Has Trump’s Protectionism Backfired On America’s Workers?

|
Posted: Jan 03, 2020 10:24 AM
Has Trump’s Protectionism Backfired On America’s Workers?

Source: AP Photo/Andrew Harnik

At the beginning of the Trump era, many of us (including me) warned that his statements on trade were nonsensical.

And when Trump shifted from bad rhetoric to bad policy, Johan Norberg pointed out why trade wars are very misguided.

As you might expect, Johan is correct. More government intervention in global commerce has led to bad consequences.

Trump’s tax increases on trade have produced bad results for the American economy. Consumers have been hurt, businesses have been hurt, exporters have been hurt, and specific sectors such as farming and manufacturing have been hurt.

All of this was very predictable.

Indeed, the Trump Administration’s own economists warned back in 2018 that a trade war would backfire. Here are some excerpts from a report in the New York Times.

A White House economic analysis of President Trump’s trade agenda has concluded that Mr. Trump’s tariffs will hurt economic growth in the United States… The findings from the White House Council of Economic Advisers have been circulated only internally and not publicly released… The administration has hit Canada, Mexico, Japan and the European Union with steel and aluminum tariffs and…tariffs on a range of Chinese goods. In return, many of those countries have either imposed or threatened reciprocal tariffs on everything from steel to pork to orange juice, a move that economists say will depress economic growth. …many economists have been warning that the administration’s trade approach will undercut economic growth and partially offset any boost from the $1.5 trillion tax cut that Congress passed and Mr. Trump signed… Wall Street research firms have warned that those tariffs, and the retaliatory tariffs that trading partners have threatened in response, will slow growth in the United States. …In a…survey of an expert panel of academic economists assembled by the University of Chicago’s Booth School of Business, no economist agreed with the statement, “Imposing new U.S. tariffs on steel and aluminum will improve Americans’ welfare.”

Needless to say, Trump ignored the good advice from his economists and imposed a bunch of tax increases on trade.

We now have some hard evidence about the wisdom of this approach. Economists at the Federal Reserve crunched the numbers as part of a new study.

While there are already vast theoretical and empirical literatures documenting the effects of changes in trade policy, …there are virtually no modern episodes of a large, advanced economy raising tariffs in a way comparable to the U.S. in 2018-2019. …these tariffs…were imposed, in part, to boost the U.S. manufacturing sector by protecting against what were deemed to be the unfair trade practices of trading partners, principally China. …This paper provides the first comprehensive estimates of the effect of recent tariffs on the U.S. manufacturing sector. …We measure the import protection channel as the share of domestic absorption affected by newly imposed tariffs. We account for declines in competitiveness associated with increased input costs as the share of industry costs subject to new tariffs.Finally, we measure an industry’s potential exposure to retaliatory tariffs by U.S. trading partners as the share of industry-level exports subject to new retaliatory tariffs. …We then relate the measures for these three channels of tariff exposure to monthly data on manufacturing employment, output, and producer prices.

And what did the experts find?

We find that tariff increases enacted in 2018 are associated with relative reductions in manufacturing employment and relative increases in producer prices. In terms of manufacturing employment, rising input costs and retaliatory tariffs each contribute to the negative relationship, and the contribution from these channels more than offsets a small positive effect from import protection. For producer prices, the relative increases associated with tariffs are due solely to the rising input cost channel. …we find that shifting an industry from the 25th percentile to the 75th percentile in terms of exposure to each of these channels of tariffs is associated with a reduction in manufacturing employment of 1.4 percent, with the positive contribution from the import protection effects of tariffs (0.3 percent) more than offset by the negative effects associated with rising input costs (-1.1 percent) and retaliatory tariffs(-0.7 percent).

In other words, the small benefits that go to the industries that are sheltered from competition are very much outweighed by the damage to other sectors of the economy (a lesson that Trump could have learned if he studied real-world evidences, such as the Great Depression).

The Wall Street Journal opined about the Fed’s study.

One mystery of the Trump -era economy has been why U.S. manufacturing slumped sharply in late 2018 and 2019 after surging the year before. The Occam’s razor culprit is the onset of trade war… Federal Reserve economists Aaron Flaaen and Justin Pierce examine the impact of the tariff outbursts of 2018 on U.S. manufacturing employment, output and prices. This is important work because 2018 marked the start in earnest of President Trump’s campaign to change the world trading order, using tariffs as his preferred bludgeon. …Mr. Trump justified his campaign in part as a way to revive American manufacturing while protecting against unfair trade practices. So how has that worked out? …the economists have bad news for tariff lovers. …the higher costs from tariffs swamped benefits to specific firms from import protection. The tariffs cost more jobs than they created. …As the Fed economists conclude, “We find the impact” from protection “is completely offset in the short-run by reduced competitiveness from retaliation and higher costs in downstream industries.” ….A previous Fed study looked at uncertainty and found it has cut U.S. GDP growth by about a percentage point, which explains the deceleration to 2% from 3% in the last year.

At the risk of sounding like a dogmatic libertarian, we now have additional confirmation that it’s not a good idea to expand the footprint of government.

That’s true about taxes. That’s true about spending. That’s true about regulation. And it’s true about trade.

P.S. Wonky readers may be interested in this chart from the Fed study, which shows the impact of Trump’s trade war on employment, production, and producer prices.

P.P.S. Trump is right when he asserts that other nations have bad protectionist policies. Unfortunately, he wrongly thinks that reducing trade deficits somehow will address those bad policies. Instead, he should have targeted the specific bad policies (such as Chinese cronyism), ideally by utilizing the World Trade Organization.