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FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
The writer is chief economist at the International Center for Law and Economics and writes the blog Economic Forces.
Donald Trump has promised a renewed momentum of tariffs when he returns to the White House. The stated goal is to protect American manufacturing jobs, but some approaches would achieve this much more effectively than others.
The historical record shows that while tariffs can preserve specific manufacturing jobs in the short term, poorly designed trade barriers destroy more American manufacturing jobs than they save. Understanding these trade-offs is crucial for policymakers determined to use tariffs.
The key is modern supply chains. Current factories rely heavily on imported components. In fact, nearly 20 percent of U.S. imports are so-called intermediate inputs used by domestic producers to make other goods. Trump’s tariffs in 2018 applied mainly to these intermediate goods. This transforms the way tariffs affect jobs. Instead of a simple trade-off between protected workers and harmed consumers, the effects ripple through the manufacturing industry.
Steel tariffs illustrate the dangers. While they benefit American producers like Nucor and US Steel, they hurt the much larger manufacturing sector that uses the metal, from Caterpillar construction equipment to Ford auto parts. These processing industries employ many more workers than steel production. When Trump imposed 25 percent tariffs on steel in 2018, manufacturing employment refused in industries that use steel intensively. These job losses outweighed any increases in steel production.
Tariffs on finished products can sometimes effectively protect jobs, but success requires careful design. The washing machine industry is an example. When the United States first imposed specific duties on China in 2017, manufacturers simply moved production to Thailand and Vietnam. Only after the United States enacted global tariffs in 2018 did Samsung and LG build American factories. While this ultimately achieved the political goal of creating jobs in the United States, it required trade protection and brought with it higher prices for consumers.
Protection is also possible when foreign producers cannot easily change their production. Take semiconductors, for example: Building new chip manufacturing plants requires huge capital investment (typically between $10 billion and $20 billion) and years of construction. In that case, a tariff can raise chip prices, protecting Intel employees. But those same barriers—huge capital requirements, training of specialized workers, complex supplier networks—also make it difficult to quickly establish new domestic production.
The automotive industry also illustrates effective and counterproductive tariff approaches. The so-called “chicken tax,” named for an initial tariff on poultry, was a 25 percent tariff on imported light trucks imposed in 1964. It helped Ford and General Motors dominate the American truck market during decades. The tariff worked because it targeted finished vehicles, not parts, and because domestic manufacturers could easily expand production. Over time, it even prompted companies like Toyota, Nissan and Honda to build plants in the United States to avoid the tariff.
But the production of modern vehicles is much more complex. When the Trump administration imposed tariffs on Chinese auto parts in 2018, it did nothing to protect American jobs. Instead, it increased costs for American automakers that relied on imported components. Higher input costs led to lower export growth and job losses in affected industries.
If the goal is to support high-value manufacturing, policymakers should focus on protecting the advanced industries in which the United States has expertise. Targeted support for semiconductor manufacturers such as Intel or electric vehicle battery producers could help domestic companies gain scale in strategic sectors. In contrast, broad tariffs on basic materials like aluminum primarily result in higher costs in manufacturing supply chains.
For companies looking to plan for the future, the lesson is simple: what matters most is where the new tariffs will affect their bottom line. Tariffs on final goods primarily affect revenue through higher prices or units sold. But input tariffs directly inflate the cost side, reducing margins and often forcing more difficult decisions about how to shift production.
Modern manufacturing involves complex international supply chains that can be easily disrupted by tariffs. The iPhone is not only “made in China,” but represents a global production network that includes American innovation and Asian manufacturing. Policymakers must update their thinking accordingly.