A better alternative to Trump's tariffs

WASHINGTON, DC: Over the past 75 years, global prosperity, poverty reduction, and economic growth rates have reached unprecedented levels, largely driven by the open multilateral trading system. By lowering tariffs and reducing transportation and communication costs, this system has enabled efficient producers to access new markets in a competitive global environment, thereby fostering innovation.

But the multilateral trading system, which came under threat when Donald Trump won the 2016 US presidential election, is at risk of unravelling, following Trump’s return to the White House in 2025. During his first term, Trump rejected the Trans-Pacific Partnership, renegotiated the North American Free Trade Agreement, and launched a trade war with China, sharply raising tariffs on Chinese imports, as well as on steel, aluminum, and other goods, often justifying these measures on national-security grounds.

Regrettably, President Joe Biden did not reverse Trump’s tariffs, jeopardising a system that had long benefited both the United States and the global economy. During his campaign, Trump pledged to impose a 10% tariff on all imported goods and a 60% tariff on all imports from China. He also threatened to keep raising tariffs until the US eliminates its trade deficit.

Even if Trump halved his proposed tariffs, they would still have devastating consequences for the US and the global economy. After all, the external current-account balance (of which trade comprises the largest part) reflects the gap between a country’s total consumption and its production. Addressing the US external deficit requires either higher incomes or lower domestic demand. While raising tariffs might reduce some imports, it would also increase the cost of imported parts and components for US firms, which would mean higher prices for consumers and a loss of competitiveness for exporters. If imports fell faster than exports, the dollar’s exchange rate would adjust to balance supply and demand in the currency market, with revaluation further undermining US competitiveness.

While Trump’s proposals are undeniably extreme, neither of America’s two major parties supports free trade as strongly as they once did. The most commonly cited reason for this is the economic dislocation and job losses caused by import competition. Even with the US unemployment rate at a historically low 4.1%, rising imports have inflicted significant pain on local communities. For small towns that rely on a single employer struggling against foreign competition, the broader economic gains to consumers and most producers offer little solace.

But tariffs are not a solution to the problems of small-town America. Higher tariffs drive up the prices of imported goods, and Trump’s proposed tariffs would almost certainly curtail consumption. Although tariffs might temporarily slow layoffs and plant closures, the overall impact on the US economy – including the inevitable retaliation from other countries – would be profoundly damaging.

Trump’s first term offers a cautionary tale. His import tariffs, lower than those he is now proposing, are estimated to have cost the average American household more than $1,000 annually, and the damage would have been even worse if US importers hadn’t rerouted goods through countries like Vietnam, where Chinese parts and components were assembled and then exported to the US to avoid Trump’s punitive duties.

If Trump’s incoming administration imposes high, across-the-board tariffs, the resulting price hikes and economic disruptions would be far more severe. The broader the tariffs, the harder it would be for importers to use third world countries to avoid them, driving up costs for US and international manufacturers.

Despite this, there is no guarantee that Trump’s tariffs would save any US jobs. At best, they might delay the downward spiral of declining housing prices, shuttered storefronts, and reduced employment. But retaliatory tariffs could compound the damage, and even if tariff-protected industries managed to survive, they would probably require indefinite protection to remain viable.

Contrary to popular belief, technological advances – not imports – have been the primary driver of US job losses. While foreign competition has played a role, its impact has been concentrated in areas reliant on a single major firm or industry. The Trade Adjustment Assistance Program (TAA), designed to support workers displaced by import competition, has proven inadequate.

A far more effective and less costly alternative to Trump’s proposals would be to make import tariffs conditional. For example, producers benefiting from trade protections could be required to refrain from hiring additional workers unless those protections are lifted. This approach would help ensure that the costs of such measures do not become permanent.

Moreover, older displaced workers could receive generous adjustment assistance, including early access to Social Security or supplemental wage support until they become eligible for retirement benefits. Their younger counterparts could receive unemployment benefits, job-placement services, and even financial assistance for relocation, provided they enroll in approved retraining programmes. These resources could be administered by local labour or unemployment offices.

To be sure, it would be difficult to justify helping workers displaced by imports while neglecting those who lost their jobs to technological change, even though import-related job losses often provoke stronger political reactions. Replacing the TAA with a more targeted programme focused on retraining younger workers and supporting older ones could benefit trade-affected communities and the broader US economy. If successful, such a programme could also be extended to cover other displaced workers.

Although the current adjustment programme is slow and fails to address workers’ needs, tariffs are unlikely to provide timely or meaningful relief to those affected by foreign competition. A more targeted adjustment programme that supports both younger and older workers would yield greater benefits while imposing far fewer burdens on the US economy than Trump’s damaging tariffs.

Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is senior research professor of international economics at the Johns Hopkins University School of Advanced International Studies, and senior fellow at the Center for International Development at Stanford University.

Copyright: Project Syndicate, 2024.
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