Introduction
“The philosophy of protectionism is a philosophy of war.” Ludwig von Mises.
During the second term of President Trump’s administration, his government has employed tariffs as a persistent tool for exerting pressure in negotiations on various topics, not exclusively trade-related, with different countries and regions.
Justifications for Tariffs
There are multiple justifications behind this approach. The primary and most widespread one is the potential to use tariffs as a means to compel American companies and some foreign ones to relocate their production chains within the United States.
This, in theory, would restore the U.S.’s dominance in the manufacturing sector, stimulate job growth, and bolster the country’s economic strength.
Other explanations for this strategy suggest that tariffs are used as a pressure mechanism for non-trade-related issues, such as the case with Mexico regarding drug trafficking or undocumented migration.
Economic Evidence and Complexity
As with most economic discussions, the topic tends to oversimplify and lean more towards ideological views rather than empirical economic research evidence.
The relationship between trade barriers and economic progress is intricate, as it involves interconnected production structures, global value chains, and real business responses—not just theoretical ones.
Economic evidence shows that tariffs ultimately have a negative impact on the implementing country. When essential intermediate goods are taxed, such as automobiles or technological inputs—a significant portion of Mexico’s exports to the U.S.—the effect harms even the implementing country, as these measures restrict GDP growth, create inflation, and erode consumer welfare. Additional costs rarely absorb businesses and eventually get passed on to final prices.
Historically, such measures have also triggered retaliatory actions affecting global trade. Moreover, artificial protection mechanisms for local industries (like tariffs) have historically had negative effects on competitiveness unless accompanied by comprehensive measures requiring substantial investments (e.g., in R&D) and long maturation periods. Mexico serves as a clear example of adapting to a more global economy (first through GATT integration and subsequently via trade agreements), which forced local industry competitiveness to increase.
Distorted Bilateral Trade and Impact on Small Enterprises
Bilateral trade is also distorted, and those most affected are rarely large corporations but small producers or small businesses linked to global supply chains. Remember the cases of Mexican avocados or tomatoes; small businesses lose all activity when a part of their supply chain shifts regions.
Business Responses to Trade Policies
Businesses aren’t passive observers of such political decisions. Multinationals adjust their supply chains, diversify suppliers, tweak prices, or innovate processes based on their outlook on the short-term, medium-term, and long-term global economic evolution. For many firms, making drastic and costly adjustments to their supply chains and production isn’t an efficient decision if they consider these policies as transient public policy, potentially changing within the next few years, like in the U.S.
Economic Implications of Relocating Production Chains
From an economic standpoint, the idea that moving production chains to the U.S. could create new jobs might potentially generate complex economic effects, considering today’s low unemployment levels in that country.
Tariffs rarely pave the way to development. In an already hyperconnected world, obstructing trade flows results in overall welfare losses. It’s clear that there’s a return to less global and more internal views; this isn’t exclusive to the U.S. but also relevant in China. However, the vision behind tariffs implies a desire to revert to a world that no longer exists.
The U.S. has indeed lost manufacturing dynamism, but it gained significant dominance in service-related topics, technology, and particularly in the financial sector. Perhaps it does need to regain leadership in emerging tech areas (like AI), where Asia has started positioning itself as a leader. Yet, aspiring to return to a manufacturing-focused vision would mean reverting 30 years in the U.S.’s economic perspective.
Key Questions and Answers
- What are tariffs? Tariffs are taxes imposed on imported goods, aiming to protect domestic industries from foreign competition.
- Why has the Trump administration used tariffs? The administration has employed tariffs as a negotiation tool on various topics, including trade and non-trade issues, to influence other countries’ policies.
- What are the economic impacts of tariffs? Tariffs can lead to reduced global trade, retaliatory measures, and negative effects on competitiveness. They can also cause inflation, restrict GDP growth, and erode consumer welfare.
- How do businesses respond to tariffs? Businesses adjust their supply chains, diversify suppliers, tweak prices, or innovate processes based on their outlook on global economic evolution.
- Can tariffs create new jobs? While tariffs might encourage relocating production chains to the U.S., creating new jobs, they could also lead to complex economic effects considering today’s low unemployment levels.
