Tariffs: what are they good for?
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Today is a big day. For weeks, we have been hearing about April 2nd. The Trump administration had promised that today would be the day that they put new tariffs on goods coming in from, I don't know, maybe every country in the world. This is one of the most important days, in my opinion, in American history.

It's our declaration of economic independence. The looming tariffs had sent chills down the spines of many economists around the world.

Because tariffs, they're an old economic tool that many economists have disliked for a very long time. They're basically an import tax paid mostly by consumers. And for centuries, they've been used to make a country's population buy its own stuff instead of another country's stuff. But economists generally prefer more and freer trade because it means more competition, lower prices, economic growth.

A bedrock theory in economics is the theory of comparative advantage. That basically countries can specialize in different things, and through trade we can all, in the aggregate, get richer. But surely tariffs have been useful ever, or they wouldn't exist, right? Right?

Hello and welcome to Planet Money. I'm Mary Childs. And I'm Greg Rosovsky. Today on the show, the case for tariffs. What can they be good for? We talk to an economist who has been making the lonely argument for protectionism for the past 30 years. And we hear how tariffs fit into President Trump's economic worldview from two economists in the orbit of the Trump administration. ♪

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So tariffs, we have long heard from economists about how and why they are bad. Today, we investigate what they can actually do, what they can be good for. And yeah, economists have always acknowledged that free trade has trade-offs, that, you know, there will be losers in the face of foreign competition. But for a long time, the dominant voices in the profession made the case that those trade-offs were really worth it.

Top lawmakers in both parties in the U.S. really bought into this idea that, you know, free trade would be great for America. And they really pushed it for the rest of the world. And through the decades of that argument, there's been an economist who argued that the dominant voices in economics were wrong. That free trade actually sometimes held countries back and protectionism could help make them richer.

Hi, I'm Ha-Joon Chang. I'm professor of economics at the University of London. Ha-Joon Chang wrote a book called Kicking Away the Ladder in 2002 about how rich countries used protectionist policies like tariffs back when they were developing and then told everyone else they couldn't do that. They had to do free trade.

And being a pro-tariff economist back in the early 2000s, it was kind of lonely. Are you a fan of the Lord of the Rings? I love Lord of the Rings. Yeah, the second movie, there's this scene of battle at the Helm's Deep. You're a band of, I don't know, 120 super capable guys, yeah? But then there are like half a million orcs in front of you. What are you going to do, yeah? A band?

battle against half a million free trade economists. That's how unpopular he felt. But he's got kind of the perfect example of why tariffs can work. My favorite example is Hyundai, the auto

When Ha-Joon was a little kid growing up in South Korea, Hyundai was not yet an automobile company. So first, Hyundai had to figure out how to make a car.

Hadjoun says it started by placing an order with Ford for something called a knockdown kit, which is just a big wooden box full of all the parts you could ever need to build one car. The box arrives, you open it up, and it's just full of car parts, large and small. A door, a bolt, two headlights. They assembled around 3,000 of those cars in the late 60s.

And then in the mid-70s, South Korean government said, we are going to cancel the license for automobile manufacturers unless they come up with their own design. Yeah, the government was like, actually, we want our car industry to be real companies, global players. Assembling a Ford car is not our end goal here. Can you level up a little bit?

So Hyundai had to come out with their own design. In 1976, it made the Hyundai Pony. It was the first Korean passenger car. They made around 10,000 of them in a year. In the same year, Ford produced 1.9 million cars. General Motors produced 4.8 million cars. So they had a ways to go, and they got a lot of help.

So yeah, Hyundai was losing money on this new venture. And he's saying the government decided to pitch in, give it some subsidies, and the other parts of Hyundai that were profitable sent over their money. But even that wasn't enough. Yeah.

Even then, it had to be protected from foreign competition because who's going to buy this two-bit car when you could import a Cadillac or, you know, Mustang, you know? No way. So import of foreign cars were completely banned. A total import ban, like a tariff to infinity, the tariff of all tariffs.

