Opinion Markets Insight
How Trump should impose tariffs
Policymakers need to update their approach if they are determined to use trade measures to protect industry
BRIAN ALBRECHT
When Donald Trump imposed 25% steel tariffs in 2018, manufacturing employment declined in industries that used steel intensively. These
job losses outweighed any gains in steel production © Bloomberg
Brian Albrecht NOVEMBER 26 2024
The writer is chief economist of the International Center for Law & Economics and writes
the Economic Forces blog
Donald Trump has promised a renewed push for tariffs when he returns to the White
House. The stated goal is to protect American manufacturing jobs, but some approaches
would achieve this far more effectively than others.
The historical record shows that, while tariffs can preserve specific manufacturing jobs in
the short term, poorly designed trade barriers destroy more American factory jobs than
they save. Understanding these trade-offs is crucial for policymakers determined to use
tariffs. Trump has said he will impose tariffs of 25 per cent on all imports from Canada and
Mexico, and an extra 10 per cent on Chinese goods. But implementation will be key.
The key lies in modern supply chains. Today’s factories rely heavily on imported
components. Indeed, nearly 20 per cent of US imports are so-called intermediate inputs
used by domestic producers to make other goods. Trump’s 2018 tariffs applied primarily
to these intermediate goods. This transforms how tariffs affect jobs. Rather than a simple
trade-off between protected workers and hurt consumers, the effects ripple through
manufacturing.
Steel tariffs illustrate the pitfalls. While they benefit US producers such as Nucor and US
Steel, they harm the much larger manufacturing sector that uses the metal — from
Caterpillar’s construction equipment to Ford’s auto parts. These downstream industries
employ far more workers than steel production. When Trump imposed 25 per cent steel
tariffs in 2018, manufacturing employment declined in industries that used steel
intensively. These job losses outweighed any gains in steel production.
Tariffs on finished goods can sometimes protect jobs effectively, but success requires
careful design. The washing-machine industry provides an example. When the US first
imposed China-specific duties in 2017, manufacturers simply shifted production to
Thailand and Vietnam. Only after the US enacted global tariffs in 2018 did Samsung and
LG build American factories. While this eventually achieved the political goal of creating
US jobs, it required comprehensive trade protection and came with higher prices for
consumers.
Protection is also possible when foreign producers cannot easily shift production. Take
semiconductors: building new chip fabrication plants requires massive capital investment
(typically $10bn to $20bn) and years of construction. In that case, a tariff may raise chip
prices, protecting Intel’s employees. But those same barriers — huge capital requirements,
specialised worker training, complex supplier networks — also make it harder to establish
new domestic production quickly.
The auto industry also illustrates both effective and counterproductive approaches to
tariffs. The so-called “chicken tax” — named after an initial tariff on poultry — was a 25 per
cent tariff on imported light trucks imposed in 1964. It helped Ford and General Motors
dominate the US pick-up truck market for decades. The tariff worked because it targeted
finished vehicles, not parts, and because domestic manufacturers could readily expand
production. Over time, it even prompted companies such as Toyota, Nissan, and Honda to
build US plants to avoid the tariff.
But modern vehicle production is far more complex. When the Trump administration
imposed tariffs on Chinese auto parts in 2018, it did not protect American jobs at all.
Instead, it raised costs for US automakers who relied on imported components. Higher
input costs led to slower export growth and job losses in affected industries.
If the goal is to support high-value manufacturing, policymakers should focus on
protecting advanced industries where the US has existing expertise. Targeted support for
semiconductor manufacturers such as Intel or electric-vehicle battery producers could
help domestic companies to gain scale in strategic sectors. In contrast, broad tariffs on
basic materials such as aluminium mainly result in higher costs across manufacturing
supply chains.
For businesses seeking to plan ahead, the lesson is straightforward: what matters most is
where new tariffs hit their income statements. Tariffs on final goods mainly affect revenue
through higher prices or units sold. But tariffs on inputs directly inflate the cost side,
squeezing margins and often forcing harder choices about moving production.
Modern manufacturing involves complex international supply chains that tariffs can easily
disrupt. The iPhone is not just “made in China”, but represents a global production
network that includes American innovation and Asian manufacturing. Policymakers need
to update their thinking accordingly.
Copyright The Financial Times Limited 2024. All rights reserved.
