‘It's a massive tax' - can Trump's tariffs reduce inequality, or will they enhance it?

NZ Herald

a day ago

The President doesn't talk much about inequality. But his animating argument for tariffs — that they will pressure companies to bring well-paid manufacturing jobs back to America — is pitched to those workers who felt left behind and neglected.
So, will the tariffs reduce inequality?
Probably not, and here's why.
Hyper globalisation certainly contributed to America's rising inequality.
Consumers saved hundreds of dollars on the cost of televisions, shoes, and comforters.
But many middle-class livelihoods and communities were destroyed when factories either relocated to countries where wages were lower or went bust because they couldn't compete with cheap imports.
China's entry into the global marketplace at the beginning of this century delivered a major wallop.
Between 1999 and 2011, Chinese imports were directly responsible for the loss of 2.4 million American jobs, according to researchers.
It is true that more jobs were created, but many of them did not pay as well as those that were eliminated, nor were they taken by the workers who lost out.
Still, cheaper imports were only one part of the story.
Automation and the creation of a digital economy that introduced online selling and cloud-based services had a far greater effect on the American economy.
Take manufacturing. Of the six million factory jobs erased during the 2000s, Chinese imports accounted for about one-sixth of the losses, or one million jobs. But the other five million were killed off by other forces.
For years, labour unions had bargained for higher wages, overtime pay and other benefits. But their ranks significantly declined.
A street in Elyria, Ohio, once home to many manufacturing plants, on September 18, 2017. Many middle-class livelihoods and communities were destroyed when factories relocated to other countries. Photo / Andrew Spear, The New York Times
Automobile factories, for instance, not only moved from Michigan to Mexico, they also moved to southern states including Alabama and Tennessee, where anti-union laws were common and wages were lower.
I visited a meat processing plant in Storm Lake, Iowa, during Trump's first term. One of the workers was hired in 1980, when it was a union shop. His starting salary was US$16 an hour plus benefits. When I met him, 37 years later, that plant was no longer unionised, and his pay was still US$16 an hour.
The growth of mega firms like Google, Apple, Amazon and Walmart that ate up or weeded out the competition also gave companies power over pricing and wages. The result was that the slice of the total economic pie going to workers shrank.
If inequality has multiple causes, why do trade and globalisation get blamed so much?
The fallout from globalisation packed a particular punch. Trade can cause economic losses to pile up and overwhelm a locale, such as Hickory, North Carolina, once a powerhouse of furniture making.
Another reason is that political leaders exploit economic setbacks and insecurities.
Trade offered a simple and satisfying explanation — even if not wholly accurate — that outsiders were to blame.
For many people, foreign competition also set off deep cultural and economic anxieties.
Diana Mutz, a political scientist at the University of Pennsylvania, argues that many Americans, including Trump, view trade as a zero-sum game rather than a co-operative enterprise in which everyone can benefit.
Foxconn workers on an assembly line at Quanta factory in Chongqing, China, on November 27, 2012. In the early 2000s, Chinese imports were directly responsible for the loss of 2.4 million American jobs, according to researchers. Photo / Gilles Sabrie, The New York Times
Through that lens, trade is a pitiless dogfight that is desirable only if the US is the 'winner' and other countries are losers.
Americans also tend to expect the government to respond more strongly to job losses that result from trade compared with other economic forces.
Dani Rodrik, an economist at Harvard University, helped conduct a large online survey in which respondents read a made-up newspaper article about the closure of a garment factory that provided different reasons for the shutdown.
One group was told it was because of new technology. A second was told management bungling was the culprit. A third group was told trade, such as relocating production abroad, was the cause.
When trade was the cause, the number of people who demanded that the government respond doubled or tripled.
'Foreign trade is particularly prone to charges of unfairness,' Rodrik writes, because countries operate under differing rules and conditions.
Government subsidies, weaker health and environmental regulations or sweatshop conditions, for instance, bestow an unfair competitive advantage.
For decades, 'fair trade' has been the rallying cry of protectionists who complained of an uneven playing field.
A former glass factory is set up as a battery factory in Bridgeport, West Virginia, on February 9, 2023. Oren Cass, the chief economist at American Compass, a conservative think-tank, says that factories can boost regions that need it. Photo / Andrew Spear, The New York Times
That sounds like Trump's tariffs could make a difference, no?
Tariffs can certainly affect how income is distributed — either increasing or decreasing inequality.
Oren Cass, chief economist at American Compass, a conservative think-tank, says that with the Trump tariffs, the effect would be positive.
He argues that factories, often located outside of the tech, finance and media capitals, can boost regions that need it.
A factory creates jobs and serves as an economic hub. That in turn generates other jobs — for barbers, baristas, and manicurists.
'Reorienting the economy toward one that is going to better serve the average worker,' could reduce inequality, Cass said.
But other economists disagreed, arguing that the President's tariffs and the haphazard way they were imposed will amplify inequality.
While some select industries will benefit from added protection, the biggest burden, they agreed, will fall on low- and middle-income households.
The cost of pretty much everything will go up because of tariffs.
'It's a massive tax,' said Kimberly Clausing, a professor of tax law and policy at the UCLA School of Law. She expects that four out of five Americans will be worse off.
So far, the overall average effective tariff rate has jumped from 2.4% in early January to 18.3%, according to the Budget Lab at Yale University.
On average, higher prices will end up costing each household an extra US$2400 this year.
Shoes and clothing prices, for example, are expected to rise by as much as 40% in the short run, the Budget Lab estimated. Prices are expected to stay at 17% or 19% higher over the long run.
US businesses, particularly small and medium-sized ones, will also feel the pinch of higher costs.
Some 40% of imports are used to produce or build things in the US. Construction costs are likely to jump.
The Budget Lab estimates that by the end of this year, US payrolls will shrink by nearly 500,000 jobs.
As for manufacturing, the number of jobs might grow, but they won't be like the well-paid ones that high school graduates used to get. Most factories are highly automated and run with computer technology.
Last year, the US steel industry employed 86,000 people and produced roughly 88 million tonnes of raw steel.
In 1970, it took 354,000 steelworkers to produce that same amount, according to the American Iron and Steel Institute.
I recently visited one of the largest steel plants in Europe. I saw titanic machinery and control stations with computer screens, but hardly any workers on the floor.
Today, the best paying manufacturing jobs require significant training and skills. Those that don't, offer low wages.
At the moment there are more than 400,000 unfilled manufacturing jobs in the US.
Even if the US$1.2 trillion trade deficit were erased, and purchases of foreign goods were replaced by domestic ones, the US would still not turn into a manufacturing powerhouse, said Robert Lawrence, an economist at Harvard University. Nor would it reduce inequality.
Under that scenario, Lawrence calculated that manufacturing jobs would rise from 7.9% to just 9.7% of total employment.
And less than half of those would actually involve work in production. The rest are in sales, management and accounting.
Lawrence, whose book Behind the Curve examines the role that manufacturing plays in the economy, explained that 'even if all these policies were actually successful in bringing back as much manufacturing as possible, it's too small to change the basic income distribution in the economy.'
This article originally appeared in The New York Times.
Written by: Patricia Cohen
Photographs by: Mark Abramson, Andrew Spear, Gilles Sabrie
©2025 THE NEW YORK TIMES