Q&A: Professor Steven Durlauf on Tariffs, Trade, and Trump

 

Steven Durlauf is the Frank P. Hixon Distinguished Service Professor and the Director of the Stone Center for Research on Wealth Inequality and Mobility at the University of Chicago Harris School of Public Policy. A prominent economist, his research examines areas such as poverty, inequality, and economic growth – topics which were of interest during the 2024 United States presidential election and remain high atop the news today.

In this Q&A, Professor Durlauf offers perspective on tariffs and the early term economic policies being enacted in the second Trump administration. 

What are your thoughts regarding President Trump’s policies on tariffs? 

Trump’s tariff policies are bad in terms of concept and in terms of execution.

When I say that this is a conceptually bad policy, I mean that implementing broad tariffs against Canada, Mexico, China, and the European Union will harm the United States even if they are well-executed.

Tariffs act in a fashion analogous to taxes. They are paid by those who purchase imports, not by the importers per se. There may be debates on the magnitude of the incidence of tariffs, i.e. to what extent importers lower pre-tariff prices in response to lower demand for products, but longstanding empirical evidence makes clear that those who purchase imports will face higher prices. This has been shown for tariffs in the first Trump term.

Higher prices cause harms in multiple dimensions. A big one is that consumers are directly affected by having to pay more for goods. To give some examples, approximately 60% of U.S. vegetable consumption comes from Mexico and 25% of crude oil processed by U.S. refineries comes from Canada. Even 80% of U.S. toys originate in China. Those, and many other products, will all cost Americans more.

The new administration argues that the new tariffs will bring wealth back to the U.S. and be good for U.S. workers.  Do you see it that way?

Part of the argument for tariffs is that they are good for U.S. jobs, with the employment effect being worth higher prices and harms to consumers. But that’s not really how they work. In fact, tariffs are likely to cause negative employment effects because of the way that they ripple through the economy. A good example is the steel tariffs implemented in the first Trump administration. These slightly raised employment in the steel industry. However, they caused an overall decline of manufacturing employment that was an order of magnitude higher than the modest gain in steel jobs. Why? Millions of manufacturing jobs involve products that use steel as an input; over two million jobs are in steel-intensive industries (which means that steel represents at least 5% of production input costs). These jobs are adversely impacted by rising production costs caused by tariffs on steel. In contrast, there are less than 150,000 US steelworkers.

These ripple effects will be felt in other large sectors. If lumber tariffs are implemented against Canada (they are currently on again/off again) they will drive up residential and commercial construction costs; about 30% of U.S. softwood lumber comes from Canada. And of course the direct effects of tariffs on Canadian oil will work through the entire economy as well.

U.S. tariff increases do not occur in a vacuum. China has already retaliated. Canada and Mexico previously proposed countermeasures to U.S. threats. The Canada and European Union have just responded to steel and aluminum tariffs. This why tariffs are often called a "beggar thy neighbor" policy. Everyone will be worse off.

There seem to be new developments about how the tariffs are being implemented–or not implemented–almost daily. What should we know about how they are being put into place?

A distinct problem with the Trump tariffs policies is their implementation. We have had tariffs threatened, tariffs imposed, tariffs delayed. This creates uncertainties that have distinct harms on the American economy. One standard measure, the Economic Policy Uncertainty Index, has unsurprisingly skyrocketed. Further, tariff policy has been taken out of the domain of standard economics by the petulant and cavalier way in which they are shifting. So it not just the uncertainty in the policies, but the reasons for the uncertainty that are damaging the U.S. economy.

How do tariffs affect our standing around the world?

Tariffs have become a cudgel to browbeat and threaten countries. The importance of the U.S. to other economies creates great power differentials that can be exploited in the short term. But policy by erratic bullying has long-run costs. Long-run agreements require trust. This is being thrown away. It is important to remember that the first Trump Presidency forced a modification of the North American Free Trade Agreement (NAFTA) into the United States-Mexico-Canada Agreement. So claims of longstanding unfairness ring especially hollow. But they do demonstrate that the US cannot be expected to adhere to agreements. It is likely that Canada will turn to the European Union as a more reliable partner; it is not fanciful to see Canada becoming an EU member if these policies continue.

The overall harms of the administration’s tariff policies on long run prospects for the U.S. economy are likely a major explanation of recent stock market declines. These declines stand as a rebuke to claims that the Trump policies can be justified as producing short run costs for long run gains. These alleged long run gains, even if they exist, have been priced by markets in such a way that they do not offset tariff costs.

One additional point. The level of dishonesty associated with Trump’s tariff policies is also distinctly damaging to U.S. standing. Repeated misrepresentations of the levels of tariffs of other countries, falsehoods about alleged U.S. subsidies to other countries, the spectacle of previously reputable economists making risible claims about the effects of tariffs on GDP, cannot help but discredit the U.S.

Are tariffs always bad? Is there a better way to think about using trade policy to support American workers and advance our national interests? 

None of these criticisms of the Trump administration’s tariff agenda means that I endorse “free trade fundamentalism.” There are legitimate arguments that the pace of globalization was too fast to accommodate disruptions that affected many workers and their families over the past several decades. Americans have every right to be frustrated. There are also legitimate reasons to impose certain tariffs to ensure robust supply chains, both for economic and for national security considerations. Unfortunately, the Trump administration’s policies cannot undo the past nor are they focused on specific supply chain issues. Nor is it obvious that tariffs are the best way to address these concerns. Industrial policies, such as the bipartisan CHIPS Act to encourage domestic semiconductor production, have the potential, in my opinion, to be more effective in promoting domestic production than tariffs.

As the economy begins to adjust to these new policies, what specific indicators will you be watching closely, and what outcomes do you expect to see in terms of economic growth?

While stock prices are informative, they are signals about levels of economic activity. The standard economic indicators, employment and unemployment rates, GDP growth, investment, will reflect the real effects of the tariff policies. To be clear, identifying a specific effect due to tariffs is complicated as they are part of a whole range of policy changes, not to mention factors outside of government policy, but I believe we will see an overall economic slowdown much of which is reasonably attributable to the emerging trade war.