overall employment, due to automation and other productivity improvements. And about the superiority of manufacturing to other pathways to the middle class in today’s economy. 

The cost to consumers of a general protective tariff is certain. Any benefits are highly speculative. 

The larger economic threat of a protective tariff regarded as a sound element of political economy in its own right is to America’s export sector. Despite all the wailing and gnashing of teeth about the erosive effects of globalism, the United States is still the world’s second largest exporter. We export over $2 trillion of goods annually, throughout the world. 

Trump mistakenly views the balance of trade as a scoreboard. If you import more than you export, you are losing. So, he thinks the United States is a trade loser, even though we are a huge force on both sides of the trade equation. There are trade policies in other countries that unfairly discriminate against U.S. goods. However, the major reason the U.S. runs a trade deficit is that we are richer and have a freer consumer market than other countries. Americans can buy more stuff from everywhere and have the freedom to do so.

This isn’t Henry Clay’s antebellum America. The United States is a huge exporter, and not just of raw materials as in Clay’s days. Trump’s tariffs would put our $2 trillion export market at risk. Other countries aren’t going to abide a unilateral retreat into mercantilism by the United States.

Now, the Biden administration, and Kamala Harris by inference, haven’t been free traders. It has mostly kept Trump’s more targeted tariffs in place. The Biden administration has pursued its own protectionist policy, in the form of industrial policy subsidies, particularly in green energy and computer chips. 

I almost hate to say this. But, if protectionism is to be the policy, tariffs are actually preferable to industrial policy subsidies. Tariffs treat all domestic producers equally. Subsidies are given to some and denied others. Tariffs distort domestic markets and competition less than subsidies. They are less damaging to market efficiency and productivity.

The United States, and the world, is slipping into a protectionist mode. But degrees matter. A Harris administration is likely to be mildly protectionist. Trump, however, seemed committed to going full bore, irrespective of the risks to consumer value and America’s huge export sector.

Reach Robb at robtrobb@gmail.com.