Because the South Korean government's really serious. They want this to happen. Yeah, they're making rules that mean South Koreans couldn't buy foreign cars, cars that were maybe better or cheaper or both. Instead, they have to buy these homegrown cars, which was great for Hyundai. But for a Korean person trying to buy a car and paying taxes that are used to subsidize this company, less great.

But as you can maybe guess, this gambit worked. Hyundai is now one of the biggest car manufacturers on the planet. And this is a canonical example of what's called infant industry protection. So this is an idea that the government of a developing nation created.

should protect and nurture the country's young industries until they grow up and can compete with more advanced industries from more advanced nations.

In the same way that we protect and nurture children until they grow up and then can compete in the other labor market. Right. Like a country uses tariffs to support a sweet little baby industry to protect it from the harsh world so it can safely grow bigger and stronger. And then, as we do with children when they grow up, we remove that protection.

In the same way that you don't want to make your kid work when he's six years old, you don't want to subsidize your kid until he's 45.

So at some point, you have to push the guy into the real world. And that's what South Korea did. It eventually took off the tariffs and the import ban and the subsidies. Right. The idea behind infant industry tariffs is they have to be temporary or you're just propping up a company that's inefficient and can't be successful on its own.

And along the way, wasting a lot of taxpayer money and societal resources that could be put to better use. This idea was actually invented by an American and not just any American. It was invented by Alexander Hamilton, the guy on the $10 bill, your first treasury secretary. Yeah.

Alexander Hamilton, RIP, Ha-Joon Chang, and other economists say if the goal is to turn a little baby industry into a strong, productive adult, then really tariffs aren't enough. You need not only to protect them from outside competition, but you also need to nourish them and help them grow with things like subsidies and piano lessons.

And the U.S. has a history of doing this, of trying to nurture little baby industries that policymakers have believed are the industries of the future, like solar energy and electric vehicles. Now, there's a big debate in economics about the infant industry argument. There are lots of examples of infant industry interventions going bad.

like Malaysia trying to build a car or Brazil trying to build a computer industry. These efforts have mostly failed, and they wasted a lot of resources in the process. Right, because for this to work, the government has to pick actors.

the right industry to nurture, and then nurture it correctly. And tariffs are not just for babies. This kind of protectionism also can make sense for national security interests. Like, what if your citizens need medicines or microchips or drone batteries, and the only people who make those things live thousands of miles away in a place with different, maybe opposing, national security goals? Even the most free trade of economists seem to agree that...

But yeah, maybe paying a little bit of a premium to support a slightly uneconomic domestic industry in these cases is a good idea.

Another situation where economists think there's a case for tariffs is when trading partners don't play by the rules. Like if a country is manipulating its currency or stealing intellectual property or egregiously exploiting workers, that gives that country an unfair advantage in the global marketplace. And so tariffs are a pretty common tool for competitors to level the playing field.

Over the last 10 years, more economists have come around to Ha-Joon's way of seeing tariffs and protectionist policies. Now things are, yeah, I wouldn't say it's going in the opposite direction, but more complicated. So Ha-Joon Chang's lonely argument? It's less lonely. A lot of economists agree now. Infant industry, national security, sure, tariffs can maybe help.

the Trump administration has more ideas. We get into that after the break.

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OK, so tariffs could be useful for infant industry protection, for national security interests and to combat unfair trade practices. President Trump is now imposing sweeping tariffs in all sorts of areas and on all sorts of countries. He does talk about things like national security and unfair trade practices, but his approach to tariffs feels like it's about something bigger than that.

And it's all part of this particular worldview that seems to be shared within Trump world and also outside of it. That the costs of free trade, they were too high. That free trade devastated communities around America. And the expectations

The economics world has really woken up to this over the last decade or so. There's this series of blockbuster studies on something known as the China shock. The shock happened when China joined the World Trade Organization in 2001. There's been a distinct drift in the academic literature that every year new stuff comes out that the China shock was worse and worse than we thought.

