Analyzing Trump Tariffs 2.0
Introduction
Back in December, in a Q&A article titled Understanding Trump Tariffs 2.0, I provided a brief overview of how tariffs work, why politicians use them, and why economists don鈥檛 like them. Well, now the second Trump administration is upon us, and while , it is highly probable that they will be at some point early in Trump鈥檚 second term. So, it seems like a good time to consider how we might analyze any new tariffs once they do arise. The purpose of this article is to provide a framework for understanding the various objectives of tariffs and the likelihood of success given domestic political and global macroeconomic constraints.
Overall, I would argue that we can think about Trump Tariffs 2.0 falling roughly into one of three categories: 1) tariffs as industrial policy, 2) tariffs as economic statecraft, and 3) tariffs as political theater. While they can overlap to some extent, these categories represent distinct strategies defined primarily by the objectives of the tariff impositions. And while it can certainly be difficult to determine the primary objective of a set of tariff policies coming from an administration with a and a proclivity to provide vague public signals regarding policy, one can attempt to discern these categories based on some key dimensions of the tariffs imposed.
By dimensions, I mean the scope, breadth, and duration of the tariffs. Scope refers to how many products or industries to which tariffs are applied, breadth refers to the number of countries to which tariffs are applied, and duration refers the length of time the tariffs are intended to be kept in place. For instance, the had a narrow scope, a narrow breadth, and a medium duration, whereas the had a wide scope, wide breadth, and a short duration. Now with the dimensions settled, let鈥檚 move on to a more detailed consideration of the categories.
Tariffs as Industrial Policy
This category consists of redistributive tariffs whereby the goals are economic 鈥 primarily to increase domestic manufacturing employment and/or competitiveness in key industries, thereby attempting to reduce the US trade deficit. This category constitutes tariffs with variable scope and breadth, but with a long duration, as the goal is to redress structural economic imbalances regarding domestic industry. Redistributive tariffs are often more effective at achieving policy objectives when paired with targeted domestic investment in the industries that are protected, such as when the Biden administration after providing .
In general, I would argue that redistributive tariffs have the lowest likelihood of success compared to the other categories. First, the Trump administration seems unlikely to pair an imposition of long-term tariffs with any kind of targeted domestic industrial investment, which would require new legislation from a Republican-controlled Congress with razor-thin margins and an aversion to approving new government spending. Second, as the scope and breadth decrease, long-term tariffs are highly unlikely to reduce the US trade deficit, as countries that are targeted have ample opportunities to engage in by shifting final pre-export manufacturing to a country upon which tariffs are not imposed or firms deciding to . Finally, even redistributive tariffs with a rather large scope and breadth can give rise to an , whereby target country currencies devalue relative to the dollar, making foreign imports relatively cheaper and US exports relatively more expensive, thereby reinforcing the . Keep in mind that these constraints exist even without retaliation from target countries, the probability of which is high if redistributive tariffs are imposed.
If the Trump administration does decide to pursue tariffs as industrial policy, we likely will not see these kinds of tariffs imposed immediately, as they are most likely to arise from his administration to pursue regarding unfair trade practices and currency manipulation by trade partners, the findings of which are set to be submitted in April. Regardless of the scope and breadth, the imposition of long-term tariffs as a form of industrial policy will represent a victory for the or 鈥 those who consider tariffs as an end rather than a means 鈥 within the administration. Thus, those within the administration who are more skeptical of the use of redistributive tariffs would seem to hope that the majority of Trump Tariffs 2.0 end up falling into the second category.
Tariffs as Economic Statecraft
This category consists of punitive tariffs whereby the goals are to extract concessions 鈥 sometimes non-economic or non-trade-related 鈥 from target countries. As such, punitive tariffs often have a limited breadth, and a variable scope and duration. Given the nature of this category of tariffs, the literature on economic sanctions seems more relevant than the economic literature regarding tariffs and herein provides a fascinating insight: while the duration of punitive tariffs is variable, success is far more likely if the duration is zero. The literature on economic sanctions suggests that , since the imposition means that the target country is likely signaling that it is willing to absorb the costs and retaliate.听
Punitive tariffs are not without precedent is recent US history. As previously mentioned, the Nixon administration placed an across-the-board 10% 鈥渋mport surcharge鈥 on trading partners in 1971 in an effort to get major economies to the negotiation table on a variety of issues. In the end, these and led instead to a after the inability to reach a durable new consensus among trading partners. So, in general, I would argue that punitive tariffs have a moderate likelihood of success, in that they are more likely to be successful than tariffs as industrial policy but less likely to be successful than tariffs as political theater. Within this category, the likelihood of success increases as the breadth decreases. By focusing on one country at a time with tariffs, Trump is more likely to extract concessions. If Trump decides to target several countries at the same time with punitive tariffs, target countries may decide to retaliate collectively and/or , much like the . So, punitive tariffs likely decrease in success as breadth and duration increase.
