| 2023: | 10.3% |
| 2018: | 10.9% |
This fall’s core choice is more basic than a policy question: Can a person who has attempted to overthrow a settled election, and called for the “termination” of unspecified parts of the Constitution, keep an oath to “faithfully execute the office of President of the United States” and “preserve, protect, and defend the Constitution”? But policy issues, even if they’re secondary this year, still have human consequences. Here’s a look at one:
The Trump campaign pitches a 10% tariff worldwide plus a 60% tariff on Chinese-made goods — which as we’ve noted before, would be the highest U.S. tariff rate since the Depression. (Last week’s float of replacing the $2.2 trillion income tax with tariffs probably isn’t serious; for those interested in it, a bit more below.) The claim is that the higher prices tariff hikes bring are worth it because they will (a) lower the U.S. trade deficit, (b) put more people in factory jobs as opposed to the health, transport, construction, etc. jobs they now have, and (c) increase U.S. manufacturing output.
The smaller first-term tariffs imposed on steel, aluminum, and most Chinese-made goods in 2018 and 2019 provide some real-world experience for this. What’s happened since then is mostly the opposite of these claims: trade deficits have sharply risen, and grown fastest in manufacturing; U.S. manufacturing job growth has slowed, though not stopped; and the manufacturing share of U.S. GDP has fallen. The data:
1. Trade balance: In the 2017 edition of the “President’s Trade Agenda” (an annual report by the U.S. Trade Representative Office) the then-incoming Trump officials argued that a rise in the trade deficit* over time showed earlier administrations had got things wrong:
“In 2000, the U.S. trade deficit in manufactured goods was $317 billion. Last year [i.e. 2016] it was $648 billion — an increase of 100 percent.”
Economists argue among themselves as to whether trade balances matter much. But nobody disputes what happened after 2018. Tariff rates rose, and the U.S. trade deficit got both bigger in general and more concentrated in manufactured goods. Between 2018 and 2021, the “trade-weighted” U.S. tariff rate doubled from 1.4% to 3.0%, and actual tariff payments rose from $33 billion to $83 billion. Meanwhile, by 2021 the “manufacturing-only” trade deficit figure cited in the 2017 report had soared to $1.06 trillion — about 60% above the 2016 figure — and the overall U.S. goods/service deficit from $479 billion to $842 billion.**
The experience affirms the Econ 1 axiom: a country’s trade balance equals the difference between its savings and its investment. As a form of tax increase, higher tariffs (all else equal) should reduce government-sector “dissaving,” and so should reduce a deficit slightly. If accompanied by larger reductions in other taxes, though, “all else” isn’t equal, and government “dissavings” rise despite the tariff increase. Unless for some reason families and businesses decide to save more, trade deficits will rise. That’s what happened after 2017 (and also after the 1981 and 2001 tax bills).
The especially sharp rise in manufacturing deficits was less predictable. Here the 2018/2019 tariffs are likely a cause. Manufacturers import goods so as to turn them into other goods, and are big tariff payers. About 45% of all U.S. imports (per a San Francisco Fed paper) are this type of industrial input, or “intermediate good.” The permanent “MFN” tariff system mainly taxes consumer goods; the Trump tariffs more often tax industrial inputs. So the tariffs raised the costs of industries like automobiles, machinery, and toolmaking; they faced a bit more challenges competing against imports and succeeding as exporters; and the overall goods/services deficit grew more concentrated in manufacturing.
2. Manufacturing employment: Since 2018, manufacturing employment has continued to grow, but more slowly than before. Looking back to the Obama administration, the BLS’ count of factory jobs grew from 11.5 million in early 2010 to 12.4 million in January 2017, or by 900,000. Since then, it’s grown to 13 million, i.e. by 600,000. On average, manufacturing employment rose an average of 105,000 a year from 2013 to 2018; since then, with tariffs up, it has continued to rise but by an average of only 50,000 per year. To take a broader view, manufacturing jobs now make up 8.2% of the 158 million non-agricultural U.S. jobs, down from 8.5% in late 2017. Again, no reason to expect a bigger tariff experiment to fare better.
