Welcome to today’s Morning Jolt. I’m John Puri, filling in for Jim Geraghty. Noah Rothman will take over tomorrow, and Jim will be back with you on Wednesday.
On the menu today: Much of President Trump’s tariff regime has been reconstituted, but its objective is no clearer. If the aim is to spark a manufacturing resurgence shielded from foreign competition, the tariffs have yet to succeed — likely because they are too haphazard to foster any long-term investment. But they have still succeeded at their most basic function: raising prices for Americans. Trump’s tariffs may never achieve the second-order effects proponents want, but we can survey what “success” looks like in corners of the U.S. economy where protectionism is long established. The common thread through them is entrenched inefficiency, stagnation, and higher costs for everyone else.
Read on.
What Are These Tariffs For?
One year, four months, and 15 days after Liberation Day, it is difficult to judge Trump’s expansive tariffs because the administration never settled on a standard for success or failure. Instead, it vacillated wildly between competing explanations. On every metric one can remember, however, tariffs are not accomplishing what the president claimed they would.
Are tariffs simply a tax to raise federal revenue? If so, Trump should have made sure he was on firmer legal footing before he imposed them. July was the third consecutive month that refunds for the previous round of tariffs, which the Supreme Court ruled invalid, exceeded revenue from replacement duties. Are tariffs intended to reduce the trade deficit, a harmless accounting figure that Trump nonetheless loathes? That was never going to happen, as the trade deficit necessarily mirrors the United States’ investment surplus. The balance of trade has seen no significant change since before the tariffs. Tariffs are certainly not a negotiating tool to get partners to agree to freer trade across the board, as some defenders argued. Of the handful of deals Trump has signed, all of them left most U.S. tariffs in place, and most have been vitiated by subsequent presidential decrees.
More sophisticated protectionists maintain that the purpose of tariffs is — or at least, should be — to grow the U.S. industrial base by ensuring demand for what it produces. Set aside the issue of whether America’s industrial output is really lower than it used to be (it’s not), and whether the sector’s declining employment is primarily due to foreign competition (also untrue). Empirically, Trump’s tariffs have shown no sign of boosting American industry.
Domestic industrial production is flat. Manufacturing employment has continued falling since tariffs were imposed. These may not be fair indicators, as it would take time for new tariff-induced factories to come online. But investment in manufacturing facilities is also down, and most industrialists are complaining about tariffs rather than celebrating them.
There are a couple of reasons why Trump’s tariffs may not be incentivizing companies to build more in America. The president has imposed tariffs that are nearly universal, making little distinction between import categories. Yet half of U.S. imports are inputs for domestic production — 30 percent capital goods (excepting automotive), 20 percent industrial supplies and materials. When the prices of these goods rise because of tariffs, domestic manufacturing becomes costlier and less competitive. Not exactly an attractive opportunity.
Even more counterproductive may be the uncertainty of current tariffs. Manufacturers have no guarantee that rates will be what they are now five years or, heck, five months into the future. Trump is on his third set of comprehensive tariffs in less than two years. His latest round may not survive judicial review, at which point he will likely introduce a fourth. Novel tariffs on different countries and goods — pharmaceuticals, semiconductor materials, drones — are announced at random. Since Congress has not legally codified any of Trump’s tariffs, they could all be rescinded immediately by the next president — or they could be kept in place. The problem for manufacturers is that nobody knows, and they cannot build permanent investment plans around a mutating trade policy.
The answer from intelligent protectionists is that tariffs must therefore be made steady and predictable. Congress should ratify targeted tariffs, as it has often done in the past, so manufacturers can be sure that their investments will pay off. Indeed, this would be a much sounder policy toward protectionists’ ends than whatever Trump is doing. But the U.S. economy is already littered with the kind of “success” stories they have in mind, and they are nothing worth replicating.
Protectionist ‘Successes’
What happens when protectionism succeeds? First and foremost, prices for Americans go up.
