The new Trump administration rightly aims to create millions more good jobs in growing industries in America. Higher tariffs aren’t the way to do it.
To promote economic opportunity, America should embrace the framework that helped it vastly outperform other economies since World War II: democratic capitalism secured by the rule of law; leadership in science, technology and education; and rules-based fair and open global trade. The United States should build on what’s worked best historically — and that doesn’t include heavy-handed tariff and industrial policies, the George W. Bush Institute argues in a new policy brief.
The United States should work with trading partners to cut international trade barriers to U.S. goods, reduce dependence on China for products essential to national security, raise federal investment in science and technology research, and support the well-being of all working Americans, not just those in specific industries or companies.
President Trump has proposed raising tariff rates to 60 percent or more on Chinese imports and 20 percent on goods from other places, which would raise average tariff rates to about 17 percent, according to the nonpartisan Tax Foundation. In comparison, tariffs fell to an all-time low of 1 percent early this century, then doubled to 2 percent during the first Trump administration and the Biden administration. Many economists believe that tariffs averaging 20 percent under the Smoot-Hawley Tariff of 1930 contributed to the Great Depression.
Trump has also given mixed signals on whether to continue Biden-era manufacturing subsidies designed to increase production of certain targeted goods within the United States. The Biden administration approved vast subsidies for favored industries, including semiconductors, electric vehicles and solar panels, reversing successful pro-market policies that have prevailed for more than three decades. However, the Biden administration has yet to release most of the $1 trillion-plus in subsidies and tax credits approved over the last four years.
A better economic strategy starts with relaunching talks with trading partners to lower international trade barriers. Congress should pass a Trade Promotion Authority measure empowering Trump to pursue reciprocal reductions with friendly nations. While average tariffs on U.S. exporters are below 4 percent in most countries, non-tariff restrictions create barriers equivalent to 40 percent tariffs, harming American export workers.
Next, the United States should pursue targeted measures to reduce dependence on China for goods essential to national security. America is over-reliant on Taiwan, which manufactures 68 percent of the world’s advanced semiconductors, making America and its allies vulnerable to Chinese coercion for indispensable products.
The federal government should generally pursue industrial policies that only target individual companies when they operate in fields vital to national security or emerging industries with significant spillovers to other strategic industries. Advanced semiconductors and AI meet both tests, but green-tech manufacturing does not.
The new administration should release remaining funds for semiconductor manufacturing under the 2022 CHIPS and Science Act since the industry has launched more than 80 projects in 25 states premised on CHIPS Act subsidies. It should end the lavish subsidies for domestic production of green technologies that Congress has passed.
Third, federal investment in science and technology research should be raised to at least 1 percent of GDP. U.S. leadership in science is one of the core foundations of prosperity and opportunity in America. Federal investment in research and development has fallen as a share of the economy for several decades and now stands at only 0.7 percent of GDP, down from 1 percent as recently as 2010.
America’s R&D model has created jobs in many high-paying industries: software, military, space, financial technology, biotechnology and more. Recommitting to U.S. preeminence in science and technology is the best step America can take to raise living standards and opportunities for Americans.
Fourth, focus on domestic policies that improve the well-being of all working Americans, not just those working in import-competing manufacturing industries. Increase support for education and skills-building, particularly by making Pell Grants more widely available for credentials. Expand the earned income tax credit and other provisions that increase working people’s earnings. And consider raising childcare subsidies.
The new administration’s proposed tariffs would raise taxes borne by American consumers by about $2,250 to $3,000 per household, based on Tax Foundation estimates.
High tariffs have also consistently reduced American exports and imports. Why? They reduce the buying power of foreign consumers of U.S. goods, invite retaliation by foreign governments, and shift labor and resources away from industries in which America is a net exporter to industries in which it’s a net importer.
The takeaway: High tariffs ship the jobs of people working in export-focused industries overseas.
Throughout America’s history, the best path for expanding opportunity and raising living standards has been building world-leading companies that outperform their competitors without protection rather than redistributing income from some industries to others through tariffs.
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