Proposals for new tariffs face a lot of criticism these days, from the media, from economists, and from foreign policy types. Part of the reason is that it’s Donald Trump making the proposals and many in those groups don’t like Trump. But the fact is that tariffs can work to build our economy. They have worked before and they have worked recently as well.
Tariffs, i.e. protection from imports, were an integral part of America’s rise to modern prosperity in the 19th century. In the 1860s, we imposed heavy tariffs on imported iron and steel. According to economist Frank Taussig, British steel rails sold in the U.S. at that time for $31 a ton, about half the U.S. price of $61 a ton. Britain was the world leader in steel technology and production. However, a U.S. tariff of $28 a ton reduced imports and enabled U.S. producers to catch up. After 1879, America’s Carnegie Steel rose to industry leadership through aggressive adoption of the most modern technology and production methods. By 1897, steel in the U.S. was down to $19 a ton, $2 cheaper than British steel. Despite the fact that Carnegie Steel paid higher wages than its British competitors, Carnegie Steel was globally competitive and began exporting steel to Britain. Protection enabled the U.S. industry to catch up and surpass the British industry, creating thousands of U.S. jobs along the way.
We know from our own history that development of a large manufacturing base has been critical to U.S. prosperity. Technological leadership is essential; but it is not enough on its own to raise living standards for all 160 million American workers. The sag in living standards for the bottom 60% of households over the last 50 years is closely related to deindustrialization. Manufacturing has the unique characteristic of paying good middle-class wages to workers without college degrees. It’s why politicians across the ideological spectrum — from Senator Marco Rubio to Vice President Kamala Harris — acknowledge that a nation’s industrial strength is key to its economic success and strength.
Tariffs can play an important role in rebuilding our manufacturing base, if they are done right. We said in a study published in July that so-called “universal” tariffs of 10% on all U.S. imports would grow our economy, adding 2.86% to gross domestic product and 5.7% or $4,300 to real (inflation-adjusted) average household income. Those results are valid and more accurate than other studies that make unrealistic assumptions about how our economy works.
But a better approach would be to target tariffs on the sectors where they could be most effective. Here are five rules which should guide decisions on tariffs (and most other trade or industrial policies) as the next president, whoever he or she may be, considers the global economic landscape next year.
Rule No. 1. Tariffs must stimulate domestic production
The purpose of tariffs is to rebuild domestic production. That’s it. Everything else is the icing on the cake and to some extent a distraction. Yes, tariffs on China can help us decouple from China. But China will find a way around those tariffs, as it is actively doing today. And the American people will become dissatisfied with tariffs if they don’t see results. Business will become dissatisfied if they cannot make profits under a tariffed regime. Since imports hold a large share of U.S. consumption in so many sectors, there are many opportunities to target tariffs in a fashion that will stimulate domestic production, while creating jobs, investment, revenue and profits along the way.
Of all the Trump tariffs of 2018-2019, the steel tariffs are the best example of this. The 25% steel tariffs led to an increase in domestic steel output and a rise in domestic market share as imports fell from over 30% of the market to 21%. More significantly, in the wake of the tariffs, U.S. steel companies opened around 15 new mills and steelmaking facilities, at locations ranging from Florida to Texas to Arizona. Steel Dynamics’ new Sinton, Texas facility will employ 3,000 when it is fully operational. It is already producing steel, with some 600 employees working there. The knock-on local economic benefits are evident. Local developers are planning to build some 400 new houses in the Sinton area to accommodate steelworkers and employees of the supplier firms setting up in the area According to the company’s SEC filings, the median pay for a Steel Dynamics employee last year was $119,460,
It’s a similar story for Nucor, the largest U.S. steelmaker, which has opened facilities in Florida, Arkansas, Kentucky, is now building a steel mill in West Virginia, and is currently evaluating locations for a new mill in the Pacific Northwest. According to local news reports, the West Virginia facility employs 2,000 now in its construction phase. When the mill is up and running in 2025, it will employ several hundred steelworkers. Nucor’s median pay last year was $105,755.
