What Trump Wants From Tariffs … and What the U.S. Might Get Instead

The announcement of widespread tariffs by the Trump administration, promoted with an April 2 Rose Garden “Liberation Day” event, sent shockwaves through the global economy. The ensuing days saw stock markets reeling and the world’s governments, economists, and business leaders searching for answers as to why the United States would take such a drastic step—and how to react to the new trade war.

“With these tariff announcements, we’re in new territory,” says Nancy Qian, a professor of managerial economics and decision sciences at the Kellogg School and an expert on international trade policy. “Tariffs this broad and at this scale haven’t really happened in modern times.”

There are two main rationales behind the administration’s decision to impose tariffs: to bring manufacturing back stateside and to close the trade deficit. Both come with issues.

“One of the difficulties in these tariff negotiations is that the U.S. administration is not clear about what it wants from others,” Qian says. “Maybe that’s a negotiating tactic, but the things it is asking for are not things that other economies can deliver.”

The administration sees reshoring manufacturing as a key to providing a more-robust domestic labor market. But the tariffs themselves will result in both higher prices, which will have a disproportionate impact on the working class, and lower profits for companies.

“The thing that’s going to change permanently is people’s perception of the U.S. as a stable political economy,” Qian says. “That’s going to have huge ramifications for trade relationships.”

Why focus on trade deficits?

Balancing the trade deficit, Qian says, is an ideological pursuit for the Trump administration, which has framed the tariffs as a reaction to trade restrictions imposed by countries across the world against the U.S.

“President Trump and many people in his current administration just believe that trade deficits are bad, that they’re a sign of something wrong with the economy, and if we can get rid of the trade deficit, that will make the American economy stronger,” Qian says.

Whether a nation running trade deficits is necessarily bad is an open question for economists, Qian says. In standard economic models, trade deficits are neither good nor bad. Instead, they are the result of a complex web of factors. So zeroing in on them as the thing that tariffs will “fix” may not be an effective strategy.

“Looking at the deficit by itself is a little bit too narrow,” Qian says. “The rest of the world is happy to invest in us. They buy American financial assets, including treasury bonds. They also buy American real estate and build manufacturing facilities here.”

These deficits also change over time. An imbalance for a few years can turn into a surplus. So, while the U.S. has run larger and larger deficits since the 1980s, the peril of doing so is not clear because this is a relatively new phenomenon, and it is being done by the world’s largest economy.

“Running large trade deficits for so long while growing so much isn’t something that has really happened before,” Qian says. “Standard economic models say it’s not a problem, but it’s legitimate to ask whether economists are missing something here.”

Manufacturing production vs. manufacturing jobs

While the administration is attempting to incentivize the return of manufacturing to the U.S. by touting its impact on employment, it’s not clear that this will actually happen. There are two reasons for this.

First, the post-industrial U.S. imports goods manufactured in countries where production costs less and maintains a trade surplus for the financial and legal services it provides to other countries. So why would it try to bring back manufacturing?

“If you really want to get rid of the trade deficit, the way to do it is to push us faster into services because that’s our competitive advantage,” Qian says. “Bringing manufacturing back to the U.S. is like pulling us back in time.”

Second, increasing automation means that even reshoring won’t restore the manufacturing job losses of the early 2000s. Even China, which has a much less-expensive labor force, is worried about losing manufacturing jobs to automation.

“There’s no way that the U.S., the richest and most technologically advanced country in the world, does not automate,” Qian says. “So when manufacturing comes back, that may add a few jobs in the beginning when we’re building factories, but not nearly as many jobs as people think will be generated on assembly lines.”

The questions for the U.S. economy are: How high will prices have to get to make bringing manufacturing back profitable, and will American consumers pay those prices?

“Tariffs are a tax on American consumers to subsidize American manufacturing,” Qian says. “It’s going to be very expensive. If we raise tariffs high enough, producers will make a profit. But because of automation, manufacturers don’t need that many workers, so the profits will be distributed in a very regressive way.”

Enduring tariff effects

Since its initial announcement, the Trump administration has increased, reduced, postponed, repealed, and exempted products from tariffs. It may take some time to sort through the fallout, but potential long-term effects of the policies are emerging.

For example, it might bring the European Union and China closer together
on trade. But even if that doesn’t happen, it’s hard to see EU nations embracing the U.S. as a trade partner to the extent that it has in the past, given the uncertainty being projected by the administration.

“I would keep an eye on the China–Europe dialogue,” Qian says. “They are the second- and third-largest economies, and for the last few years, the Biden administration has assiduously worked with allies to isolate China. The tariffs announcement essentially put China and Europe on the same side of this trade war.”

This is a good reminder that other nations have to consider their own goals—both economically and politically—in tariff negotiations. So while they may seem like uneasy partners, with Europe upset about China’s lack of support for Ukraine and nervous about China flooding its markets with cheap goods, they may find common ground on matters such as climate change and the development of battery technology.

“The other possibility is that Europe and the U.S. make a deal and China is isolated,” Qian says. “But in both scenarios, prices are higher in the U.S. because of the tariffs.”

In addition to the enduring unreliability of the U.S. as a trade partner, the ongoing tariff situation will negatively affect purchases of financial assets. Traditionally, U.S. debt has been a safe haven for investors during tumultuous times. But their confidence has been shaken.

“If other countries think of the U.S. as risky, they’ll be less willing to take on American debt, which will make it harder for the U.S. to carry that debt.”