How the ‘Experts’ Got Tariffs So Wrong—and Trump Got It Right

Trump has a new idea about the economy. The usual suspects hate it.

Everyone who follows politics knows what that idea is, because the media and people like Larry Summers have not stopped commenting about how awful it is. On June 13, Trump said he’d consider a 10 percent tariff on imports and use the revenue to reduce some income taxes.

Sixteen Nobel economists said in a letter recently that his policies would lead to higher inflation. Joseph Stiglitz signed that letter. He was critical of Trump’s China tariffs in 2018, when he wrote, “Public support will wane as Americans realize that they lose doubly from this (trade) war. Jobs will disappear.”

Wrong.

A Reuters/Ipsos poll in 2023 showed overwhelming support for China tariffs. The unemployment rate in 2018 was 3.9 percent, falling to 3.7 percent in 2019. We can all agree that 2020-2022 numbers were grossly impacted by pandemic policies. Unemployment is 4 percent now, according to the Bureau of Labor Statistics.

On debate day Thursday, The New York Times wrote that tariffs lead countries to retaliate. China and Europe imposed tariffs on soybeans, whiskey, orange juice and Harley Davidsons. “U.S. agricultural exports plummeted,” they wrote (joyously).

This is true. But soy exports broke records two years later. Whiskey, Harley and OJ tariffs to Europe and the U.K. were suspended because the E.U. and U.K. agreed to steel export volume limits to the United States. Without the original tariffs as leverage, none of this would have happened. Now the U.S. steel and aluminum industry can grow (as they are) without being inundated with imports.

The Tax Foundation also hates Trump’s idea. On June 26, they said the dollar may appreciate in response to tariffs, which would “make it more difficult for exporters to sell their goods on the global market, resulting in lower revenues for exporters.”

The dollar index fell during the Trump years but rose in the Biden years. In this strong dollar environment, exports were $1.75 trillion in 2021 and $2.085 trillion in 2022, falling to $2.045 trillion in 2023, according to the Bureau of Economic Analysis. We exported $1.55 trillion in goods in 2017, pre-tariffs, then $1.67 trillion in 2018 and $1.65 trillion in 2019.

The Tax Foundation’s board includes Emeritus Chairman Bill Archer, former GOP Chairman of the Ways & Means Committee in 2000. At that time, the government granted China permanent normalized trade relations (PNTR), or basically near-duty free access to the U.S. so companies could outsource their manufacturing labor and ship goods here cheaply. His district, which included parts of Houston, lost over 64,000 manufacturing jobs from 2001 to 2010.

In 2023, goods imports were $3.1 trillion and China imports were $421.4 billion. A 10 percent tariff would raise revenues by $311 billion, and a 60 percent tariff on China would raise about $213 billion. Obviously not enough to eliminate all income taxes.

The Tax Foundation says that actual tariff revenue raised would be lower due to tariff avoidance and lower incomes caused by less people working because of tariffs. Trump’s tariff plan cuts GDP by nearly 1 percent, and capital stock by 0.7 percent.

Why do they say the capital stock shrinks? The evidence from the steel tariffs alone show that they inspired billions in new investments. Well, because most economists use the standard GTAP model to make economic predictions, and those models can prove to be wrong over time. Timothy Kehoe, an advisor at the Federal Reserve Bank of Minneapolis, wrote in 2018 that GTAP models have “essentially zero predictive accuracy.”

The standard GTAP model also has a built-in bias towards tariff free trade. Yet all countries have tariffs, some very high. “It is also highly unrealistic because it insists on a final result in what economists call ‘equilibrium’ which means full employment will always be maintained whatever policies are enacted,” said Jeff Ferry, chief economist at the Coalition for a Prosperous America. “Most mainstream economists use the model in its standard form, which is why the results are inevitably unrealistic and often wrong.”

The GTAP model is open source and can be modified. We modeled Trump’s 10 percent universal tariff, and found that the tariff change would increase economic growth and create opportunity for Americans through increasing incomes and job creation. Under the proposal, real household incomes would increase by nearly $8,000 and 3.3 million new jobs would be created. Real GDP would grow by 3.6 percent. New federal tax revenue of $460.3 billion a year would be generated by the tariff and policymakers would have the opportunity to use that money to reduce income taxes or invest in the economy.

No serious person believes record inflation during the Covid-years was due to tariffs. If so, how do you explain inflation falling even as Biden extended Trump’s tariffs and added new ones in May?

Complex, human systems are hard to analyze. There are many moving parts. Plus, the economy is global, with global actors beyond our control. But one thing is certain: Those who said tariffs would lead to inflation and big layoffs were wrong. We should not trust them to be right this time.