A U.S. International Trade Commission (USITC) report from 2023 looked at 12 industrial categories where the Trump tariffs applied and found that by 2021 domestic production increased in all of them, ranging from 1.2% for computer equipment up to 7.5% for household furniture. All 12 industries together accounted for $931 billion in output in 2021 and production increased an average of 4.1%. I summarized the study’s results here.
A production increase of 4.1% is significant but insufficient for a set of tariffs that were mostly in the 15%-25% range. The reason the result was not stronger is that most of the tariffs studied were limited to China. Since the U.S. has a cost disadvantage against most of our major competitors (as we did in the 1860s), the tariffs should be global. But they should be monitored carefully to ensure that they are in fact leading to increases in domestic production.
Rule No. 2. Target specific sectors
The need to show actual results means that specific sectors should be targeted, including those sectors most likely to respond to tariffs by moving production here, creating jobs along the way. Two sectors that responded promptly and successfully to the 2018-2019 tariffs were washing machines and furniture. We have in the U.S. today two washing machine factories (Samsung and LG Electronics) that we did not have in 2018. In both sectors, the weight and size of the products made them awkward and expensive to ship across the Pacific. Manufacturers are always aware of the costs and logistics of their production process, and always asking themselves how they could do it better, cheaper, faster, and more resiliently. With furniture and washing machines, it didn’t take much to push producers into re-shoring some portion of their production.
But those are relatively small sectors with mostly local impacts. We should target large sectors, for a tangible impact on the national economy. Another important factor in rebuilding domestic industry is national security. We cannot continue to rely on China for large portions of our generic pharmaceuticals, or rare earth minerals, or electronic components, or computers. Addressing those dependencies makes sense for security reasons and also for winning support among voters and members of Congress. Tariffs can be a key part of re-shoring and rebuilding each of those sectors.
The impact on price is another important factor to consider. There is an awful lot of cant and nonsense thrown about on tariffs and prices. The Trump tariffs of 2018-2019 had zero measurable impact on consumer prices in the period up to the beginning of the Covid pandemic in February 2020. The broad-based inflation that took off in 2021 was caused not by tariffs but by the combination of poor fiscal/monetary policy and shortages due to international supply bottlenecks. The USITC study referenced above found that price increases in the U.S. market in the tariffed products averaged between 10% and 20% of the headline value of the tariff. In other words, a 25% tariff led to price increases in the U.S. of about 2.5% in that product segment. The effect on the U.S. market was small because imports account for a minority of the market in most segments, and U.S. producers did not match the price increase in imports. Instead the U.S. price edged up slightly.
The fundamental reason why the corporate sector, Wall Street, and academic economists expend so much energy tearing their hair out about tariffs and prices goes back to the core reason the U.S. adopted globalization back in the 1980s and 1990s. By then the country was reaching the end of a huge century-long growth cycle. As growth stagnated, large corporations looked around desperately for the next leg of growth. What they found was that by offshoring production to low-wage and low-cost countries, they could realize a new long-term cycle of rising profits. (Full disclosure: as a manager at Nortel Networks in 1998-2000, I was involved in our plan to offshore some $10B of production and some 40,000 jobs to Asia.) This has indeed worked out as planned for U.S. industry, with profits rising as a share of GDP, by a huge six percentage points, according to Mario Draghi. Cutting U.S. companies off from low-cost foreign labor could throw that process into reverse and dramatically reduce profitability. The fact that voters now recognize the antagonism between the interests of large corporations and the average worker is what the media calls “populism.”
Nevertheless, targeting specific sectors for re-shoring and rebuilding will limit price increases and ensure that the benefits in terms of security, resiliency, and domestic growth of jobs and prosperity become readily apparent.
Rule No. 3. Industry must believe that the tariffs will work
In every major sector, U.S. industry is controlled by a handful of large corporations. They can determine whether almost any government policy will succeed…or fail. Our legal system, in which any policy can be repeatedly challenged in the courts on a variety of pretexts, makes it hard for a new policy to succeed.
