How Removing Tariffs Would Create Jobs and Boost the Recovery
The COVID-19 pandemic took a significant toll on the U.S. economy, causing the largest economic decline on record in the second quarter of 2020.1 The good news is that Gross Domestic Product (GDP) – a measure of the size of the economy – bounced back at a record 33.1 percent annualized growth rate in the third quarter, and growth remained positive through the end of the year.2 Unfortunately, GDP and consumer spending have yet to reach pre-pandemic levels, reflecting ongoing consumer anxiety about the virus.3 Furthermore, several states have renewed previously mandated business closures following a rise in new COVID-19 cases.4 Globally, the story is the same, with the International Monetary Fund (IMF) estimating a global contraction of 4.4 percent in 2020.5
COVID-19 also rocked the U.S labor market. At the height of the recession, 20 million Americans lost their jobs.6 Today, the number of employed workers remains roughly 10 million lower than at the start of the pandemic.7 Removing trade barriers like tariffs would be an effective tool to boost economic growth, connect more people to work, and increase Americans’ purchasing power as the recovery continues.
Decreased consumer demand both in the United States and around the world negatively impacted trade flows, reducing global trade in goods by a predicted 9.2 percent in 2020.8 In the United States, goods imports through November were 5.5 percent lower than at this point last year, adjusted for inflation.9 Similarly, real goods exports were 9.3 percent lower in 2020 than in 2019.10 This trend is primarily driven by decreased purchases of autos and other consumer goods, however nearly 100 countries also imposed restrictions on exports of medical supplies in an effort to fight the pandemic, further contributing to decreased trade.11 The chart below displays this trend.
Trade Flows During COVID-19 Pandemic
The data show that overall U.S. trade – imports and exports – dropped 19 percent from February to May. As of November, real exports have yet to reach pre-pandemic levels, and real imports did not fully recover until October. At the same time, new tariffs imposed starting in 2018 continue to raise costs for businesses and consumers and inspire retaliation that depresses exports. As of 2019, these tariffs impacted over $350 billion of annual imports from China, the European Union, and other nations, acting as a tax on consumption.12
Erecting trade barriers in an effort to protect American workers may be attractive during a time of crisis, however it would likely worsen the United States’ recovery. Research shows that tariffs eliminate more jobs than they create.
Take, for instance, the national security tariffs on steel and aluminum imposed in March of 2018. By increasing the cost of foreign steel and aluminum relative to U.S. products, the national security tariffs were predicted to add roughly 26,000 jobs to the U.S. steel and aluminum manufacturing sectors. Yet they were also predicted to eliminate nearly 500,000 jobs in the rest of the economy – harming both U.S. manufacturers and U.S. service providers, like construction, that utilize imported steel and aluminum, as well as harming U.S. exporters through retaliatory tariffs from other nations.13 Other studies have confirmed that recent U.S. tariffs, combined with retaliatory tariffs from other nations, caused net decreases in manufacturing employment due to rising input costs.14
The harm of tariffs extends to every sector of the economy. In 2018, over 60 percent of goods imported by the United States were either intermediate or capital goods, both of which are used by U.S. firms in production.15 When these goods face tariffs, businesses must absorb rising costs either by reducing their spending on labor, reducing future investments and expansions, or passing the costs on to consumers through price increases, each of which slows economic growth. When consumer goods face tariffs, retailers must absorb the tariffs in similar ways, increasing the prices of consumer goods like food and clothing.
The link between tariffs and price increases has been confirmed by empirical research. Multiple studies found that 100 percent of the United States’ recent tariffs were passed on to businesses and consumers when they purchased the affected imports.16 Low-income individuals are disproportionately harmed, as they spend a higher percentage of their incomes on imported goods than wealthier Americans.17 All together, new tariffs were estimated to decrease national income by $8 billion in 2018, reaching costs as high as $1.4 billion per month by the end of that year.18
In a time of economic recovery, it is harmful to keep tariffs in place that slow economic growth. Alternatively, removing tariffs and other trade barriers would boost the recovery.
