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The author of this piece serves as the director of economic policy studies at the American Enterprise Institute.
“Liberation day” is upon us, but it carries with it the risk of taking away Americans’ solid real wage growth, low unemployment rates, and a sizable portion of their retirement savings.
Trump’s tariffs have stirred up quite the economic mess. If they go through, the US will face a tariff rate higher than even the notorious Smoot-Hawley days. This could become the most significant tax hike since we taxed to fund the Vietnam war in 1968. Retaliation from our trade partners is almost certain, leading to increased taxes and prices and severely impacting household income and spending. The hit to business investment and US exports could be massive. Let this persist, and a recession might be knocking on our door.
So, what’s driving this risky play? Nearly half of what the US imports are intermediate goods, essential for producing final products domestically. Slapping high tariffs on these imports means higher production costs for American companies, hurting their competitive edge. Think about steel – while the tariffs might benefit one steel producer, there are 80 others in industries that rely on steel who will suffer, losing ground in the competitive market.
Economists Aaron Flaaen and Justin Pierce discovered that, during the Trump administration’s initial trade war, the damage to manufacturing jobs due to heightened input prices was quintuple the benefits derived from import protections. And the blow from retaliatory measures was nearly three times the gains from import protection.
Already, we’re seeing the impact. Last week, Cleveland-Cliffs, a steelmaker out of Ohio, announced it would lay off 600 workers in Michigan and 630 in Minnesota as a response to diminished demand caused by Trump’s tariffs. That same week, the company’s shares dropped by 11%.
Vice-President JD Vance contends that Trump is a proponent of economic self-sufficiency. For a peek at what self-reliance looks like, we can look at North Korea. Nonetheless, Vance highlights something true – Trump is indeed a mercantilist, viewing trade deficits with disdain. However, these tariffs won’t likely shrink the deficit, which stems from the US investing more than it saves. Just look at his first presidency, when the US current account deficit expanded by 18% from early 2017 to early 2020.
We shouldn’t be overly focused on manufacturing, nor should we be overly anxious about the trade deficit. By late 2018, service-sector wages had surpassed manufacturing wages. Nostalgia for a bygone era and playing politics with swing states aren’t solid reasons to shift workers from higher-paying to lower-paying positions.
Then, there’s the perspective on the trade deficit as an allowance for the US to consume more than it produces, which isn’t a bad thing. It provides consumers with more product choices and enables US enterprises to compete by letting workers engage in higher-value-added activities. Going back to workers sewing tennis shoes in factories isn’t something we should desire.
Regarding Trump’s other goals, while these tariffs may bring in revenue for tax cuts, hitting working-class households with higher consumption taxes to lower income taxes for wealthier households seems illogical. Intentional actions that slow global economic growth could jeopardize national security, and alienating allied businesses won’t bolster supply chains or enhance economic resilience.
Trump should be concerned that his tax policies might politically backfire, potentially weakening his stance and that of other Republicans, complicating the passage of future tax bills and maintaining Congressional control.
A recent CBS News/YouGov poll shows just 23% of Americans feel Trump’s policies are financially benefiting them, down significantly from January. In two surprisingly competitive House races in Republican-stronghold Florida, Democrats performed better than anticipated. The day following these results, a few Republican senators broke ranks with Trump over trade policy, voting against his tariffs on Canada. GOP Senator Rand Paul argued against Trump’s constitutional authority to raise taxes.
The political truth remains: Americans won’t sit quietly as a president raises consumer prices and pushes unemployment higher. This dissent might just be what averts an economic downturn. If Trump aims for Republican success in upcoming elections, reversing these policies before they inflict further harm is crucial. When all is settled, “liberation day” could mean freeing Americans from mercantilist illusions crafted by a misguided presidency.
