America’s Experiment With Protectionism Is Failing

Starting in March 2018, the United States has undertaken its largest experiment with protectionism since the end of the Second World War. The average tariff on all imported goods today sits at 6.1%, its highest level since 1947 and compared to just 1.5% in 2017. For decades, large segments of the political arena on both the left and right have argued that greater protectionism is necessary to protect American wages, jobs, and manufacturing. As a result, the effects of this experiment are critical not just to the Trump presidency, but to the ongoing bipartisan debate over free trade and tariffs. A year and a half into its implementation, however, the experiment appears to be failing. Jobs have not come back to the United States, domestic manufacturing has been weakened, the average household has lost over $1,000, and growth has slowed.

The Trade Deficit Has Continued To Rise, And Manufacturing Hasn’t Returned

The most important argument made by the President in defense of his protectionist strategy was that the tariffs would lead to a reduction in imports of manufactured goods and a closing of the trade deficit, thus spurring a revival of domestic manufacturing, jobs, and wages. Importantly, however, this import substitution has simply not happened. From January 2018 to July 2019, the US trade deficit has actually expanded by $2 billion/month (an increase of about 3.5%) in spite of the tariffs. While the trade deficit with China has fallen by $3 billion/month (a decline of 8.5%), those imports have simply been replaced by ones from other trading partners rather than by production in the US. The trade deficit has expanded by $6.6 billion with the EU (+49%), $3.5 billion with Mexico (+77%), $2 billion with Vietnam (+71%), and $0.7 billion with Japan (+13%), more than making up for the reduction with China.

As a result, there has been no re-shoring of manufacturing production that was previously “lost” to foreign imports, something that was critical to Trump’s argument that he would revive jobs and wages. It is important to note that this central argument is of course nonsense, because the trade deficit is a function of domestic national savings and investment, not trade policy, so a structural reduction in the trade deficit would also necessarily either increase the savings rate (thus reducing consumer spending) or reduce investment, both of which would harm jobs and wage growth. However, even if we take Trump’s argument at face value, it has not succeeded.

What has happened instead is that the tariffs have cut off US access to important export markets, increased the costs of inputs for businesses, and increased the prices faced by all American consumers. As a result, on every metric that Trump promised to improve – exports, manufacturing, economic growth, jobs, and incomes – his protectionist strategy has instead created a slowdown if not outright contraction.

Export Growth Has Collapsed

First, foreign retaliation to Trump’s trade wars has led to a closing off of key export markets for US firms and workers. As a result, export growth has slowed significantly since the trade war began, from an average of +9.1%/year in 2016 and 2017 to just +0.1%/year in the first half of 2019. In particular, farmer bankruptcies have hit a 6-year high as prices for soybeans and other products have collapsed in the face of weaker foreign demand.

Manufacturing Has Weakened

Second, US manufacturing – the industry that Trump based his campaign upon helping more than anything else – has seen an enormous slow-down since early 2018 as a result of weakened foreign demand for manufactured goods and higher input costs for factories. In August 2019, the manufacturing sector contracted for the first time in three years, and manufacturing job growth has ground to an almost complete halt this year – through the first eight months of the year job growth in manufacturing was just 5.5k/month compared to 15.8k/month in 2017.

Economic Growth Has Slowed

Third, overall economic growth has been severely impacted by the trade war. New research from the Federal Reserve estimates that the trade war will reduce US GDP growth by 0.8 percentage points in 2019 and more than 1.0pp in 2020, while Goldman Sachs projects the tariffs will reduce 2019 growth by 0.6pp. Furthermore, the IMF now projects that the trade war will reduce global growth by 0.8pp in 2020. Rather than increase growth to a sustainable 3%/year level as promised by the President, growth has instead rapidly decelerated since the tariffs were first implemented.

Job Growth Has Fallen

Fourth, job growth has weakened considerably as firms have fewer export opportunities and higher input costs and consumers are faced with lower disposable income. Moody’s Analytics estimates that the trade war with China has already destroyed 300,000 jobs, and projects that 450,000 jobs will be lost in total by the end of 2019 and 900,000 by the end of 2020 if the trade war continues. As can be seen below, both overall job growth and manufacturing job growth have declined significantly since March 2018.

Income Growth Has Reversed

And finally, real income growth has now begun to slow sharply after remaining relatively steady in 2017 and 2018 (although at lower levels than in 2015 and 2016). JP Morgan estimates that the average household will lose $1,000 by the end of 2019 as a result of the tariffs, while reduced hiring by firms has put pressure on nominal wage growth. As can be seen below, the slight increase in nominal earnings growth in 2018 has stopped and begun to roll-back in 2019 as the trade war has escalated, and nominal earnings growth is today slower than at the start of 2018.

Overall, then, what has the trade war gotten us? To be sure, Trump’s goals of reducing the trade deficit and thus bringing manufacturing production and jobs back to the US have not happened. Instead, this great experiment in protectionism has weakened essentially every economic metric that we measure. Over 300,000 workers have lost their jobs, middle class households are $1,000 poorer, and the country as a whole will have lost at least $100 billion in economic output by the end of the year. While much of the American political establishment is still enthralled with protectionism, the American people have largely come around to this reality. Poll after poll finds a wide majority of voters in favor of free trade and opposed to Trump’s tariffs – for example, a new Pew poll from July finds that Americans say free trade agreements are a good thing by 65% to 22%, with Democrats in particular in favor by a 73% to 15% margin. It is time now for Congress, and the 2020 Presidential candidates, to step up and end this disastrous experiment with protectionism.