Publications /
Opinion

Back
Trump Tariffs Have Hurt U.S. Manufacturing Jobs
Authors
January 5, 2020

The hike in tariffs imposed by the United States against its major trading partners since early 2018 has been unprecedented in recent history. President Trump alluded to, among others, the goal of revitalizing jobs in the country’s manufacturing industry by protecting it from unfair trade practices of other countries, particularly China. However, according to a study by two Federal Reserve Bank staff – Aaron Flaaen and Justin Pierce – released last December 23, the effect so far has been just the opposite, i.e. a reduction in U.S. manufacturing employment!

Tariff escalation – and retaliation from those affected – from 2018 onwards took place in three stages. In February of that year, surcharges were imposed on imports of washing machines and solar panels, followed in March by others affecting steel and aluminum imports. China, the European Union, Canada, and Mexico responded with retaliation on U.S. exports. A third moment came with the sequence of tariffs on imports from China announced starting in April, always accompanied by Chinese retaliatory reactions against U.S. exports.
Chart 1, taken from the Fed study, depicts the escalation of U.S. import tariffs and retaliations since 2018, including the latest rounds currently suspended after the announcement of an incoming “phase one” U.S.-China trade deal.

PCNS

In addition to the Trump administration’s references to U.S. security issues and trade deficit reduction targets, with an emphasis on bilateral deficit cases, the resumption of domestic manufacturing employment had emerged as a promise since the electoral process. Tariffs would provide the opportunity for local production processes to take market shares occupied by foreign competitors. Higher product prices, whether imported or locally import-substituted, would be an acceptable and limited welfare cost offset by increases in manufacturing employment levels.
However, two other tariff impacts should also be considered. The imposition of tariffs on inputs and intermediate products leads to cost increases for those who use them, damaging their competitiveness domestically and externally. In addition, retaliation also affects the ability of domestic production to compete in the corresponding overseas markets.
Flaaen and Pierce estimated the weight of these effects at a very detailed sector level, namely the gain of local market shares against the burden of rising intermediate costs and overseas losses. The study comes to figures showing that the burden has outweighed the gains, with the positive contribution on employment driven by tariff protection being more than negatively offset by the impacts of rising input costs and retaliatory measures. In addition, it has led to increases in U.S. wholesale price levels.
The characteristics of industrial production as value chains integrating fragmented and geographically dispersed activities, particularly since the 1980s, explain why tariffs on specific segments end up negatively affecting a much broader set of economic activities. In addition, they tend to frustrate tariffs that are specifically set on countries of origin, on a bilateral basis: for example, much of Chinese production has moved to Vietnam, Thailand and other countries rather than to the U.S.
Is the negative effect temporary, lasting only while local production does not adjust to the new context via new investments? It should be noted that adaptation can also reinforce the negative impact sides on jobs. Therefore, there is no reason to believe that the immediate, short-term consequences of the tariff escalation would wind down over time.
The Fed study of the effects of tariff escalation did not even encompass the broader negative indirect effects, namely the depressive effect on manufacturing investments and economic growth in the U.S. and abroad generated by trade policy uncertainty, affecting particularly capital goods industries and world trade. Such an impact on investments was one of the major factors explaining the global economic growth in 2019 as the lowest since the global financial crisis.
But hasn’t the U.S. GDP and employment performance remained favorable since the onset of the tariff escalation? That has occurred for other reasons, such as the fiscal stimulus provided by the tax reform of the early Trump administration, the pivotal turn of the Fed’s monetary policy, and the buoyancy of domestic consumption and services. It would have been otherwise if it had depended on the manufacturing industry – Chart 2 – and trade policy of the Trump administration.

PCNS

Finally, it is worth remembering the mistake of finding it possible to shrink the U.S. current account deficit via trade measures upon countries with which it has negative bilateral balances. The current account deficit reflects the difference between domestic “absorption” (consumption and investment) and local production. In the absence of miraculous increases of the latter, the reduction of the current deficit would only occur with recession and falling domestic wages, just the opposite of the promise.

