Trump’s tariffs will accelerate America’s economic decline

NEW YORK – On March 26, President Donald Trump signed an executive order imposing a 25 per cent tariff on all cars and light-duty trucks imported into the United States. This measure took effect on April 3, one day after the administration rolled out its “reciprocal tariffs” on US trading partners. Trump tried to reassure nervous Americans, promising that “our automobile business will flourish like it’s never flourished before.”

It will not. While Trump’s tariffs fly in the face of conventional economic wisdom, from Adam Smith and David Ricardo to John Maynard Keynes and Milton Friedman, his confidence may lead some to think there’s a hidden logic behind them. Presumably, the tariff on cars and trucks aims to incentivize automakers to establish factories in the US.

But on closer inspection, it becomes clear that this rationale is deeply flawed. And while it will negatively affect many countries, especially Canada, Mexico, and Japan, its most devastating impact will be felt in the US itself.

Trump’s critics rightly point out that the tariff will raise US car prices, but that is just one of its many drawbacks. Consider, for example, that industries like automobiles (and semiconductors) have substantial fixed production costs. Given that a sudden tariff reduction after these sunk costs, such as acquiring land, building factories, and obtaining permits, have been incurred could lead to significant losses, investors would need to be assured that the tariffs will remain in place for at least 10-15 years. If the government could somehow signal to investors that the tariffs will remain in place for the foreseeable future, it is likely that new car factories will be established in the US, increasing demand for labor.

But that may not be a positive development. Far from making American automobiles great again, the artificial boost in demand for traditional labor could harm the US economy’s long-term health. With the US market protected behind its tariff wall, domestic production would become increasingly costly, and countries with naturally lower labor costs, like China, India, Mexico, and Indonesia, would be able to produce cars at much lower prices, thereby outcompeting the US and gaining a stronger foothold in the global market.

Trump’s desperate attempt to bring back auto manufacturing contrasts sharply with how the US handled the decline of its textile industry. In the early nineteenth century, the US was a leader in textiles, with cotton and woolen mills operating at full capacity. The textile and garment sectors continued to thrive well after World War I, with North Carolina in the lead. But as the US grew wealthier and labor costs increased, it gradually lost its comparative advantage and pivoted to sectors that required research and innovation, areas where it was well-positioned to lead. Today, the textile industry is dominated by countries like Vietnam, Bangladesh and Turkey.

Had the US decided to impose heavy tariffs on imported textiles and clothing in the second half of the twentieth century to encourage domestic production, it might have remained a garment manufacturing hub. But this would have come at a steep cost: the US economy would not be where it is today. Instead, it would have large factories where workers toiled at labor-intensive jobs.

This is not to suggest that tariffs, when used strategically and sparingly, are not effective and perhaps even necessary in certain circumstances. But when they undermine a country’s competitive edge, as Trump’s tariffs undoubtedly will, they can only cause harm.

History offers valuable lessons about the dangers of hyper-nationalism and protectionist trade policies. In the early twentieth century, Argentina was growing rapidly and was among the world’s richest countries, surpassing Germany and France. Some even predicted that it would overtake the US economically.

Everything changed in 1930, when José Félix Uriburu led a military coup and declared himself president. Within three years, he restricted immigration and nearly doubled tariffs. Meanwhile, the US was opening up its economy to both goods and people, investing in higher education, and conducting cutting-edge research. The American economy surged while Argentina’s stagnated, dashing any hopes of rivaling the US.

The takeaway is clear: instead of clinging to outdated industries through protectionist trade measures, countries should embrace innovation. Yet, while technological advances create economic opportunities, they also tend to reduce the demand for labor. The solution lies in redistributive taxation and profit-sharing to ensure that the benefits of growth are allocated equitably, rather than being hoarded by corporations and concentrated among billionaires.

To be sure, redistributive taxation is no easy feat. It must be carefully crafted to avoid discouraging innovation and distorting incentives. But it is far more desirable than Trump’s misguided policies, and in an era of rapid technological change, it is absolutely essential.

Kaushik Basu, a former chief economist of the World Bank and chief economic adviser to the Government of India, is Professor of Economics at Cornell University and a non-resident senior fellow at the Brookings Institution. Copyright: Project Syndicate, 2025.

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