For tariffs (or any industrial policy aimed at re-shoring industry) to succeed, the private sector must invest in U.S. plant and equipment, at scale, and quickly. For companies to do this, they must believe that the policy will persist and that it will work. Conflicting messages from Washington, such as that some tariffs are designed to “punish” an enemy and will be rescinded as soon as he changes his behavior, or that a policy is contingent on certain hiring practices, dilute the message and allow corporate managements to think they can bluff their way around the policy.
Targets are the most effective way to communicate the government’s goal. A simple, powerful, ambitious target is best. For example, the government could say that the purpose of the tariffs is to achieve a profitable 50% share in each targeted product sector within three or five years.An even better option is to build incentives into the program so the private companies are incentivized to cooperate in reaching the target.
Rule No. 4. Target complete supply chains
The U.S. has lost a critical mass of capacity in many manufacturing sectors. The importance of logistics is often overlooked, especially by economists whose models assume that price can solve all problems. If all the components of a product are made in Asia, it is almost inevitable that the final product will be assembled in Asia. For the U.S. to grow its automotive business, it must also grow its parts business. To justify final automotive assembly in the U.S., the engine or motor, the plastic, glass, and the battery must be easily available and made here too in significant volume.
This is also critical from a security perspective. Renewable energy equipment like solar panels are a prime candidate for this policy (and they are already tariffed, albeit ineffectively). It does little good for us to manufacture the panels here if the upstream components (solar wafers) are completely monopolized by a bad actor like China.
In some industries, a downstream U.S. market is important. For intermediate products like steel and aluminum, U.S. producers must have a U.S. market. The best way to ensure continued growth of those metals, as well as many other intermediate products, is to pursue similar pro-manufacturing policies for their customers such as the auto, appliance, and aerospace industry. Tariffs should start from the upstream components and materials and apply equally, and perhaps at a higher level, to the downstream consumer products.
Rule No. 5. Tariffs can’t do everything
One of the most common criticisms of tariffs heard in the U.S. today is that tariffs have failed topreserve jobs. Or save a specific company. Or solve other broad problems. Tariffs, like any other industrial policy, can only do certain things. They can revive, re-shore, and rebuild specific industries, if they are pursued correctly and persistently. They cannot, and should not, aim to preserve jobs. Nothing can change the fact that the number of jobs in automobile assembly will shrink over time, due to automation and the shift to EVs. In most industries, productivity increases over time, meaning that less manpower is required for each dollar of output. The goal of tariffs is to re-shore enough industries so that, as jobs are lost in automotive for example,, they are gained in electronics or medical devices or aerospace.
It is a related fact that the Midwest, from Pennsylvania to Wisconsin, has a set of manufacturing businesses that will continue to shrink their workforces. Many of the outdated, inefficient facilities are located in that area and much of the industrial growth will take place in the southern half of the country. Tariffs can slow down the decline but will likely not reverse it. Other regional policies will be necessary for those regions. But tariffs will help rebuild growth industries and Americans, who are never loathe to move for a better job, will over time migrate to those new jobs and regions.
Further, the U.S. has many badly managed large companies, and we have no solution for how to rejuvenate them. Companies like U.S. Steel or Boeing, and perhaps even Intel and General Motors, are victims of a too-successful past. No tariff or industrial policy will turn an obsolete corporate dinosaur around. The solution of the “activist investor” is that of the undertaker: kill, dismember, and sell the parts for cash. We need a superior solution for these dinosaurs, who have much talent, knowledge and potential buried deep within layers of stultifying bureaucracy.
The bottom line is that economic growth has always been national. From the Middle Ages, when Flanders (modern-day Belgium and Netherlands) first established its European leadership in textiles, through the British Industrial Revolution, and up to the U.S. century (1870-1970), economic success stories have always been national success stories. Globalization was a strategy supported by many in Washington on behalf of the interests of the large multinationals on one side and globalist foreign policy types on the other. By returning to a focus on national economic growth, we can rebuild America’s industrial strength, put living standards back on the growth path they enjoyed half a century ago, and re-establish America’s place in the world.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
Economic View: Tariffs Done Right Can Rebuild Our Economy
Proposals for new tariffs face a lot of criticism these days, from the media, from economists, and from foreign policy types. Part of the reason is that it’s Donald Trump making the proposals and many in those groups don’t like Trump. But the fact is that tariffs can work to build our economy. They have worked before and they have worked recently as well.