Let us review the traditional economic rationale for tariffs: They exist to solve the “problem” of goods that are too cheap. When foreign producers can make goods at lower cost than domestic producers (usually due to natural comparative advantage), they can sell their products at lower prices. Sometimes, domestic firms are unable to match their prices and go out of business. Other times, they can match the lower prices to stay alive, but their return on investment shrinks, and the industry contracts over time. The deliberate goal of tariffs is to artificially raise import prices, allowing domestic producers to increase their own prices while keeping them lower by comparison. Consumers are driven to buy domestic goods — not because they have gotten cheaper (they are more expensive, in fact), but because tariffs have caused the prices of foreign goods to rise by even more. Industries are thus “protected” from global price competition.
The president’s tariffs are doing what they’re supposed to do at this most basic level. Gold-standard research finds that retail prices for both imported and domestic goods have risen in tandem since duties were imposed, when pre-tariff trends had them declining. Americans have less purchasing power because of tariffs than they did previously.
This effect is more pronounced in places where tariffs have existed for many years. Steel was one of the most protected American industries before Trump ever stepped into the Oval Office, but he doubled down in his first term by imposing a 25 percent tariff on steel imports. Last year, he raised the tariff to 50 percent. It should come as no surprise that the cost of steel for U.S. companies has exploded; domestic buyers now pay nearly two-and-a-half times the international price, up from a 26 percent premium in 2018. Meanwhile, U.S. steel production has been flat since Trump imposed his initial tariffs.
Aluminum shares the same story: tariffed in Trump’s first term, tariffed even more in the second term. The current duty of 50 percent has produced an unprecedented gap between U.S. and international aluminum prices that manufacturers must pay. Although imports from Canada have collapsed, domestic production is flat here, too.
Another protectionist “success” is solar panels, tariffed over several years by both Trump and President Biden. Domestic panel makers have been able to compete with Chinese suppliers only because Americans pay multiples of the international prices. Ironically, this form of renewable energy would be more accessible if not for the Biden administration.
Other protectionist programs have much longer track records. The U.S. sugar industry, for example, has been shielded by a tariff-rate quota system for almost a century. A few thousand growers survive in Florida, but in return, Americans pay twice as much for the sweet stuff. Higher prices destroy approximately three times as many jobs in the downstream confectionery industry as they save in the sugar business. (They also induce food companies to put corn syrup in everything.)
Long-standing tariffs on Canadian lumber have driven up wood prices, which home builders and buyers don’t much appreciate. Protectionism helps insulate a flabby domestic car market from cheaper models. It raises the prices of essential foods like beef and peanuts. It makes clothing and shoes more expensive to protect domestic industries that hardly exist anymore.
Perhaps nowhere is the “success” of protectionism more thorough than in shipping and shipbuilding. The Jones Act of 1920 prohibits the transport of goods between two U.S. ports unless the ship is built in America, flagged in America, and crewed by Americans. The country imposes a 50 percent duty on foreign shipyard services performed for U.S.-flagged vessels. And the Navy is restricted to buying only domestically produced ships, except under extraordinary conditions.
The result of all this protection is a sad, sclerotic U.S. maritime industry that barely chugs along. Domestic vessels cost five times as much and take twice as long to complete as those built in Japan and South Korea. Virtually all the ships America produces are acquisitions mandated by law. Still, the Jones Act-eligible fleet is now fewer than 100 vessels after decades of aging and shrinking. Protectionism for U.S. shipbuilding has brought down shipping with it. The situation is so dire that even our protectionist-in-chief wants to let the Navy buy ships from abroad.
Advocates of tariffs cannot defend the effect of their policies on purely theoretical grounds. They must either defend the real-world examples of protracted protectionism — how we should want the entire U.S. economy to look like shipbuilding — or explain why this time will be different. What they must never deny is that the point of tariffs, if they have any effect at all, is to raise prices at home.
ADDENDUM: Because of its diffuse costs and concentrated benefits, targeted protectionist policies are extremely difficult to roll back once enacted. Occasionally, though, the light of competition shines through. Since March, the Trump administration has maintained the longest and broadest Jones Act waiver in modern history to ease domestic energy supplies, allowing foreign vessels to move fuel between U.S. ports. A sprawling network of new trade has sprung up in response: Fifty-seven million barrels have been shipped across 215 voyages — between the East and West coasts, and from the Gulf of Mexico to Puerto Rico. Foreign ships have supplemented America’s native fleet, as every domestic tanker is fully employed. We should make this holiday permanent by sending the Jones Act out to sea.