That's Mark Summerlin. He's an economist, consultant, and longtime friend of Trump's treasury secretary. We just basically added suddenly like a billion people to the global workforce.

And it really gutted a lot of things. And we were too slow to realize it. He says that China got a bunch of manufacturing jobs and the U.S. got cheaper imports. But the people who lost jobs in the United States didn't bounce back. They didn't get new jobs. The China shock created like these mini depressions in towns around the country. Now we have massive trade deficits with China and other countries where we're importing way more than we export.

Trump World sees this as a huge economic problem and tariffs as a solution, one that will help correct the trade imbalances and bring back manufacturing jobs. The way that the Trump administration looks at it, especially with something like China, is, no, it's a bad deal. And China gets jobs and we get like bad Chinese goods that last for a year and then we throw them out.

And so you can see why people would say, you know, maybe we would prefer to have jobs and be building assets rather than getting all this excess consumption. One of the big goals of free trade policies has been to lower prices. But the tradeoff was a huge loss of manufacturing jobs and manufacturing jobs maybe have something kind of magical about them.

For example, a lot of economic research has shown that manufacturing jobs provided ladders to the middle class for people without a college education. So the administration's idea seems to be to choose a different trade-off, to accept higher prices with the hope of eventually bringing back some of those good jobs. If Christmas decorations coming in from China suddenly cost 25% more, I feel that you're going to see people suddenly rev up

and start producing them here. Judy Shelton is an economist and senior fellow at the Independent Institute, a think tank. Because we have Etsy, we have people can sign up for Amazon. I think Americans are quick to recognize an opportunity.

Judy has been making the case for correcting the U.S. trade imbalance for years. In his first term, Trump nominated her for the Federal Reserve Board of Governors. She did not get confirmed. A bunch of economists and Fed employees wrote letters saying her views were extreme and too partisan on monetary policy.

Judy says tariffs can really work when it comes to achieving the administration's economic goals, which is not only to deter people from buying imports, but also to incentivize them to buy stuff made in America. The whole agenda of the Trump administration is oriented toward correcting the past tariffs

general shift toward a more government-managed economy, a more financialized economy, and going back to the real economy where people make things. To Judy, redirecting that spending is the best part of tariffs. But even if Americans refuse to buy American… If they go ahead and continue to purchase the good produced by another country and they pay the tariff,

I guess the consolation prize is that you get the beautiful revenue, right? You get the increased taxation, the revenues to the U.S. government from the tariff that's being applied. And this is one more benefit the administration points to, to solving our problems using tariffs. They say it will help rebalance the government's budget.

Right now, more money goes out of the government than comes in. If tariffs raise beautiful revenue, that's money in our pocket.

But of course, if we are taking money out of our pocket for new spending or, you know, collecting less money through taxes, then tariffs won't necessarily improve the budget problem. Like much of the revenue from tariffs in Trump's first term was offset by bailing out farmers who were harmed by trade retaliation. And now the administration is talking about compensating farmers again.

Now, all that, that has been basically their argument for why they want to use tariffs. And the way Trump is applying these tariffs is pretty different from the prescription that many economists are now on board with. There are a bunch of different tariffs flying around right now. So we're just going to focus on one, one that President Trump has been talking a lot about in recent weeks, the

Last week, Trump announced 25% tariffs on all imported cars and certain car parts. Cars made in the U.S., even by foreign companies? No tariff. And the stated goal is to get Americans to buy cars made in the U.S.,

because they would be comparatively cheaper. And the U.S. gets those good manufacturing jobs. Now, you could make the case that electric cars are maybe an infant industry, but the auto industry in general, it's not an infant industry. It doesn't need piano lessons. It has been competing on the global stage for years, and now it's getting protections. And that means that car prices are going to

artificially higher. Foreign cars will be subject to this import tax. But also, US car makers use foreign parts, which also face the same import tax. And there will be less pressure on US car makers to keep their prices low because their foreign competitors have a big price disadvantage in the US market. So yeah, likely higher prices all around. And that means consumers will likely buy fewer cars.

