A strong contender for the 2025 “Word of the Year”—an annual award by the Oxford Dictionary, emerged on April 2nd 2025, when President Trump announced his “Liberation Day” Tariffs. Sweeping taxes were imposed on imports from nearly every country that trades with the US, regardless of trade balance. Many legal scholars, however, questioned the legitimacy of such tariffs, as the president has the power to impose tariffs only in time of an economic emergency. Trump justified the move by citing the decline of American manufacturing, industrial offshoring to China and an alleged wage stagnation. While it is generally agreed upon that tariffs will cause semi-substantial inflation and perhaps even an economic downturn, is this short-term pain a worthy trade-off for reasserting American industrial self-sufficiency and restoring the once mighty American manufacturing. Are Tariffs the bitter pill America has to swallow? Is there a crisis, and can tariffs solve it?
First, we have to start off with definitions. A tariff is a tax an importer has to pay to import goods. It is absolutely crucial to note that tariffs only apply to the added-value and NOT THE WHOLE PRODUCT, therefore significantly dampening the inflationary effect of the tariffs. However, prices will still rise, though it is very hard to see an inflationary spike as high as in 2022. It is also important to note that inflation does not measure prices, but rather their growth. So if inflation last year was 9 percent and this year it is 3 percent, it does not mean prices fell; it means they grew by 3 percent. With that in mind, let’s take a look at the implications of tariffs for US economy in general and manufacturing in particular
Is There Even a Crisis?
The arguments that there is a crisis goes as follows:
- American manufacturing employment has dropped by 5 million since 1990, while manufacturing as a share of employment has decreased by 4 times since 1950- from 32 percent to 8 percent.
- The US imports more and more from abroad, as the US trade deficit hit 900 billion dollars in 2024.
- Because of offshoring, wages have not grown since 1950.
Do These Claims Survive Scrutiny?
- It is true that American manufacturing employment is declining, but the biggest factor is not offshoring but automation and general economic shift. Labor participation has kept steady since 1950, and actually rose in the 1980s. While US total gross manufacturing is actually thriving. Total Inflation-Adjusted Manufacturing Value Added was 1.4 trillion in 1997. In 2024 it was 2.4 trillion dollars, down slightly from 2021. Such rapid expansion came right after NAFTA came into effect. We will get to the reason later down the lines.
- American manufacturing relies heavily on foreign input materials, as US natural resources are not infinite. Not having tariffs leads to more efficient supply chains and assembly, so US hours per vehicle have been declining steadily for years now. This trend is seen most heavily from 1909 to 1920s, as due to trade liberalization culminating in the Underwood law that was followed by the plummeting of hours per car from 400 hours to merely 50 hours. Tariffs also lead to greater input costs, as producers are forced to buy expensive domestic products. This may lead to lay-offs. For example, in June 1930, US unemployment rate was 6.3 percent, 8 months after the stock market crash, and reduced significantly since March, when it hit 8.9 percent. However, on June 13th 1930, President Hoover signed the “Smoot-Hawley Act” that pushed up the average tariff rate from 26 percent to 60 percent. Greater input costs, and importantly, international retaliatory tariffs led to a spike in unemployment, which never fell below 14 percent for the rest of the decade.
- It is true that American trade deficit has exploded since the 50s, but the reason is primarily the strength of the US dollar. The US dollar is the Global reserve currency, meaning that it is incredibly stable, so at times of economic turmoil in other countries, investors convert foreign unstable currency into the stable dollars, pushing up the demand for it and therefore leading to higher valuation. This is great for consumers, because now 4 dollars can buy as much as 5 dollars could before, but it is damaging to exporters, as you need more local currency to buy the same amount of dollars. This resulted in US consumption being 70 percent of GDP– the highest in the developed world.
- Wages have not been stagnant. The American quality of life has objectively improved since the 1950s. The US upper middle class has grown to almost 17 percent of the population in 2024, while being less then 1 percent in 1980. Since 1980, real median household income grew by 36 percent since 1985 to 2024 (adjusting for 2022 prices, even despite US median household size decreasing from 2.9 people to 2.5 people per household, meaning that 2.5 people can buy 36 percent more than 3 people could just 50 years ago.
You can’t claim that growth is only caused by inequality as middle 60 percent income grew by 40 percent from 1970 to 2020 and by 50 percent after accounting for taxes and transfers. The share of households earning more than 100 000 dollars in 2006 dollars more than doubled from 1980 to 2006. US average wage since 1980 also went up by 43.5 percent for all workers using CPI, and 62.2 percent using PCE–a more accurate measure of inflation. That is not a denial of problems in the US economy. I do not live in the US, so I cannot definitively assess the state of its economy, but statistics say that the average and the median Americans are better off today that they were in the 50s, 70s or any other point in time, except primarily on the housing ladder which has no relation to the current topic of discussion.
- As for the divide between productivity, the decoupling between worker productivity and compensation is a phenomenon seen world wide, regardless of trade policy. Singapore, for example, has a lower disparity between worker productivity and income, despite being a free trade hub.
Lessons To Be Learned
Economics is a very complicated and counterintuitive study, as it tries to observe and predict human behavior. It is impossible to predict with certainty the outcome of any, even the most minute action. But there is one thing we can say for certain–our brains will come up with the most ridiculously complicated way to outmaneuver regulators just to earn a few more dollars. The current tariff situation is not an exception. American manufacturing cannot be resurrected by government decree, only through the free will and entrepreneurial spirit of its great people. Let’s remember that governments do not create growth, businesses and individuals do.
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