Trump’s Tariff Trap

I think what has surprised me the most about the Trump tariffs is how people I personally consider clear-headed in the social media space are falling over themselves justifying the tariffs because they are unsurprisingly, Trump supporters. Of course, as Economist Tyler Cowen wrote, one would find it a difficult task to find any credentialed economist colleague—Democrat, Republican, or independent—who would endorse it. There is not a single reputable business or economic outlet that endorses it, from the Financial Times to The Economist to the Wall Street Journal.

Those who support Trump hinge their support on two things – high tariffs on American goods and the return of manufacturing to the United States. I will spend a bit more time on the second point, but before then, let me tackle the first point.

Trump has in public mostly couched his justification for the tariffs on the pillar that other countries have higher tariffs on American goods and that the United States suffers from persistent trade deficits. There is some truth to these claims. Certain countries, particularly China, have engaged in trade practices that distort global markets, flooding the world with cheap manufactured goods and using state subsidies to give their industries an unfair advantage. Some nations, including India and Canada, also impose steep tariffs on specific American exports such as motorcycles, dairy products, and alcoholic beverages.

However, Trump’s argument ignores a crucial reality: the United States, despite its reputation for free trade, also imposes high tariffs on several key products, such as the 25 percent levy on imported light trucks, the 350 percent tariff on tobacco, and the nearly 200 percent tariff on Chinese stainless steel kitchenware. The global trading system is not as one-sided as Trump portrays it. In any case, the lopsided tariff system is not one to employ a sledgehammer policy on but one which requires a shrapnel to prevent the chaos we are currently witnessing and whose impact would be long lasting.

To the second point that the companies hurt by high tariffs on imports will simply relocate their production to the United States, enticed by the country’s strong purchasing power and large consumer base. In the view of those who buy this narrative, tariffs serve as both a punishment for foreign manufacturers and a bait for companies to shift operations stateside, thereby creating jobs and boosting domestic industry. While this might sound logical at first glance, the reality is far more complicated.

Setting up manufacturing operations in the United States is not as simple as flipping a switch. It looks so if you are deceived by the companies that have been announced by Trump as wanting to set up factories in the US because of his influence. However, it’s not as easy. This is because many industries depend on complex global supply chains that cannot be easily replicated domestically. For example, the auto industry, where car manufacturers source parts from multiple countries to keep costs down, is a case in point. Relocating an entire production network to the United States would require massive investments in new facilities, infrastructure, and labor training. Even if companies were willing to make such an investment, it would take years before they could achieve the same efficiency and cost-effectiveness they currently enjoy overseas.

Labor costs in the United States are another major deterrent. One of the reasons companies manufacture goods in countries like China, Mexico, or Vietnam is the significantly lower cost of labor. While American workers might be more productive on average, they also command much higher wages. For industries that rely on cheap labor, such as textiles, electronics assembly, and basic manufacturing, relocating to the U.S. would make their products too expensive to remain competitive. Companies are more likely to look for alternative low-cost countries, such as India or Indonesia, rather than move to the U.S.

Even for companies that do move production to the United States, there is no guarantee that this will translate into large-scale job creation. Modern factories are highly automated, relying more on robotics and artificial intelligence than on human labor. In many cases, setting up a U.S. factory would mean hiring a relatively small number of highly skilled engineers and technicians rather than the thousands of assembly-line workers that Trump envisions.

The idea that businesses will flock to the U.S. because of its consumer base also ignores the fact that companies want access to global markets, not just American consumers. If tariffs make it too expensive to export from the United States, companies may choose to establish operations in regions where they can manufacture goods more efficiently and still access key markets. This is particularly true for multinational corporations that sell a large portion of their products outside the United States. Instead of moving their factories to the U.S., they may simply shift production to a different country that offers them better trade advantages.

In reality, tariffs create uncertainty, and uncertainty discourages investment. Businesses do not want to make long-term commitments in an environment where trade policies can change overnight. If companies fear that Trump’s tariffs could be lifted by a future administration, they may make public assurances but hesitate to make costly relocations that could become unnecessary in a few years. Instead of bringing jobs back to the U.S., these policies could encourage businesses to hold off on expansion or look for alternative ways to sidestep the tariffs, such as rerouting supply chains through intermediary countries.

The assumption that America’s high purchasing power will naturally attract manufacturers also overlooks the fact that many of the industries affected by tariffs are already producing goods in the United States. The U.S. has a strong manufacturing base in industries like aerospace, medical equipment, and high-tech manufacturing, but these industries operate within a global system of trade. Forcing them to buy more expensive domestic raw materials or components rather than sourcing them internationally at competitive prices makes them less efficient. This ultimately harms their ability to compete, not just in the U.S. but in global markets as well.

Rather than using tariffs as a blunt-force instrument to coerce companies into relocating, a more effective strategy would be to create an environment that naturally encourages investment. This means improving infrastructure, investing in workforce training, and ensuring a stable regulatory framework that fosters innovation. Policies that support research and development, tax incentives for strategic industries, and trade agreements that provide access to global markets would do far more to strengthen American industry than punitive tariffs that risk driving businesses away.

Trump’s vision of a manufacturing renaissance in the U.S. assumes that businesses will ignore fundamental economic realities. While some companies may shift limited operations to the United States in response to tariffs, the broader effect of his policy is likely to be increased costs, reduced global competitiveness, and economic inefficiency. If anything, the tariffs may encourage companies to rethink their dependence on U.S. markets altogether, further isolating the country in an increasingly interconnected global economy.

I quote Tyler Cowen again, “This is perhaps the worst economic own goal I have seen in my lifetime.”