Work & Economy

Larger lesson about tariffs in a move that helped Trump but not the country

An Iowa farm.

China’s retaliatory tariff on agricultural products and food devastated U.S. farmers, particularly in the Midwest and Deep South.

8 min read

Researcher details findings on policy that failed to boost U.S. employment even as it scored political points

Promising to reduce a longstanding trade deficit with China, curb theft of U.S. intellectual property, and reclaim manufacturing jobs, then-President Donald Trump announced new tariffs on a wide range of Chinese imports in January 2018.

By at least one key set of measures, the move was a failure.

After tariffs on Chinese goods jumped from 3 percent to 12 percent, Beijing retaliated by raising tariffs as high as 25 percent on many U.S. goods, including agricultural products and food, devastating U.S. farmers, particularly in the Midwest and Deep South. The USDA estimates that the retaliatory tariffs cost the U.S. $25.7 billion in revenues between 2018 and 2019, 95 percent of the total lost to tariffs imposed by European nations and Canada.

Trump’s actions failed to produce more jobs, and in some instances even had a negative effect on employment, according to a new working paper published in the National Bureau of Economic Research. But the move was successful in one area: winning over voters to Trump and the Republican Party.

The Gazette spoke with the economist Gordon Hanson, one of the paper’s co-authors and the Peter Wertheim Professor in Urban Policy at Harvard Kennedy School, about the findings. Hanson studies the impact of globalization on labor markets and helped originate the concept of “China Shock” to describe the huge loss of American jobs in places directly hit by a spike in imports from China in the 2000s. The interview has been edited for clarity and length.

The new tariffs combined with farm subsidies in the South and Midwest did not bring back jobs as President Trump had promised. Even separately, U.S. import tariffs had no positive effect on employment and China’s retaliatory tariffs had a negative effect. What happened?

In the 1990s and 2000s, U.S. industries competing with China were hit by an avalanche of Chinese products arriving on the world market, which led to factory closures, job loss, and in many cases decades of hardship in U.S. regions that were home to those factories and jobs. When the U.S. put tariffs on Chinese imports, it was hitting the heart of what we were buying from China. The expectation was we’re going to reverse that job loss. That didn’t happen for three reasons.

“If we want to find policies that could help improve economic opportunities for less-educated workers, import tariffs should not be at the top of the list.”

Gordon Hanson.
Gordon Hanson

One is that when you raise tariffs, there’s no guarantee that you’re going to reduce the value of imports; you might just increase prices instead. Once U.S. tariffs were in place, we saw U.S. firms expanding sales of goods that were competing with Chinese imports. But the increase in sales was largely a result of higher prices and not greater quantities. The absence of a strong U.S. output response to tariffs on Chinese imports meant that the extra trade protection didn’t translate into higher employment.

Reason two is that when we increase import tariffs on China, U.S. consumers have the option to purchase those goods from other countries. The trade war led to a diversion of U.S. imports from China to U.S. imports from Vietnam, especially, as well as other countries in South and Southeast Asia.

A third reason is that the types of jobs that the U.S. lost to import competition from China in the 1990s and 2000s are quite different from the types of jobs that would be created if those same industries were to expand operations today. The jobs that were lost were in factories built in the 1960s and 1970s, which used older vintages of technology that were highly labor-intensive. Modern technology in those same industries has replaced labor with capital, meaning that compared with the past, every extra dollar of output you produce requires fewer workers. So, the potential employment gains from new tariffs were much smaller than the employment losses from earlier import competition. Combining those three things, the result was not much positive employment impact of U.S. tariffs on China at all.

Now, what about the impact of China’s tariffs on U.S. goods? Because U.S. tariffs on Chinese goods and China’s retaliatory tariffs on U.S. goods hit different industries, we can isolate how U.S. barriers on Chinese manufacturing imports affected U.S. regions that specialize in producing these goods and how Chinese barriers on U.S. farm imports affected U.S. regions that specialize in agriculture. For reasons we don’t fully understand, higher tariffs in China didn’t divert U.S. exports of farm products to other countries. The result was simply a decline in U.S. farm exports, farm jobs, and jobs in farm regions.

If they didn’t work, why has the Biden administration kept them in place?

I think they understand that U.S. tariffs on Chinese imports are politically popular. If they were to reverse Trump’s trade policy, they’d be seen as trying to restore the era of hyper-globalization which preceded Trump and during which many American workers feel like they lost out. It would have been a political blunder.

The trade war was successful in one respect — boosting support for Trump and the Republican Party. Why is that?

There are a couple of potential answers to that question, and I don’t know that we can select among them with a lot of confidence right now. One is that voters were simply naive. The Trump administration chose a policy action which on its surface seemed like it would be effective, and the public just believed them without understanding the complexities of global commerce. A second possibility is that what the public was supporting was not necessarily the narrow action of impeding U.S. imports from China, but a broader effort of trying to reverse the wave of globalization that took place over the past couple of decades. If the public supports making America more closed off to the rest of the world, and more dependent on ourselves, then blocking Chinese imports would be one step in the process.

Jobs didn’t materialize and yet, people in the hardest-hit areas were still pleased with the trade war outcome. Is that consistent with previous U.S. trade wars?

As with much of what the Trump administration did, we don’t have a lot of precedent. The U.S. has been liberalizing trade steadily and, at times, aggressively since World War II. We built a global trading system that was based on dismantling the tariffs that had arisen after the Great Depression. Since the late 1940s, most of the instances in which we raised trade barriers were efforts to target narrowly defined industries — apparel in the 1960s, automobiles and steel in the 1980s, tires and auto parts in the 1990s. Many of those targeted trade barriers were not in place for very long. The Trump administration enacted the first broad-based tariffs we had seen in a couple of generations. The last big increase in U.S. tariffs were the Smoot-Hawley tariffs of the 1930s. So, what the Trump administration did was a big deal. And it’s a bigger deal, in retrospect, because of the apparent permanence of those tariff increases.

What can lawmakers, policy advisers, or voters take away from this research?

I think there’s agreement among both Democrats and Republicans that the loss of manufacturing jobs has hurt traditional industrial regions quite a bit and that the U.S. economy has performed poorly in creating good jobs for workers without a college education. It’s been a very tough three or four decades for folks without a college degree. If we want to find policies that could help improve economic opportunities for less-educated workers, import tariffs should not be at the top of the list.

The reason for this is pretty simple. Tariffs are poorly targeted policy instruments for helping workers. They don’t target manufacturing employment, they target imports. And impacts on jobs are several steps removed from impacts on inflows of imported goods. I am all in favor of thinking hard about policies that can help working-class Americans in terms of job quality and job growth, particularly in the regions that have been hurt by the decline of manufacturing. But trade policy is unlikely to be an effective policy in trying to accomplish those goals.