3. Manufacturing output: Job totals and employment growth, of course, don’t always directly relate to the health of “manufacturing” as such. By adding computers, robots, and other productivity-boosting technology, some factories can raise output while employing fewer people. In practice, though, U.S. manufacturing trends since 2018 seem to have paralleled those in employment: growth slower than before, and manufacturing output (though not down in actual dollars) reduced as a share of GDP. The Bureau of Economic Analysis reports that the manufacturing sector grew by $183 billion from 2013 to 2018 (from $2.03 trillion to $2.21 trillion) and accounted for 10.9% of U.S. GDP in pre-tariff 2018. Output in 2023 was $2.29 trillion, meaning $78 billion in growth from 2018 to 2023, with a GDP share of 10.3%. Sectors that buy fewer goods, and so are less burdened by tariffs, grew noticeably faster — real estate from 7.0% to 7.6% of GDP, information from 5.0% to 5.4%, and professional and business services from 12.5% to 13.0%.
So: Again, this fall’s policy debates aren’t as important as the constitutional and rule-of-law questions. But for those tracking policy, the 2017 assertions that tariffs would reduce trade deficits and pump up the manufacturing sector have gotten a fair test and proven wrong, and the 2024 claims shouldn’t get much credence.
* Use of nominal dollars, not inflation-adjusted “constant” dollars, is unsound. A better comparison, of the trade balance to GDP, shows a decline from the 3.7% of GDP deficit in 2000 to a 2.7% deficit in 2016.
** Since then it’s drifted back down a bit, to $773 billion in 2023, or more meaningfully from 3.6% to 2.9% of GDP.
Data:
The Census Bureau’s U.S. monthly trade data.
… and for the big picture, U.S. exports, imports, and balances from 1960-2020 on one convenient page.
BEA’s GDP and GDP-by-Industry databases have the stats on trade balance/GDP, manufacturing/GDP, etc.
OMB’s Historical Tables tell you where the money comes from, and where it goes. Use Tables 2.1 and 2.5 for personal income tax and tariff revenue respectively.
San Francisco Fed staff explain intermediate imports.
Left/center/right on Trump campaign tariff proposals:
Brendan Duke of the Center for American Progress sees a $1500-per-family price hike.
Kimberly Clausing & Mary Lovely of Peterson Institute for International Economics estimate $1,700.
And Bryan Riley of the National Taxpayer’s Union evaluates the idea from a low-tax, small-government perspective.
A look back:
The 2017 President’s Trade Agenda report.
And just for the record:
Last week’s Trump campaign float of replacing the income tax with tariff money probably wasn’t a serious idea. More likely, it was a partially successful effort to move press coverage of the candidate’s Washington visit to something other than the Jan. 6 attack and the recent New York state court criminal proceedings. For the record, though, the concept is financially unworkable, and liable to induce fiscal crisis and rationing if tried. Here’s the arithmetic and the logical endgame:
1. In FY2023, the U.S. government collected $4.44 trillion in revenue: $2.18 trillion from personal income taxes, $1.61 trillion from payroll taxes, $0.42 trillion from corporate taxes, $0.08 trillion from excise taxes (on tobacco, alcohol, gasoline, etc.), also $0.08 trillion from tariffs, and $0.16 trillion from miscellaneous other fees and taxes. So, scrapping the personal income tax would cost the government half its revenue, and require a $2.18 trillion increase somewhere else simply to match the 2023 revenue.
2. If the tariff system is this “somewhere else,” a system now at $0.08 billion (and already inflated by the 2018/19 tariffs) must grow to $2.26 trillion. Imports of goods potentially subject to tariffs, meanwhile, totaled $3.1 trillion. So, where tariffs now raise $2.80 for every $100 spent on imports, they’d have to get $73. For example, U.S. hospitals, clinics, and drug stores bought $250 billion worth of medicines and medical devices from abroad last year, mostly duty-free. A 73% tax on them (assuming the buyers kept buying) would be $185 billion in new costs for the health system — for example, a $2 billion hike in hearing aid costs, $1.5 billion for crutches, etc.
3. In reality, of course, the buyers probably mostly wouldn’t keep buying; instead, a 73% tariff is likely to collapse trade, leaving us with oil shortages, OTC medicine price spikes, clothing and shoe rationing, and so on. Setting these aside, if imports collapse so does tariff revenue, leaving the U.S. Treasury without its extra $2.18 trillion but still on the hook to pay Social Security, Medicare, interest on previous debt, defense, and other bills. This in turn suggests a supplementary set of policies to prevent or reverse a collapse in revenue, interest rate spike, etc. The logical endgame, a year or so later, is pairing the new tariff system with a big “Buy Foreign” spending and subsidy scheme for businesses and consumers.
Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.
Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.
Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.
Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.
