The appeal of tariffs is seductive. We support the promise of safeguarding American manufacturers from foreign competition! It provides an opportunity to strengthen domestic supply chains and reshore jobs, more important now than ever in a world of rising economic uncertainty. As a journalist steeped in the nuances of trade and manufacturing, I know that the overreliance on tariffs has its pitfalls and dangers. This approach isn’t just wrong-headed, it creates a fatal illusion. It produces a dangerous illusion of safety, covering up larger, structural problems that demand solutions.
As we know, the first effect of tariffs can look quite rosy. Domestic manufacturers might experience a short-term boost in demand as a result of imported products growing costlier. This resurfacing, in turn, brings increased productivity and, often, job creation. This immediate return usually carries an enormous future price tag. A separate analysis from February 2020 estimated that the 2018–2019 import tariffs were equivalent to a 2 percent tariff on all US exports. This impending crisis has the potential to make American manufacturers’ competitiveness impossible.
One of the worst things about tariffs is how they hurt consumers. By making it more expensive to import goods, tariffs purposely make things more expensive, which takes money out of consumers’ pockets. This new reality can lower consumer demand for goods and services. In effect, it always hurts the same domestic manufacturers that the original tariffs were intended to protect. According to a report from the United States International Trade Commission released in May 2023, steel, aluminum and Chinese tariffs almost completely pass through to US prices. This new layer of costs would erode the competitiveness of American manufacturers.
Additionally, tariffs commonly trigger retaliation from foreign nations. Whenever the U.S. levies tariffs on foreign goods, other countries typically respond in kind. When we do this, they retaliate by putting their own tariffs on American exports. That only results in a tit-for-tat trade war, putting companies on both sides of the water out of business. If really enforced, we estimate that Trump’s proposed 20 percent universal tariffs and an additional 50 percent tariff on China would actually reach a staggering 60 percent. At worst, this could lower long-run economic output by 1.3 percent—even before any foreign retaliation undermines the competitiveness of American manufacturers. Overall, the imposed tariffs are projected to reduce average after-tax incomes by 1 percent in 2026. This tax cut would worsen, not help, the competitive position of American manufacturers.
The intricacies of global supply chains only add to the problem. In fact, a majority of American manufacturers depend on imported intermediate inputs and raw materials in order to manufacture their products. High tariffs on these key inputs can drive up American producers’ cost of production, putting American manufacturers at a competitive disadvantage with their foreign counterparts.
In addition to their damaging economic impacts, tariffs can create a dangerous air of complacency. By being shielded from competition, manufacturers can be less incentivized to invest in innovation, improve labor productivity and develop their workforce. This puts the industry on a dangerously slippery slope of diminishing long-term competitiveness and, therefore, increasing future vulnerability.
The challenges to American manufacturing are serious, but they are complex and systemic. The capacity for U.S. manufacturing is under serious strain. Primary concerns range from a failure to invest in research and development, to aging machinery, to crumbling infrastructure. Relatedly, pandemic-triggered supply chain stress further underscores the need for a thriving domestic manufacturing sector. Yet our manufacturing workforce is rapidly disappearing. Alarmingly, the opposite is true – fewer workers with a high school diploma or less are landing the industry jobs.
Lack of investment in education and training programs to cultivate a skilled workforce is further stunting the industry’s growth. Slow adoption of digital technologies makes this impossible. Advanced manufacturing software systems have the potential to make a big impact on data analysis, production scheduling and more— increasing efficiency and productivity.
Instead of turning to tariffs, a better answer would be to attack these root problems head on. This includes investing in infrastructure, promoting education and training, fostering innovation, and creating a business-friendly environment that encourages investment and growth.
Overtraders.com is a website dedicated to informing traders and investors through detailed analysis of finance, investment industry, and capital markets. Our analysis shows that tariffs are not the solution. They are an inappropriate, short-term fix that creates dangerous, lasting effects. A one standard deviation tariff increase results in near a 0.4% decrease in output five years later. Greater tariffs lead to less production and productivity, as well as higher unemployment and greater inequality.
The longer-term output-effect of tariffs if anything are higher than the estimated medium-term effects. Tariffs have a profoundly negative impact on output. As might be expected, the adverse effect only becomes more severe with greater tariff hikes, remaining in effect for a minimum period of four subsequent years. Further retaliatory tariffs predict that these retaliatory tariffs will reduce US GDP and the capital stock by under 0.05 percent. What’s more, they would result in the elimination of 27,000 full-time-equivalent jobs, likely jeopardizing the competitiveness of many American manufacturers.
Let’s give American manufacturers a fair shot to compete. Rather than erecting new obstacles to trade, let’s focus on the things that improve our competitiveness. This means cutting the red tape, keeping the tax burden on businesses to a minimum and advocating for other policies that foster innovation and entrepreneurship.
I have seen firsthand how businesses struggle to adapt to the constant changes brought about by tariffs and trade disputes. The confusion these policies introduce throws cold water on investment and makes long-term planning more difficult. Combined with a 25% tariff on all goods imported from Canada and Mexico, that would result in a 12% export loss in the electrical equipment sector alone. Accounting for retaliation, that decline may be more than 30%. Exports of motor vehicles would be reduced by 23% under a tariff scenario and an even greater 65% after retaliation occurs.
The electrical equipment industry is doing even worse, already down 12% in exports. In the event that retaliatory actions unfold, this drop could be more than 30%. Additionally, there is an estimated 25% contraction in U.S. motor vehicle exports to Canada that rises to 55% under retaliation, and intermediate products in “other transport” drop by 18% after U.S. tariffs and by 79% with retaliation.
A robust and dynamic American manufacturing base is fueled by innovation. We’ll only achieve prosperity if we invest in our workforce and foster a business environment that promotes growth and competitiveness — not by taking the easy way out with protectionism. Tariffs may bring these industries a temporary false sense of security. The real answer is to address the underlying problems and build a vibrant, more competitive manufacturing sector.