Tariffs, i.e. protection from imports, were an integral part of America’s rise to modern prosperity in the 19th century. In the 1860s, we imposed heavy tariffs on imported iron and steel. According to economist Frank Taussig, British steel rails sold in the U.S. at that time for $31 a ton, about half the U.S. price of $61 a ton. Britain was the world leader in steel technology and production. However, a U.S. tariff of $28 a ton reduced imports and enabled U.S. producers to catch up. After 1879, America’s Carnegie Steel rose to industry leadership through aggressive adoption of the most modern technology and production methods. By 1897, steel in the U.S. was down to $19 a ton, $2 cheaper than British steel. Despite the fact that Carnegie Steel paid higher wages than its British competitors, Carnegie Steel was globally competitive and began exporting steel to Britain. Protection enabled the U.S. industry to catch up and surpass the British industry, creating thousands of U.S. jobs along the way.
We know from our own history that development of a large manufacturing base has been critical to U.S. prosperity. Technological leadership is essential; but it is not enough on its own to raise living standards for all 160 million American workers. The sag in living standards for the bottom 60% of households over the last 50 years is closely related to deindustrialization. Manufacturing has the unique characteristic of paying good middle-class wages to workers without college degrees. It’s why politicians across the ideological spectrum — from Senator Marco Rubio to Vice President Kamala Harris — acknowledge that a nation’s industrial strength is key to its economic success and strength.
Tariffs can play an important role in rebuilding our manufacturing base, if they are done right. We said in a study published in July that so-called “universal” tariffs of 10% on all U.S. imports would grow our economy, adding 2.86% to gross domestic product and 5.7% or $4,300 to real (inflation-adjusted) average household income. Those results are valid and more accurate than other studies that make unrealistic assumptions about how our economy works.
But a better approach would be to target tariffs on the sectors where they could be most effective. Here are five rules which should guide decisions on tariffs (and most other trade or industrial policies) as the next president, whoever he or she may be, considers the global economic landscape next year.
Rule No. 1. Tariffs must stimulate domestic production
The purpose of tariffs is to rebuild domestic production. That’s it. Everything else is the icing on the cake and to some extent a distraction. Yes, tariffs on China can help us decouple from China. But China will find a way around those tariffs, as it is actively doing today. And the American people will become dissatisfied with tariffs if they don’t see results. Business will become dissatisfied if they cannot make profits under a tariffed regime. Since imports hold a large share of U.S. consumption in so many sectors, there are many opportunities to target tariffs in a fashion that will stimulate domestic production, while creating jobs, investment, revenue and profits along the way.
Of all the Trump tariffs of 2018-2019, the steel tariffs are the best example of this. The 25% steel tariffs led to an increase in domestic steel output and a rise in domestic market share as imports fell from over 30% of the market to 21%. More significantly, in the wake of the tariffs, U.S. steel companies opened around 15 new mills and steelmaking facilities, at locations ranging from Florida to Texas to Arizona. Steel Dynamics’ new Sinton, Texas facility will employ 3,000 when it is fully operational. It is already producing steel, with some 600 employees working there. The knock-on local economic benefits are evident. Local developers are planning to build some 400 new houses in the Sinton area to accommodate steelworkers and employees of the supplier firms setting up in the area According to the company’s SEC filings, the median pay for a Steel Dynamics employee last year was $119,460,
It’s a similar story for Nucor, the largest U.S. steelmaker, which has opened facilities in Florida, Arkansas, Kentucky, is now building a steel mill in West Virginia, and is currently evaluating locations for a new mill in the Pacific Northwest. According to local news reports, the West Virginia facility employs 2,000 now in its construction phase. When the mill is up and running in 2025, it will employ several hundred steelworkers. Nucor’s median pay last year was $105,755.
