Things Are Not Always What We Are Told: Lessons from the First Tariff War

Photo: Mark Wilson/Getty Images
It has become routine for every presidential challenger to ask voters, “Are you better off now than you were four years ago?” Donald Trump asked that question in last year’s election and then answered it himself with a resounding “no.” The voters agreed, and he won the election. But are we really worse off than we were four years ago? The voters’ perception was that we are, but it’s probably too soon to say definitively. We can, however, go back a few years before that and look at Trump’s previous term and see whether people were better off after his first four years. That matters because, based on his statements during the campaign, it appears he will pursue some of the same policies with respect to trade and tariffs. John Murphy at the U.S. Chamber of Commerce has assembled some data to illustrate that from a number of perspectives, Trump’s tariffs did not leave the economy in better shape.
This is not to say the voters got it wrong last year. Inflation is a fact, and it seems clear that it played a significant role in the election. However, a significant element of the Trump economic policy was then—and apparently will be again—tariffs. Data from 2018–2019, however, shows that tariffs were not the cure-all Trump promised. That time period was chosen because it was pre-Covid-19. Here are some examples.
Investment Went Down
Both domestic and foreign investment declined in 2019 (pre-Covid-19):
Real Gross Private Domestic Investment
Foreign Direct Investment Declined
It appears we may well see the same thing happen again. A recent Bloomberg article reported: “Recent surveys point to tepid growth in capital expenditures in the manufacturing sector next year, not the kind of jump that was expected with the election in the rearview mirror and the Federal Reserve starting to cut interest rates.” Of course, if Congress passes the tax cuts the president-elect has been promising, that could pump up the economy, at least temporarily, although the uncertainty and unpredictability that was the hallmark of the last Trump administration gives every sign of returning. When that happens, the message to investors is to hold on to your wallets and wait to see what happens before you leap into new commitments.
Manufacturing Was Down
One of the hallmarks of all the Trump campaigns, and the Biden campaign as well, was a promise to bring manufacturing back to the United States. That has turned out to be more difficult than either of them expected—the United States is not a low-cost economy. Many of the businesses derisking from China are not moving back to the United States but instead are creating redundant facilities in third countries. So far, the big winners have been Vietnam and Mexico.
Manufacturing Output Contracted by 1.3 Percent in 2019
And, of course, with a decline in manufacturing came a decline in manufacturing jobs and wages.
Manufacturing Jobs Were Lost in the Midwest
It is noteworthy that what the Midwest jobs decline graph shows is significant sharp declines in three of the election’s battleground states—Michigan, Pennsylvania, and Wisconsin—all states Trump lost in 2020. Trump may have benefited in 2024 in those same states from workers who were still unhappy but blamed it on the incumbent.
Exports Went Down
While tariffs are expected to bring imports down, they often succeed in reducing exports as well, as targeted countries respond with retaliation, as China did.
U.S. Exports Declined
And, of course, tariffs raise prices. Contrary to Trump’s repeated assertions, the consumer pays, not the foreign companies. A New York Federal Reserve study suggested that the aggregate consumer price index (CPI) was 0.3 percent higher in January 2019 than it would have been without the tariffs. Washing machines, one prominent covered good, saw immediate spikes in CPI and producer price index (PPI) after the imposition of 20–50 percent tariffs in January 2018.
Of course, this is only a partial analysis, and I leave it to historians to draw a complete picture of the Trump era—both terms—in the decades to come. The data does, however, suggest that the reality was far different from the spectacular success that the president-elect frequently claims for his earlier tenure. Most importantly, the data demonstrates that tariffs did not spark growth in investment, manufacturing, and manufacturing jobs. That matters because we are about to hear the same argument again as the nation faces threats of new broader and larger tariffs than the last time. Once again, they will be touted as the solution to the nation’s economic problems—a way to restore manufacturing without causing inflation. And once again, I think we will see a very different outcome. That poses a bit of a dilemma for economists and trade experts. If things go off the rails, should we be happy because we were right or distressed because of the unnecessary harm being done to the economy? A good example of the German term “Schadenfreude.”
A personal note: This is my last column in my capacity as the Scholl Chair at CSIS. I am moving to part-time status and will be senior adviser and Scholl Chair emeritus. I will continue to write this column, record the Trade Guys podcast with Scott Miller, and take on some additional projects, but Philip Luck will be the new Scholl Chair. I hope you will give him your best wishes as he takes on leadership of the program.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
