Tariffs and the return of Made in America!

Trump's tariffs look less and less like an instrument for negotiation, of whatever they would allow to negotiate (some stuff is simply ludicrous, like the discussion on reducing fentanyl entry through Canada), and, at least rhetorically, he is using the language of bringing back manufacturing jobs to the United States. That would actually strengthen his populist credentials. Many trade union types were very happy, contrary to what most media outlets would make you believe, and certainly it should worry Dems.

However, whether this tariffs will bring back manufacturing jobs is far from clear. There have been a lot of jokes about the back-of-the-envelope calculations used to determine the level of the tariffs. At the end of the day, it seems that the actual decision was somewhat arbitrary, and mostly concerned with punishing countries with higher trade surpluses with the US.

I don't think this is clear yet, but average tariffs may go back to the levels of the 1930s, if these stick (which again, nobody knows, since some might negotiate side deals with the Don). And while there is a lot of debate about the effects that they will have in the economy in the short run (inflation, stagflation and so on), there has been little discussion of the historical precedent, and whether tariffs were instrumental for American industrialization, and whether the claim that they will bring back good jobs makes sense. Certainly, on the progressive side that is the common understanding, and a lot of that is associated to Alexander Hamilton, and his followers, less well-known figures like Mathew and Henry Carey, Friedrich List, and later Progressives like Simon Patten, during the Gilded Age. And tariffs were definitely high in the post-bellum period, when the US industrialized (see below, from Douglas Irwin's massive history of US trade policy).

It is certainly true that the bulk of industrialization happened when tariffs where high, even if some industrialization did happen in the ante-bellum period, when tariffs fluctuated quite a bit. The official economic historiography, Taussig, North and Irwin himself, to cite some of the more prominent authors, are somewhat skeptical of its role. Irwin, in particular, is very forceful in his views about the fiscal nature of the ante-bellum tariffs, and even, in terms of intellectual history, the notion that Hamilton was not a protectionist defending import substitution industrialization. I have problems with that interpretation, and I think a reading of Hamilton's Report on Manufactures shows that he is incorrect.

However, it is true that tariffs alone did not cause industrialization. Just as an example, tariffs by the end of the 19th century were higher in Latin America, on average, than in the US, and even though there was some increase in manufacturing in some countries in the region, they remained mostly commodity exporters during this period (see graph below from Coatsworth and Williamson).

So, if not tariffs, what allowed for the industrial boom in the post-bellum period, one may ask. First and foremost, the railroad boom, and the finishing of the transcontinental railroad in 1869,  the "Golden Spike" at Promontory Summit, Utah (I visited, and they do a recreation of the famous photo below), created a national market, that was only possible because of the Federal government. Republican governments in that era had an industrializing project, were protectionist, but more importantly provided subsidized land to railroad corporations, which otherwise would not have been able to finance these massive infrastructure projects. Land grants were central for the expansion of the economy, and suggest that the role of the government was much larger than if one looks simply at the level of spending in this period, which was modest, by modern standards.

In other words, protection did play a role, but it was not sufficient to explain the industrialization boom of the late 19th century. Government support for the expansion of the domestic market was key. I do not expect, and so far that has been the case, that the Trump administration will cut significantly spending. A lot of the money that they will spend, will certainly go to contracts for big corporations. In that sense, American corporations will continue to benefit from government largess, but I doubt jobs will come back in great quantities. Note that manufacturing jobs were constant up to the entry of China in the WTO, and then even when they collapsed in the early 2000s (explaining the Tea Party and Trumpism itself to a great extent), at least for a while, it went hand in hand with the expansion of manufacturing output. Only in the last 15 years, in the aftermath of the Great Recession did manufacturing production stalled, and that was during a period of relative modest government spending growth (the Obama-Trump lackluster recovery).

In my view, and this is admittedly impressionistic, cost of production in the US will remain too high, and alternatives will still be more attractive than moving production back to the US. Also, while I do think that the new Republican coalition is fractious, and some may really want to bring back manufacturing jobs, neither Trump, nor his main backers (mostly wealthy billionaires) are pro-workers or really concerned with bringing back good manufacturing jobs. He is dismantling unions (in the Federal bureaucracy) and has a very pro-business, anti-labor set of policies. Even in immigration that could strengthen labor to some extent, he has not deported more than Biden, at least not yet.

On the critical, progressive side, the most common critique is that tariffs will lead to a collapse of the global economy, like the Smoot-Hawley Tariff of the 1930s, and a significant acceleration of inflation. Perhaps even stagflation. I, obviously, think that fears (or hopes) here are also exaggerated. Smoot-Hawley did not cause, and did not even exacerbate the Depression (even if it did not help either), the latter a view that is probably in the minority these days. And as I noted repeatedly, while tariffs will have a short run effect on inflation, since they will affect the level of prices, they will not lead to persistent inflation, which will come down fast, as did it after the pandemic. The problem will be that workers this time will not have higher wage increases. In other words, tariffs will hurt some people in the economy for sure. But that is a matter for another discussion.