A U.S. International Trade Commission (USITC) report from 2023 looked at 12 industrial categories where the Trump tariffs applied and found that by 2021 domestic production increased in all of them, ranging from 1.2% for computer equipment up to 7.5% for household furniture. All 12 industries together accounted for $931 billion in output in 2021 and production increased an average of 4.1%. I summarized the study’s results here.
A production increase of 4.1% is significant but insufficient for a set of tariffs that were mostly in the 15%-25% range. The reason the result was not stronger is that most of the tariffs studied were limited to China. Since the U.S. has a cost disadvantage against most of our major competitors (as we did in the 1860s), the tariffs should be global. But they should be monitored carefully to ensure that they are in fact leading to increases in domestic production.
Rule No. 2. Target specific sectors
The need to show actual results means that specific sectors should be targeted, including those sectors most likely to respond to tariffs by moving production here, creating jobs along the way. Two sectors that responded promptly and successfully to the 2018-2019 tariffs were washing machines and furniture. We have in the U.S. today two washing machine factories (Samsung and LG Electronics) that we did not have in 2018. In both sectors, the weight and size of the products made them awkward and expensive to ship across the Pacific. Manufacturers are always aware of the costs and logistics of their production process, and always asking themselves how they could do it better, cheaper, faster, and more resiliently. With furniture and washing machines, it didn’t take much to push producers into re-shoring some portion of their production.
But those are relatively small sectors with mostly local impacts. We should target large sectors, for a tangible impact on the national economy. Another important factor in rebuilding domestic industry is national security. We cannot continue to rely on China for large portions of our generic pharmaceuticals, or rare earth minerals, or electronic components, or computers. Addressing those dependencies makes sense for security reasons and also for winning support among voters and members of Congress. Tariffs can be a key part of re-shoring and rebuilding each of those sectors.
The impact on price is another important factor to consider. There is an awful lot of cant and nonsense thrown about on tariffs and prices. The Trump tariffs of 2018-2019 had zero measurable impact on consumer prices in the period up to the beginning of the Covid pandemic in February 2020. The broad-based inflation that took off in 2021 was caused not by tariffs but by the combination of poor fiscal/monetary policy and shortages due to international supply bottlenecks. The USITC study referenced above found that price increases in the U.S. market in the tariffed products averaged between 10% and 20% of the headline value of the tariff. In other words, a 25% tariff led to price increases in the U.S. of about 2.5% in that product segment. The effect on the U.S. market was small because imports account for a minority of the market in most segments, and U.S. producers did not match the price increase in imports. Instead the U.S. price edged up slightly.
The fundamental reason why the corporate sector, Wall Street, and academic economists expend so much energy tearing their hair out about tariffs and prices goes back to the core reason the U.S. adopted globalization back in the 1980s and 1990s. By then the country was reaching the end of a huge century-long growth cycle. As growth stagnated, large corporations looked around desperately for the next leg of growth. What they found was that by offshoring production to low-wage and low-cost countries, they could realize a new long-term cycle of rising profits. (Full disclosure: as a manager at Nortel Networks in 1998-2000, I was involved in our plan to offshore some $10B of production and some 40,000 jobs to Asia.) This has indeed worked out as planned for U.S. industry, with profits rising as a share of GDP, by a huge six percentage points, according to Mario Draghi. Cutting U.S. companies off from low-cost foreign labor could throw that process into reverse and dramatically reduce profitability. The fact that voters now recognize the antagonism between the interests of large corporations and the average worker is what the media calls “populism.”
Nevertheless, targeting specific sectors for re-shoring and rebuilding will limit price increases and ensure that the benefits in terms of security, resiliency, and domestic growth of jobs and prosperity become readily apparent.
Rule No. 3. Industry must believe that the tariffs will work
In every major sector, U.S. industry is controlled by a handful of large corporations. They can determine whether almost any government policy will succeed…or fail. Our legal system, in which any policy can be repeatedly challenged in the courts on a variety of pretexts, makes it hard for a new policy to succeed.
