Full Text of Gramm and Boudreaux on Trump’s Proposed Across-the-Board Tariffs

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Now that 30 days have passed since the Wall Street Journal‘s publication of Phil Gramm’s and my piece on Donald Trump’s proposed across-the-board tariffs, I share the full text of that piece here beneath the fold.

Trump’s Tariffs Would Smother His Economic Successes

A minimum 10% levy on all goods would hike domestic prices, reduce wages and invite foreign retaliation.

By Phil Gramm and Donald J. Boudreaux
Nov. 13, 2024 at 4:44 pm ET

Donald Trump hopes to supercharge economic growth, restore manufacturing employment, and raise wages by imposing across-the-board tariffs of at least 10%, with even higher duties on Chinese goods. Yet any understanding of international trade, and of Mr. Trump’s first term, provides strong evidence that such measures wouldn’t achieve the president-elect’s objectives. The decline in economic growth caused by tariffs—along with reduced wages and income-tax collections—would at least partially offset any additional customs revenues. Implementing the tariffs would also likely trigger a trade war that would erode, if not overwhelm, the positive effects of tax reform and deregulation.

After Mr. Trump’s regulatory and tax relief boosted real economic growth from 1.8% in 2016 to a 13-year high of 3% in 2018, tariffs stunted growth. That was as the Congressional Budget Office predicted, with growth slowing to 2.6% in 2019, the first full year of the tariffs. Employment in manufacturing continued falling as a percentage of total employment at the same rate as the previous decade. Before the tariffs were imposed, manufacturing jobs were 8.5% of total employment. The figure fell to 8.4% by the end of 2019 and 8.1% today. Manufacturing output, after rising 2.5% during the first three quarters of 2018, fell when the tariffs fully kicked in. By the end of 2019, the inflation-adjusted value of manufacturing output was 6.2% lower than when the tariffs were imposed.

Mr. Trump’s pro-growth tax and regulatory policy attracted a surge of foreign investment, including from American companies operating abroad. Such investment required dollars, and the currency’s value soared. That made U.S. exports more expensive, imports cheaper and the trade deficit larger. The last was 24% larger when Mr. Trump left office than when he entered.

Imposing a 10% tariff on all imports would more than triple the average U.S. tariff rate on all imports, which in 2022 was 2.8%, slightly above the average tariff rate for Organization for Economic Cooperation and Development countries. A 60% tariff on Chinese imports would hike the average. The surge in Americans’ costs of acquiring imports—now 13.7% of gross domestic product, the lowest of any developed country in the world—would be economically convulsive.

An across-the-board tariff would stimulate U.S. production of goods that we now import more cheaply. To produce these goods at home, American workers and capital would be drawn away from producing other goods and services that we produce more efficiently. Productivity, wages and the return on capital would fall as we produce things at home that we could buy more cheaply abroad. This would simultaneously reduce production in industries for which our labor productivity and capital returns are higher. Moreover, because half of our imports are component parts used by U.S. producers, tariffs would further increase our production costs and reduce our competitiveness at home and abroad.

The retaliation by our trading partners would compound tariffs’ costs by reducing U.S. exports in the industries where wages and capital returns are highest. A trade war could trigger global results similar to the consequences of the Smoot-Hawley tariff, which reduced the volume of world trade by approximately 14% and deepened the Great Depression.

The yearning to return manufacturing employment to yesteryear’s levels is misguided nostalgia. A half-century ago nearly 25% of American workers were employed in manufacturing, down from the all-time high of 39% in 1943. This percentage continues to fall because of technological advances, not trade. Modern technological prowess allows American industry to produce nearly 2.5 times as much manufacturing output as in 1974 with a fraction of the labor force.

Researchers estimate that 10% across-the-board tariffs would shave a full percentage point off U.S. GDP growth. An additional 0.8% of GDP would be lost from the 60% duty on Chinese imports, raising the yearly cost per household of the tariffs to almost $4,000. And as an October report from the Yale Budget Lab concluded, “a consistent theoretical and empirical finding in economics is that domestic consumers and domestic firms bear the burden of a tariff, not the foreign country” exporting the given product.

The burden of the tariff would be regressive, too, considering lower-income households spend a larger share of their income on consumer goods. Kimberly Clausing and Mary Lovely of the Peterson Institute estimate that the tariffs Mr. Trump has proposed would impose disproportionately large losses on these households. Those in the bottom income quintile would find their purchasing power reduced by 4.2%, while households in the middle-income quintile would lose 2.7%. Highest-quintile households would lose less than 1%. Any ensuing retaliation could multiply these costs.

Restoring the factories our parents left decades ago would also resurrect many old—and unsavory—economic conditions. Inflation-adjusted average hourly compensation a half-century ago was only about half of what it is today. Two-thirds of American households now have real incomes that in 1967 would have put them in the top quintile of earners. In 1967 the share of the working-age population without a high-school diploma was more than 45%. In recent years it was under 10%.

Who would fill the jobs of the 1960s if we could bring them back? It’s a safe bet that those who long to restore such factories didn’t have parents or grandparents who worked in one.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a nonresident senior fellow at the American Enterprise Institute. Mr. Boudreaux is a professor of economics at George Mason University and the Mercatus Center. This article is based on their forthcoming book, “The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism.”

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