Counting dollars, dimes, and cents with William Lang sales register (1890) | CC0
I have spent decades giving boring lectures on tariffs to graduate students. Suddenly, every other newspaper article is on tariffs. We have to credit President Trump with tapping into the popular disgruntlement with globalization beginning in 2016, leading to a rethinking of the structure of global economic governance and a newfound fascination with tariffs.
Economics textbooks tell us tariffs will raise prices, reduce imports, raise domestic production, transfer value from consumers to producers, and lead to inefficiencies (deadweight loss). Empirical analysis of versions of the Trump tariffs shows that the burden (tax) on US households will be regressive, as lower income households are hit relatively harder by the price increases. This is the microeconomics of tariffs. These effects are magnified by the global structure of production, with many inputs now as imports in global supply chains and subject to tariffs.
The irony is that many of us have argued for the dynamic benefits of tariffs for a long time, insisting that they swamp the static effects. The policy, usually applied in a developing country context, is called “infant industry protection” or “import substitution industrialization” (ISI). This is what the US did in its industrial development in the eighteenth and nineteenth centuries, Latin America in the 1950s–1970s, and East Asian did in the 1980s and 1990s. But in the current wave of tariff protection, macroeconomic, and geopolitical considerations may be more important than the microeconomic effects.
The current episode of international economic policy is in part the inherited legacy of crises past. First of all is the 1997 Asia Crisis, with its lesson that countries should hold ample foreign reserves to protect against a sudden depletion of reserves, what some have called “self-insurance.” This can also require a steady undervalued currency. Second is the 2007–8 financial crisis in the US, when asset values collapsed, banks were bailed out, and household finances became weaker, leading to a significant rise in household debt. The manufacturing sector has stagnated since 2008, and much of the political backlash against globalization, against experts, against the state, can be found to originate in that deep recession. Third, and more generally, is the impact of decades of liberalized trade, which had huge social and political consequences. In particular, the surge of Chinese imports—the “China shock” from 2000–2011—has been associated with deep employment declines in the United States, and what Ann Case and Angus Deaton have described as “deaths of despair,” involving a decline in lifespan of men in these devastated communities, driven by increases in suicide and drug- and alcohol-related deaths.
Why did a shift suddenly happen in the US position on China? What was a deeply collaborative and efficient trade relation, dubbed “Chimerica” because the two economies were hand in glove, suddenly became a trade war of historic proportions, with tariffs from both sides raised to 125–145 percent (since reduced to about 50 percent). My own research has focused on the economic rationale of this political shift by looking at the relation between Chinese imports and the profit share of US industry. In the period of hyper-globalization from 2000–2011, Chinese imports were positively correlated with the profit share in US private industry. China provided cheap inputs to US production and wholesale trade, reducing costs and raising profits of US firms. This correlation has become negative in the period since 2011. So the politics may have an economic rationale: Chinese imports supported US company returns in the first period and have competed against those returns more recently.
The explanation for this flip in the sign of the correlation is not mysterious. China was rapidly upgrading its technology and its product lines, and became the world leader in a number of areas, including lithium-ion batteries, rare earth minerals processing, solar panels, electric vehicles, pharmaceutical products, and even AI. China had upgraded and is now competing directly with US producers in electronics, green technology, transport equipment, pharmaceuticals, and software.
The question for today is if the global hegemon—the US—will be able to successfully implement an ISI policy. I call it ISRI, for “import substitution re-industrialization.” I am skeptical of the likelihood of success of this policy for a number of reasons. First of all, the United States is hugely dependent on China for consumer goods as well as higher-end goods in the sectors mentioned above. It is hard to imagine that US industry in these tech- and capital-intensive sectors will be rejuvenated simply with a price increase from tariffs. US industry is highly concentrated, so it is more likely that tariffs will translate into higher cost markups for US firms rather than more production. ISRI requires a significant boost in investment demand for capacity expansion and technological improvement, and if the firms themselves are unlikely to undertake this expenditure, then successful ISRI requires a complementary industrial policy to create capacity. President Biden had championed such a policy, but it is being reversed by the Trump administration. In addition, the Trump tariffs have been met with strong retaliation from China, which hinders US industry by cutting its sales in China, further impeding ISRI.
There are two sides to the logic of ISRI. One is the domestic industry rejuvenation discussed above. The other is the spur to domestic production from foreign investment in the United States. The case for this is based on the old “tariff hopping” argument, whereby foreign firms invest in production in the US to avoid the tariffs. Tariff hopping has long been known to require a stability of policy and a willingness of local political leaders to negotiate with foreign companies, for tax breaks, job supports, and provision of state-of-the art infrastructure such as transportation. None of this has been forthcoming in the Trump plan, least of all the policy stability. Policy changes are happening daily.
I want to make two final points. The first is that recent US tariff policy is driven by other goals, not just ISRI. These goals are broader, involving macroeconomics and geopolitics. One goal is, to quote CEA chair Stephen Miran, “fundamentally reshaping the global trade and financial systems” to better serve US economic interests. The goal of the so-called “Mar-a-Lago Accord” project is a sustained dollar devaluation that nonetheless retains the US dollar as the key currency. This is a risky proposal, since there is a tipping point beyond which there could be a run on the dollar and a decline in US purchasing power and key currency privilege. The recent trends of falling bond prices and a declining value of the dollar is an indication that this risk is real. It is unusual for the economic hegemon to be running a large deficit in its current account. But rebalancing is a politically challenging task for both China and the US, as Matthew C. Klein and Michael Pettis make very clear in their book, Trade Wars Are Class Wars, arguing for a Keynes-style expansionary adjustment policy. China has for decades proclaimed an interest in raising household consumption, with little to show for it. And the US might start by raising taxes, precisely the opposite of what the Trump administration is promoting.
This leads to the next goal of tariffs that has been put forward: to raise government revenue to offset fiscal implications of domestic tax cuts. The United States has not tried this since its income tax was introduced in 1913 and the most hopeful estimates of tariff revenue from the current US tariff plan would not raise enough to support the proposed tax cuts, much less the entire income tax system.
The other rationale for the massive tariffs in the US is to pressure countries and US companies to support the President: his personal and campaign coffers and his political agenda. I call this “neopatrimonial mercantilism,” as it is the use of tariffs to induce lobbying for exemptions. Examples include Nvidia, Apple, Amazon, Tesla, SpaceX, Ford, GM, Crypto, TikTok; Canada, UK, Mexico, Ukraine … The list goes on.
I should add that Trump’s objectives with respect to China are unclear, perhaps intentionally so. Does he want a grand bargain on spheres of influence? Does he want to contain China economically to allow United States dominance to continue? Does he want to compete in high tech and rare earth minerals? Does he want the US to move down the value chain and produce sneakers and T-shirts? Again, it is worth noting that anti-China policy is the one foreign policy issue on which Republicans and Democrats seem to agree. But to what end?
A final point: If neoliberalism and hyper-globalization were unsustainable, and the deglobalization brought on by the protectionism of today looks like it will not be effective, then what form will globalization and global governance take after deglobalization? It may involve a carving up of the globe into spheres of influence (“never say never”). It may involve more South-South trade—that is, trade among developing countries, especially as China seeks out new markets. It may involve trade, environmental, and even military agreements that exclude the United States. But ultimately, any redesign of the multilateral system will need to address three (so far) unsustainable global forces: global trade imbalances, global inequalities within and across countries, and global warming.
The current policy chaos and posturing only delays us from addressing these serious challenges.
These remarks were first presented to the General Seminar at the New School for Social Research on May 7, 2025.