For tariffs (or any industrial policy aimed at re-shoring industry) to succeed, the private sector must invest in U.S. plant and equipment, at scale, and quickly. For companies to do this, they must believe that the policy will persist and that it will work. Conflicting messages from Washington, such as that some tariffs are designed to “punish” an enemy and will be rescinded as soon as he changes his behavior, or that a policy is contingent on certain hiring practices, dilute the message and allow corporate managements to think they can bluff their way around the policy.
Targets are the most effective way to communicate the government’s goal. A simple, powerful, ambitious target is best. For example, the government could say that the purpose of the tariffs is to achieve a profitable 50% share in each targeted product sector within three or five years. An even better option is to build incentives into the program so the private companies are incentivized to cooperate in reaching the target.
Rule No. 4. Target complete supply chains
The U.S. has lost a critical mass of capacity in many manufacturing sectors. The importance of logistics is often overlooked, especially by economists whose models assume that price can solve all problems. If all the components of a product are made in Asia, it is almost inevitable that the final product will be assembled in Asia. For the U.S. to grow its automotive business, it must also grow its parts business. To justify final automotive assembly in the U.S., the engine or motor, the plastic, glass, and the battery must be easily available and made here too in significant volume.
This is also critical from a security perspective. Renewable energy equipment like solar panels are a prime candidate for this policy (and they are already tariffed, albeit ineffectively). It does little good for us to manufacture the panels here if the upstream components (solar wafers) are completely monopolized by a bad actor like China.
In some industries, a downstream U.S. market is important. For intermediate products like steel and aluminum, U.S. producers must have a U.S. market. The best way to ensure continued growth of those metals, as well as many other intermediate products, is to pursue similar pro-manufacturing policies for their customers such as the auto, appliance, and aerospace industry. Tariffs should start from the upstream components and materials and apply equally, and perhaps at a higher level, to the downstream consumer products.
Rule No. 5. Tariffs can’t do everything
One of the most common criticisms of tariffs heard in the U.S. today is that tariffs have failed to preserve jobs. Or save a specific company. Or solve other broad problems. Tariffs, like any other industrial policy, can only do certain things. They can revive, re-shore, and rebuild specific industries, if they are pursued correctly and persistently. They cannot, and should not, aim to preserve jobs. Nothing can change the fact that the number of jobs in automobile assembly will shrink over time, due to automation and the shift to EVs. In most industries, productivity increases over time, meaning that less manpower is required for each dollar of output. The goal of tariffs is to re-shore enough industries so that, as jobs are lost in automotive for example,, they are gained in electronics or medical devices or aerospace.
It is a related fact that the Midwest, from Pennsylvania to Wisconsin, has a set of manufacturing businesses that will continue to shrink their workforces. Many of the outdated, inefficient facilities are located in that area and much of the industrial growth will take place in the southern half of the country. Tariffs can slow down the decline but will likely not reverse it. Other regional policies will be necessary for those regions. But tariffs will help rebuild growth industries and Americans, who are never loathe to move for a better job, will over time migrate to those new jobs and regions.
Further, the U.S. has many badly managed large companies, and we have no solution for how to rejuvenate them. Companies like U.S. Steel or Boeing, and perhaps even Intel and General Motors, are victims of a too-successful past. No tariff or industrial policy will turn an obsolete corporate dinosaur around. The solution of the “activist investor” is that of the undertaker: kill, dismember, and sell the parts for cash. We need a superior solution for these dinosaurs, who have much talent, knowledge and potential buried deep within layers of stultifying bureaucracy.
The bottom line is that economic growth has always been national. From the Middle Ages, when Flanders (modern-day Belgium and Netherlands) first established its European leadership in textiles, through the British Industrial Revolution, and up to the U.S. century (1870-1970), economic success stories have always been national success stories. Globalization was a strategy supported by many in Washington on behalf of the interests of the large multinationals on one side and globalist foreign policy types on the other. By returning to a focus on national economic growth, we can rebuild America’s industrial strength, put living standards back on the growth path they enjoyed half a century ago, and re-establish America’s place in the world.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
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