Some tariffs are worse than others

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is chief economist of the International Center for Law & Economics and writes the Economic Forces blog

Donald Trump has promised a renewed push for tariffs when he returns to the White House. The stated goal is to protect American manufacturing jobs, but some approaches would achieve this far more effectively than others. 

The historical record shows that, while tariffs can preserve specific manufacturing jobs in the short term, poorly designed trade barriers destroy more American factory jobs than they save.  Understanding these trade-offs is crucial for policymakers determined to use tariffs. Trump has said he will impose tariffs of 25 per cent on all imports from Canada and Mexico, and an extra 10 per cent on Chinese goods. But implementation will be key.

The key lies in modern supply chains. Today’s factories rely heavily on imported components. Indeed, nearly 20 per cent of US imports are so-called intermediate inputs used by domestic producers to make other goods. Trump’s 2018 tariffs applied primarily to these intermediate goods. This transforms how tariffs affect jobs. Rather than a simple trade-off between protected workers and hurt consumers, the effects ripple through manufacturing.

Steel tariffs illustrate the pitfalls. While they benefit US producers such as Nucor and US Steel, they harm the much larger manufacturing sector that uses the metal — from Caterpillar’s construction equipment to Ford’s auto parts. These downstream industries employ far more workers than steel production. When Trump imposed 25 per cent steel tariffs in 2018, manufacturing employment declined in industries that used steel intensively. These job losses outweighed any gains in steel production.

Tariffs on finished goods can sometimes protect jobs effectively, but success requires careful design. The washing-machine industry provides an example. When the US first imposed China-specific duties in 2017, manufacturers simply shifted production to Thailand and Vietnam. Only after the US enacted global tariffs in 2018 did Samsung and LG build American factories. While this eventually achieved the political goal of creating US jobs, it required comprehensive trade protection and came with higher prices for consumers.

Protection is also possible when foreign producers cannot easily shift production. Take semiconductors: building new chip fabrication plants requires massive capital investment (typically $10bn to $20bn) and years of construction. In that case, a tariff may raise chip prices, protecting Intel’s employees. But those same barriers — huge capital requirements, specialised worker training, complex supplier networks — also make it harder to establish new domestic production quickly. 

The auto industry also illustrates both effective and counterproductive approaches to tariffs. The so-called “chicken tax” — named after an initial tariff on poultry — was a 25 per cent tariff on imported light trucks imposed in 1964. It helped Ford and General Motors dominate the US pick-up truck market for decades. The tariff worked because it targeted finished vehicles, not parts, and because domestic manufacturers could readily expand production. Over time, it even prompted companies such as Toyota, Nissan, and Honda to build US plants to avoid the tariff.

But modern vehicle production is far more complex. When the Trump administration imposed tariffs on Chinese auto parts in 2018, it did not protect American jobs at all. Instead, it raised costs for US automakers who relied on imported components. Higher input costs led to slower export growth and job losses in affected industries.

If the goal is to support high-value manufacturing, policymakers should focus on protecting advanced industries where the US has existing expertise. Targeted support for semiconductor manufacturers such as Intel or electric-vehicle battery producers could help domestic companies to gain scale in strategic sectors. In contrast, broad tariffs on basic materials such as aluminium mainly result in higher costs across manufacturing supply chains.

For businesses seeking to plan ahead, the lesson is straightforward: what matters most is where new tariffs hit their income statements. Tariffs on final goods mainly affect revenue through higher prices or units sold. But tariffs on inputs directly inflate the cost side, squeezing margins and often forcing harder choices about moving production. 

Modern manufacturing involves complex international supply chains that tariffs can easily disrupt. The iPhone is not just “made in China”, but represents a global production network that includes American innovation and Asian manufacturing. Policymakers need to update their thinking accordingly.