Tariffs create the wrong jobs: Should US really be making T-shirts, shoes?

It is now abundantly clear that United States (US) President Donald Trump does indeed believe that a higher baseline of tariffs is necessary for his country’s success. They may not reach the exalted heights that he threatened in his famous press conference in early April, when he held up a chart with illogical and inexplicably high tariff rates attached. 

Only a fraction of those threats from Mr Trump have come into effect. But the Yale Budget Lab nevertheless calculates that US consumers now face an overall effective tariff rate of over 20 per cent — the highest in more than a century. This will change in the next year or so — pushed upward by the final application of additional tariffs on countries after Mr Trump’s various deadlines for negotiating trade agreements expire, as well as downward when some countries win exemptions and as consumers substitute away from high-tariff imports. 

Nevertheless, some trends are already visible in relative prices within the US. While overall price levels have not yet increased as much as expected, consumers are paying almost 40 per cent more for certain goods, including many shoes and clothes. These are, of course, largely manufactured outside the US and particularly in developing countries that have been particularly hard hit by Mr Trump’s plans. 

It should be noted that most developing countries that have sought to negotiate Mr Trump’s threatened tariff rates downwards have had limited success. The Philippines, for example, has apparently had to agree to a 19 per cent base rate on exports to the US  — while US goods will face no duties at all. As a headline number, this is not exactly a vast improvement over Mr Trump’s original threat of 20 per cent. Indonesia has agreed to a similar package, apparently, accepting a 19 per cent tariff on its exports and promising to reduce duties to zero on most US goods. 

Many such countries, particularly in Southeast Asia, might well have taken a calculated risk. Their need is to protect their ongoing export revenues from the US. They probably expect that these revenues could fall, but will not be eliminated, if they all face similar tariff rates. They may assume that their exports will not face any competition from domestic US producers post tariffs, or from other countries that successfully negotiate a lower tax rate — among which there will be very few developing economies, since lower rates have mostly been applied to richer nations that run trade deficits with the US, such as Great Britain. Under such conditions, they may face a reduction in US demand due to higher domestic prices, but will not lose market share completely. 

Let us leave, for a moment, the ethics and economics of high tariffs aside. It may be unfair to penalise those countries that have most effectively built bridges to the US market and therefore run trade deficits; and it is economically illiterate to expect a poorer country to run a trade deficit with a richer one. Let us focus instead on the core assumption that some developing countries are making, that they will be able to protect their export revenues to a degree as long as their emerging-economy peers do not get far better deals. 

Is this assumption safe? Will, for example, the manufacturing of shoes and clothes that have seen big spikes in prices shift back to the US? 

There are several subordinate questions here. First, is this the Trump administration’s intention? Second, is it even possible? And third, if it is possible, is it a good thing? 

The first question, about intent, unfortunately does not have a clear answer. It reflects the broader divides within the administration on trade policy. Some, like senior advisor Peter Navarro, believe in high tariffs across the board. But even those who are more moderate, like Commerce Secretary Howard Lutnick, have in the past said that “T-shirts, sneakers, and towels” will be made in the US once again. 

The President himself, however, when specifically asked, has said that “we’re not looking to make sneakers and T-shirts. We want to make military equipment. We want to make big things … chips and computers and tanks and ships.” If so, it is not quite clear what tariffs on apparel are supposed to achieve. 

The second question, on whether onshoring in textile production is even achievable, is another question. Certainly, some low-margin goods might well be possible to repatriate. Consider the humble T-shirt, which has few remaining American manufacturers. Estimates for the additional cost that consumers might pay if imports are replaced vary. But at the very least, there will be an additional cost of around $8 a unit. This is a considerable increase in base cost, but not an unaffordable one. The difficulty will be in achieving an increase in manufacturing at scale, where the US economy may run into constraints on the supply of low-wage labour, as well as in higher-end products such as outerwear and complex shoes, where the US may not retain the stitching expertise required. 

But, supposing those constraints are met and such jobs return to the US, is this even a good thing, even within the “America First” mental structure of the current administration? These are not great jobs. The economist Paul Krugman has warned that the US government actually wants to “make sweatshops great again” and there is some truth to that warning. Certainly some parts of the US have suffered when the shoe and garments industries left. These jobs, towards the end of the 20th century, tended to be concentrated in certain towns -- though they had already left cities like New York, where once half a million might have been employed in the garment industry. But young people in those towns are not necessarily eager to do the same jobs their grandfathers did. Nor would it be a good thing from the point of view of their wage growth or US macro-level productivity for these young people to be pushed into a low-value added job. 

So Indonesia and others might lose their bet. Some low-margin sectors might well be able to scale up US production to a degree. But I doubt that either US consumers or workers will be overjoyed at this success.