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Roula Khalaf, FT Editor, picks her favorite stories in this weekly newsletter.
The writer is chief economist at the Center for International Law & Economics and writes the blog Economic Forces
Donald Trump promised new push about tariffs when he returns to the White House. The stated goal is to protect American manufacturing jobs, but some approaches will achieve this much more effectively than others.
The historical record shows that, while tariffs may preserve specific manufacturing jobs in the short term, poorly designed trade barriers destroy more US factory jobs that they save money. Understanding these trade-offs is critical for policymakers determined to use tariffs. Trump said he would impose 25% tariffs on all imports from Canada and Mexico, and an additional 10% on Chinese goods. But execution will be key.
The key lies in the modern supply chain. Factories today rely heavily on imported components. Indeed, nearly 20% of U.S. imports are so-called intermediate inputs that are used by domestic manufacturers to produce other goods. Trump’s 2018 tariffs apply mainly these intermediate goods. This changes the way tariffs affect employment. Rather than a simple trade-off between protected workers and harm to consumers, these effects ripple throughout production.
Steel tariffs illustrate the pitfalls. While they benefit US manufacturers like Nucor and US Steel, they hurt the much larger metal-using manufacturing sector – from Caterpillar construction equipment to auto parts by Ford. These downstream industries are more labor intensive than steel production. When Trump imposed a 25% steel tariff in 2018, manufacturing jobs refuse in industries that use a lot of steel. These job losses outweigh any gains in steel production.
Taxes on finished goods can sometimes be effective in protecting jobs, but success requires careful planning. The washing machine industry is an example. When the US first imposed specific tariffs on China in 2017, manufacturers simply moved production to Thailand and Vietnam. Only after the US introduced global tariffs in 2018 did Samsung and LG build factories in the US. While this ultimately achieved the political goal of creating jobs in the US, it was demanding trade protection and comes at a higher price for consumers.
Protectionism can also occur when foreign producers cannot easily switch production. Take semiconductors as an example: building new chip factories requires large capital investments (typically between $10 billion and $20 billion) and years of construction. In that case, tariffs could increase chip prices, protecting Intel employees. But the same barriers – large capital requirements, specialized worker training, complex supplier networks – also make it more difficult to establish new domestic production quickly.
The auto industry also illustrates both productive and counterproductive approaches to tariffs. The so-called “chicken tax” – named after the original tax on poultry – was a 25% tax on imported light trucks imposed in 1964. It helped Ford and General Motors dominate the market. American pickup truck market for decades. The tariff is effective because it targets finished vehicles, not parts, and because domestic manufacturers can easily expand production. Over time, it even motivated companies like Toyota, Nissan and Honda to build factories in the US to avoid taxes.
But modern car production is much more complicated. When the Trump administration imposed tariffs on Chinese auto parts in 2018, it did nothing to protect American jobs. Instead, it increases costs for American automakers that rely on imported components. Higher input costs leads to Slower export growth and job losses in affected industries.
If the goal is to support high-value manufacturing, policymakers should focus on protecting advanced industries in which America has existing expertise. Targeted support for semiconductor manufacturers like Intel or electric vehicle battery makers could help domestic companies scale up in strategic sectors. In contrast, widespread tariffs on basic materials such as aluminum primarily lead to higher costs in the manufacturing supply chain.
For businesses looking to plan ahead, the lesson is simple: what matters most is where the new tax rate affects their income statement. Taxes on final goods primarily affect revenue through higher prices or sales volumes. But tariffs on direct inputs increase costs, reduce profit margins and often force tougher choices about moving production.
Modern manufacturing involves complex international supply chains that tariffs can easily disrupt. The iPhone is not just “made in China” but also represents a global manufacturing network that includes American innovation and Asian manufacturing. Policymakers need to update their thinking accordingly.
