Anachronism and Political Performance Define U.S. Tariff Policy

On April 10, after a week of plummeting stock markets and a day of declining demand for U.S. bonds, former U.S. treasury secretary Janet Yellen made an uncharacteristically direct assertion. President Donald Trump’s tariffs, she said, “are the worst self-inflicted wound that I have ever seen an administration impose on a well-functioning economy.” She characterized the U.S. president as having “taken a wrecking ball” to the American economy.

As the U.S. economy tips into a catastrophic downturn that drags global markets with it, many people ask: why? Why has the Trump administration enacted the most sweeping tariff program the world has ever seen, affecting far more commerce than even the notorious Smoot-Hawley Tariff Act of 1930 which plunged the United States deeper into the Great Depression?

Three justifications have been advanced—although these explanations are rife with contradictions. Credit goes to economist Paul Krugman and journalist Ezra Klein for articulating these ideas so clearly in a recent interview, which has helped crystalize my thinking on the matter. 

The first justification is that tariffs are needed to restore manufacturing to the United States. In recent decades, U.S. manufacturing capacity has dramatically contracted and jobs have been lost as businesses moved production offshore. Trade liberalization with China has indeed been a profound driver of this transition. But tariffs are a poor policy tool for enticing manufacturing back to America. Stability of incentives over several years is required for firms to consider relocating their factories. Broad industrial policy initiatives, implemented by legislation and backed by stable funding—like the 2022 CHIPS and Science Act—are a more promising pathway to onshoring. In the meantime, production in the United States may suffer, for example, as automakers absorb the costs of tariffs on materials and components. 

A second justification is that tariffs are a diplomatic lever. By enacting trade barriers that could devastate another country’s exports to the United States, the president aims to extract policy concessions from foreign governments. This justification was publicized with respect to Canada and Mexico’s enforcement efforts against fentanyl and illicit drug trafficking. Such a strategy, however, hinges on the assumption that tariffs will be quickly removed once the diplomatic goals are met. Rapidly switching tariffs on and off may be a useful maneuver in international negotiations, but the resulting instability inherently undermines the industrialization policy justification for tariffs.

Third, President Trump has declared that his tariffs are raising billions of dollars of revenue, a claim that could bear out in upcoming months. This could be a persuasive rationale—at least for business interests—if it means that corporate taxes could remain low and the federal deficit could be reduced. Yet the reality of who pays tariffs undermines this logic—the costs are partly passed onto consumers in the form of higher prices. Consumers typically respond by belt-tightening, shifting consumption to domestic equivalents, or both. This means, above some turning point, tariff revenue would likely fall. The cost of tariffs are also partly shouldered by domestic firms. This expectation is behind the precipitous decline of the stock market in the last week. As input costs rise and firms see fewer pathways to growth, those firms may contract their operations. And as firms anticipate slowdowns, they may be even less willing to make the long-term investments in new factories. The efficacy of tariffs, as gauged on the first or second points, as well as the consumer and business responses to increased prices, mean that tariffs are a poor tool for funding the federal government. 

Given these numerous contradictions, economists, business leaders, foreign politicians, and the general public have expressed bewilderment at U.S. policy. There’s a striking consistency between President Trump’s discussion of tariffs and the historical mercantilist approach, which held that: 

1. A country’s economic strength is a critical component of national power, 
2. Trade is to be valued for exports, but governments should discourage imports whenever possible, and 
3. Some forms of economic activity—like manufacturing—are more valuable than others, such as agriculture. 

Mercantilism started to fall out of favor around 1817 when British economist David Ricardo developed the theory of comparative advantage, which holds that trade is a positive-sum game when countries can purchase goods that others can produce relatively efficiently and specialize in exporting goods which they can produce relatively efficiently.

As for the ultimate motivation behind U.S. policy, it may be that the simplest explanation is the best. President Trump just likes tariffs, plain and simple, as he has stated time and again, since at least 1987. He sometimes describes tariffs as a tax on other countries. This is incorrect of course: tariffs are typically paid by importing firms and those costs are partly passed along to consumers in the form of higher prices. 

Nonetheless, this fondness for tariffs may be grounded in a distorted narrative to which the president and his advisors have grown attached. Tariffs are a politically appealing way to tackle international grievances. They can be enacted, adjusted, and removed without Congressional support; they are flashy and easy to report to media; they are performative in their appearance of support to American workers left behind in a globalized economy; and they have rapid effects on foreign leaders whom the president might want to bring to the bargaining table.

Many observers have noted that President Trump is a skilled showman and a media virtuoso, which is a tremendous political advantage. But by playing a political game and by stubbornly holding onto an outdated 18th century ideology, President Trump may be dragging the global economy into a costly, spiraling trade war, the likes of which we have not seen in a century.

Lauren Peritz is an associate professor of political science at the University of California, Davis.

Thumbnail credit: Evan El-Amin / Shutterstock.com