Tariffs only “work” if they make prices higher | Promoting manufacturing jobs with trade barriers will make Americans poorer

> There are lots of different ways that tariffs could play out. Some of those ways could lead to large increases in consumer prices and some have smaller or near-zero price effects. But to the extent that tariffs successfully protect high-wage American jobs or drive new investment in creating such jobs, the mechanism through which they succeed is higher prices. If the prices don’t go up, then the things that Trump is touting as the benefits of tariffs also don’t happen.

> The high prices are the protection.

# Raising prices is how it works

> I sometimes hear from MAGA Twitter that prices won’t rise due to tariffs if companies just reshore their production. That is not correct. The tariffs raise the price of both US-made and foreign-made products. The difference is that they make US-made products more profitable, and that is the reason they incentivize more US-based production. The goal is achieved through higher prices.

> I think this is obvious, especially if you think about it in the reverse direction. The reason that (some) people are angry about NAFTA is that they (rightly) believe it encouraged companies to build factories in Mexico rather than in the United States. The way that worked is that a person who located his factory in Mexico could undercut a US-based factory on price and thereby gain market share. And part of why the industrial unions hate this so much is that beyond the direct impact on jobs, the threat of being undercut on price by foreign producers was a way for US-based employers to discipline their own workforce. I would not like it if this happened to me, either. But it’s important to acknowledge that it wasn’t just bosses being jerks — it was genuinely true that international trade let cheaper stuff into the country. Prices for durable goods fell. US-based producers who refused to find ways to cut costs would genuinely have gone out of business.

> The way to use trade policy to protect American manufacturing jobs is to put a floor under price competition, force Americans to spend a larger share of their income on goods and less on services, and drive new investment in American production.

> I think that most people recoil from this idea when they see it spelled out, because their goal is to make the country more prosperous and what we are describing is clearly a world in which Americans are becoming poorer. You’ll pay more for US-made goods, and because you’re paying more, you’ll have less to spend on dining out, on haircuts and getting your nails done, on fitness classes, on newsletter subscriptions, on taking your kids to SkyZone. In exchange, somewhat fewer people will work in those kinds of places and somewhat more will work in car factories. You can talk yourself into the idea that this is progressive, if you imagine that only the rich will be paying more for cars. But, in fact, waitresses and nail techs and yoga teachers and the guys who work at SkyZone buy cars, too. In fact, lower-income people spend a higher share of their income on goods. It’s just a bad idea.