So if this stuff works in the way the administration seems to want, the best case scenario seems to be that it will still be an expensive, slow process, like multiple years to build up all of this manufacturing in the United States. In fact, after Trump announced his car tariffs, the stock prices of U.S. automakers fell. The market is signaling that this policy will have costs even for American manufacturers. And the rollout of many of these tariffs has been a little chaotic.

This year alone, we have seen Trump go back and forth on tariffs on different countries, and that uncertainty has a cost. It makes it hard for businesses to make decisions about which plant to build or where to hire, and waiting is expensive.

And we actually have a little bit of data from the last Trump term so we can see empirically what the effect was of similar policies. The Trump administration back then, they put tariffs on a bunch of Chinese goods, including washing machines. And one study found that the washing machine tariffs actually did create jobs. 1,800 new jobs in the USA making washing machines. Wow.

an average cost to U.S. consumers of more than $800,000 per job, even after accounting for the revenue raised from the tariffs. The view from the Trump world, though, is like, yeah, the transition from our current setup may be painful, but it's going to be worth it.

But there is this whole other side to the way Trump is using tariffs. Like earlier this year, Trump wanted to deport Colombian citizens who were in the U.S. to send them back to Colombia. The normal course is apparently to send people on commercial flights. But in January, the Trump administration sent two military planes. The Colombian president wouldn't let the military planes land. So, Mark Summerlin says, Trump turned to tariffs. For President Trump, a...

Tariff is just a form of power. So with, you know, with Columbia, he wanted them to take back

25% tariffs on Colombian goods. And Trump said they'd go up to 50% a week later. That was Sunday morning. And by that evening, Colombia and Trump had reached an understanding. Colombia would allow deportation flights without restriction. No tariffs. And that's what Trump said.

Though the White House said that the threat of tariffs would be, quote, held in reserve in case Colombia reneges. So that was a case where for some of us it might be uncomfortable seeing it. Different people have different philosophies on whether big countries should be bullying little countries or not. But, you know, in that case, he got what he wanted. It was short-lived. There wasn't – from a U.S. perspective, there wasn't really any damage done.

And the reason the U.S. can act like this, the thinking goes, is because we're rich. There are so many of us and we spend so much money. We don't rely on trade as much as our trade partners do. In the end...

We kind of do have the leverage. So, I mean, if they want to retaliate, I think ultimately they're going to lose that game because they need us more than we need them. I mean, to put a sort of another like blunt frame on it, it's like using a richness as a country, as leverage, a bullying tactic. Yeah, as leverage. Yeah. Yeah. That's it. That's it. We're using our power.

And because we have this power, thinking goes, if we're going to trade with someone, we should get something we want for it. The Trump administration did this with Mexico, too, threatening tariffs and then delaying them because Mexico did something he wanted, agreed to send troops to the border. Because trade is power. And we have used trade policy kind of like this in the past as a geopolitical tool. For example, we thought, you know, that capitalism would cure communism.

Judy remembers being in China when it was opening its markets in the 1980s. We thought that it was two sides of a coin, that if you liberalize the trading rules so they could benefit economically, then you would have people demanding more freedoms. They would insist on sort of empowering their own private sector, and that would be all to the good.

We had this idea that we could use free trade to make other people see the world in the same way that we do. Now the U.S. is operating with a slightly different idea. Instead of free trade as an incentive to be our friend and join our democracy club...

The U.S. is threatening to close trade to incentivize, strongly incentivize people to do what it wants. Like, nice economy you got there. And that's kind of the view from Trump world. We have all of this power and we should use it. We could go through some pain to get some gain.

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