If Trump does decide to pursue punitive tariffs, we may see them imposed soon. Trump鈥檚 fits this category quite well, as the goal is to extract concessions from these countries regarding immigration and drug-trafficking, and Trump has suggested that . to convince the Trump administration that they are taking these issues seriously, thereby attempting to stave off the imposition of new tariffs . Counterintuitively, as the sanctions literature suggests, the likelihood of success regarding US punitive tariffs against Canada and Mexico decreases once the tariffs are imposed. So, it will be telling whether these tariffs are imposed on February 1, and if so, how long they remain in place. I would argue that the longer they remain in place without substantial concessions, the more likely they are to bleed into the last category.
Tariffs as Political Theater
This category consists of mostly performative tariffs whereby the goals are oriented mostly toward domestic politics 鈥 an insight that can be drawn from the literature on the . Such performative tariffs have a variable scope and a limited breadth and duration, and success would be determined by the ability of Trump to save face, declare victory, or appear strong.听
For a variety of reasons, I would argue that a large portion the incoming administration鈥檚 tariffs policies will fall into the performative category, in part because this category may seem more likely to succeed given the subjectivity of the metrics involved. Trump has already established himself as someone who is able to craft a narrative about his success that resonates with his domestic political coalition and gets reinforced by other prominent Republican politicians. Despite the subjectivity of success, performative tariffs can have material effects on the economy if imposed. All the concerns economists have about the imposition of tariffs 鈥 , , , and 鈥 still apply when performative tariffs are imposed. Still, like punitive tariffs, the goal might be not to have to impose them at all.听
I would argue that Trump鈥檚 threat to fits well into this category. While there are broader strategic objectives at play here regarding punitive and even redistributive tariffs, China allowing ByteDance to divest its interest in TikTok, thereby allowing the domestic ban on TikTok to end, could represent a shift in behavior upon which Trump elects to declare victory. This move would allow Trump to appear strong with respect to economic relations with China, despite a lack of more substantial political concessions or economic restructuring to global trade. As mentioned earlier, one could also foresee punitive tariffs against Canada and Mexico 鈥 if imposed 鈥 become performative should Trump decide that the costs of such tariffs are too steep and Canada and Mexico provide token gestures regarding immigration and drug-trafficking that allow Trump to save face, declare victory, and avoid a retaliatory spiral with neighboring trade partners, leaving broader issues to a .
Conclusion
Overall, any imposition of new tariffs will likely have considerable effects on the US and global economy. However, determining the most likely effects of Trump Tariffs 2.0 requires a framework that discerns the various objectives of tariffs and their respective chances of success. To this point, I have laid out three broad categories that we can attempt to discern by paying attention to the scope, breadth, and duration of tariffs proposed, threatened, or imposed. While I think it is unlikely that even a more robust set of tariffs as industrial policy will succeed at reducing the US trade deficit due to domestic political and global macroeconomic constraints, implications still loom for inflation, employment, and economic growth, regardless of the tariffs鈥 objectives. Given Trump鈥檚 initial hesitation regarding tariffs and the notion that he , it strikes me that it is more likely that Trump elects to pursue tariffs as some combination of economic statecraft and political theater.[1]听
Regardless, the most significant impact of Trump鈥檚 proclivity for tariffs as a rhetorical and political tool has been an ideological shift away from the bipartisan neoliberal consensus that dominated US politics for the past 50 years. What exactly we are shifting towards is less clear. Discerning what categories of tariffs are threatened or imposed may help to determining whether we are approaching a new ideological consensus regarding US foreign economic policy or simply running away from the old one.
[1] It should be noted that it can be exceedingly difficult to distinguish between these two categories. During the writing of this article, . Depending on who you ask, this either constitutes or .