How Trump’s Tariffs Really Affected The U.S. Job Market

cargo ships docked at the pier during day

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A January 2021 study commissioned by the U.S.-China Business Council (USCBC) claims that former president Donald Trump’s trade policies cost the United States 245,000 jobs. As a Reuters news report put it, the USCBC claimed that “a gradual scaling back of tariffs” could help stop the bleeding, while also arguing that a failure to do so would lead to even greater job losses and more sluggish growth.

But while I have long argued that Trump’s approach to trade harmed the U.S. economy more than it helped, this is mainly because these trade policies were based on obsolete ideas about how trade works and because they ignored the fundamental sources of the U.S. trade imbalances. As Matthew Klein and I argued in Trade Wars are Class Wars, bilateral tariffs on Chinese goods do nothing to change the income distortions in China that spurred the country to run huge surpluses and export its deficient levels of domestic demand. Nor do such tariffs address the mechanisms that send these demand deficiencies to American shores. As a result, even if Trump’s tariffs were to succeed in reducing the U.S. bilateral deficit with China, they would simply cause the U.S. deficit with the rest of the world, along with China’s surplus with the rest of the world, to rise by at least as much.

Clearly, the Trump administration’s trade policies were not successful. American deficits with China and the rest of the world were higher last year than they had been in over a decade. And while it is a little unfair to consider 2020 data without recognizing the peculiar economic distortions created by the coronavirus pandemic, U.S. trade, and current account deficits were much higher during Trump’s presidency than they had been under former President Barack Obama.

But these tariff policies did not backfire for the reasons the USCBC report claims. The main problem is how they mismeasure the benefits of trade. The report identifies several components of the trade relationship (U.S. imports from China, U.S. exports to China, U.S. investment in China, and Chinese investment in the United States) and tries to count up the direct jobs associated with each of these components. They then try to measure the impact of trade policies on each of these components and then tally the estimated job losses. The summary they provide shows how they do this:

The US has benefited from trade and investment flows with China. The combination of bilateral trade, investment, and supply chain integration has supported economic growth, consumer choice, and job creation. In 2019, exports to China supported 1.2 million jobs in the US and as of 2018, 197,000 people in the US were directly employed by Chinese multinational firms. US companies invested $105 billion in China in 2019, and the profits from these investments and the contribution they make to the competitiveness of US businesses help support the US economy through R&D, domestic investment, and dividend payments. With China forecast to drive around one-third of global growth over the next decade, maintaining market access to China is increasingly essential for US businesses’ global success.

TRADE CLEARS GLOBALLY, NOT BILATERALLY

The first and perhaps most obvious problem with this approach is it assumes that trade clears bilaterally. This may have been largely true 150 years ago, when transportation costs were too high to allow production across many locations, but it has become less true over time. In the first chapter of our bookTrade Wars Are Class Wars, Klein and I discuss how the global collapse in transportation, communication, and travel costs beginning in the 1980s has made bilateral trade a mostly useless measurement. Imbalances in one country are far more likely to be transmitted to another country indirectly, through other (sometimes multiple) parties, than directly through the bilateral account.

Even if we knew what to count and how to assess its employment impact, in other words, it would be meaningless to limit the discussion of the costs and benefits of trade with any one country solely to that bilateral trade account. To hammer this point home, my mentor at Columbia University, the late Michael Adler, once glared angrily at his students and warned that if any of them even mentioned bilateral trade they would immediately fail the class. Bilateral trade data convey very little about the overall trade relationship between two countries.

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