RELATED CONTENT

  • December 13, 2018
    Moderator John Yearwood, Executive Board, International Press Institute Speakers Uri Dadush, Senior Fellow, Policy Center for the New South Anabel Gonzalez, Former Minister of Foreign Trade, Republic of Costa Rica Ricardo Meléndez-Ortiz, Founder and Chief Executive, International Centre...
  • December 13, 2018
    Moderator John Yearwood, Executive Board, International Press Institute Speakers Uri Dadush, Senior Fellow, Policy Center for the New South Anabel Gonzalez, Former Minister of Foreign Trade, Republic of Costa Rica Ricardo Meléndez-Ortiz, Founder and Chief Executive, International Centre...
  • Authors
    Axel Berger
    Andreas Freytag
    Simon J. Evenett
    Christian von Haldenwang
    Ricardo Meléndez-Ortiz
    Raul Ochoa
    Agustin Redonda
    Karl P. Sauvant
    November 26, 2018
    *The recommendations put forth below have been published, both print and online, in the Financial Times.  The leaders of the G20 will meet on 30 November and 1 December in Buenos Aires for their annual summit. They need to acknowledge that the last two years have been characterized by strong headwinds for the world economy. This time, however, it is not a mixture of poor macroeconomic policies and bad business decisions – as in 2008 when they met in Washington for their first summi ...
  • Authors
    Sabine Cessou
    October 8, 2018
    « Amérique latine, crises et sorties de crises », telle était la première des deux thématiques des 6èmes Dialogues stratégiques, organisés le 4 avril par HEC Paris (Centre de géopolitique) et OCP Policy Center. Un tableau mitigé a été dressé, avec des signes de reprise et une croissance supérieure à 2 % qui n’empêchent pas des situations de crise comme au Brésil, au Nicaragua ou au Vénézuela. Crise d’un modèle d’oligarchies anti-capitalistes Au Vénézuela, la corruption paraît si e ...
  • Authors
    Anabel Gonzalez
    August 30, 2018
    The agreement establishing the African Continental Free Trade Area (AfCFTA) is a framework to create a free trade area across the region, bringing together the 55 members of the African Union into a continental market with a cumulative Gross Domestic Product (GDP) exceeding US$2.2 trillion and a total population of over one billion people. When concluded and successfully implemented, it will become the largest free trade area in the world in terms of membership, opening up significa ...
  • August 1, 2018
    “This article has been originally published in 'Morocco in Focus 2018,' the magazine of the Moroccan Embassy in New Delhi, India on the occasion of the Morocco National Day 2018.” Introduction In an article published last year, the author stressed the role of partnership between Morocco and India for the inclusive growth of small farmers. There is no doubt that agriculture remains a major instrument for human development both in India and in Africa. Several international reports h ...
  • Authors
    May 31, 2018
    Salutations Thank you for the invitation to address the 2018 Africa Think Tank Summit  in this memorable city of Rabat. I thank in particular, the OCP Policy Center and the Think Tank and Civil Societies Program of the University of Pennsylvania for hosting the Summit with the theme “Deepening Expertise and Enhancing Sustainability: Insight into Contemporary Challenges Facing African Think Tanks”. Rabat, Morocco has been the sprouting ground of numerous agenda-setting instruments ...
  • May 21, 2018
    Le partenariat Afrique Europe fait son chemin depuis l'adoption de la stratégie commune Afrique-UE et la négociation complexe des Accords de Partenariat Economiques. L’évaluation des volets commercial, financier et humain de ces relations multidimensionnelles fait ressortir la persistance de grands déséquilibres dans les échanges commerciaux de biens et services, des tensions dans la gestion de la mobilité humaine et des dysfonctionnements dans les mécanismes institutionnels de part ...
  • Authors
    Bouchra Rahmouni
    April 5, 2018
    Depuis la création de l’OMC, l’économie mondiale a enregistré deux évolutions majeures : la mise en place des chaînes de valeur globales et la conclusion de méga-accords commerciaux régionaux (Accord transatlantique Europe-États-Unis, Accord de Partenariat Transpacifique entre l’Amérique du Nord et une dizaine de pays asiatiques, partenariat unique total entre l’ASEAN, la Chine, le Japon et la Corée du Sud, plus la partie océanique). Le commerce intra-régional n’est plus une simple ...
  • Authors
    Mouhamadou Moustapha Ly
    March 28, 2018
    Ce mardi 21 Mars 2018, quarante-quatre chefs d’Etat et de gouvernement réunis à Kigali (Rwanda) signaient l’accord de création de la zone de libre échange continentale (Continental Free Trade Area, CFTA). Cet accord historique marque la volonté des Etats africains d’aller vers la mise en place à l’échelle du continent d’un marché commun où les échanges de biens et de services seraient libres et la circulation des capitaux et des personnes sans contraintes. Tels que précisés dans la ...