Trade is an engine of job creation. In the United States, one in every five jobs is connected to international trade.19 Out of the 40 million total jobs supported by trade in 2018, 12.8 million were supported by trade with Canada and Mexico and 7.7 million were supported by trade with China.20
International trade creates U.S. jobs in several ways. First, and most obviously, trade generates jobs at exporting companies. Second, trade creates jobs at importing companies that utilize foreign-made intermediate goods, which reduces the cost of U.S. production. In fact, over one quarter of total manufacturing jobs created between 2010 and 2016 can be directly attributed to increases in imports.21 Third, as consumers and producers gain access to lower cost goods and services from around the world, their real incomes rise. The increase in income, in turn, boosts economic activity and generates new jobs. One study estimates that international trade generates increases in U.S. income equal to 2 to 8 percent of GDP.22
Removing current tariffs would also reduce barriers against U.S. exports. Each of the 2018 tariffs were met with retaliation from other nations. As of January 2020, over $110 billion of annual U.S. exports are impacted by retaliatory tariffs.23 Removing the United States’ tariffs would encourage a corresponding removal of the retaliatory tariffs against the United States, boosting U.S. exports and increasing economic growth even further. The ability to freely export is invaluable to U.S. companies, as 95 percent of global consumers live outside of the United States.24
Furthermore, research shows that international trade increases productivity – one of the key components of economic growth.25 The competition resulting from open markets encourages companies to innovate and provide higher-quality goods at lower prices. International trade also increases productivity by encouraging specialization, a process by which companies focus on producing the goods and services that they can most effectively given the labor, capital, and natural resources available to them. Lowering trade barriers during the current economic crisis would give American consumers access to lower-priced goods from around the globe, increasing their purchasing power.
To demonstrate how trade spurs economic growth and improves purchasing power, the chart below tracks the relationship between quarterly changes in imports and GDP over the past two decades.
Contrary to the belief that imports are a subtraction from GDP, they have no direct impact on the size of the economy. GDP measures domestic production only; it is calculated by adding national consumption, domestic investment, government spending, and net exports (exports minus imports). Imports are added to consumption, investment, and government spending – for example, to account for the purchase of foreign-made computers by businesses, consumers, or the government – but subtracted from net exports, meaning that imports are not counted in GDP at all.26
While imports are not counted in GDP, they are positively associated with economic growth. As the economy grows, Americans increase their spending on all goods, including imports. Alternatively, imports fall during economic contractions – the opposite of what one would expect if trade harmed economic growth. In fact, imports and GDP are so strongly connected that the correlation of their quarterly changes, dating from 1947 to 2020, is 0.86.27
The evidence clearly shows that international trade generates economic growth and is a net job creator. Additionally, in the midst of the current pandemic, removing tariffs and other barriers to imports would increase U.S. access to essential medicines and medical supplies that are produced around the world. Recognizing this fact, the United States Trade Representative (USTR) began reversing its tariffs on medical supplies from China starting in March.28
The United States is facing an unprecedented crisis. As we work toward recovery, it is counterproductive to keep tariffs in place that hinder economic growth. Removing these trade barriers would lower costs for businesses and increase affordability for families during the recession. It would also stimulate economic growth, helping to create jobs and boost the labor market recovery.
4 “See How All 50 States Are Reopening (And Closing Again,” New York Times, Accessed January 29, 2021, 2020, https://www.nytimes.com/interactive/2020/us/states-reopen-map-coronavirus.html.
5 International Monetary Fund, World Economic Outlook, October 2020: A Long and Difficult Ascent, October 2020, https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020.
6 Bureau of Labor Statistics, The Employment Situation – April 2020, May 8, 2020, https://www.bls.gov/news.release/archives/empsit_05082020.pdf.
7 Bureau of Labor Statistics, The Employment Situation – December 2020, January 8, 2021, https://www.bls.gov/news.release/archives/empsit_01082021.pdf.
8 World Trade Organization, Trade shows signs of rebound from COVID-19, recovery still uncertain, October 6, 2020, https://www.wto.org/english/news_e/pres20_e/pr862_e.htm.
9 Author Calculations, Bureau of Economic Analysis, “U.S. International Trade in Goods and Services, November 2020,” January 7, 2021, https://www.bea.gov/sites/default/files/2021-01/trad1120.pdf.
12 Lee, Tom and Jacqueline Varas, The Total Cost of Trump’s Tariffs, American Action Forum, September 16, 2020, https://www.americanactionforum.org/research/the-total-cost-of-trumps-new-tariffs/.
13 Francois, Dr. Joseph and Laura M. Baughman, Round 2: Trading Partners Respond, The Estimated Impacts of Tariffs on Steel and Aluminum, Trade Partnership LLC/ The Trade Partnership, March 13, 2018, https://tradepartnership.com/wp-content/uploads/2018/03/232RetaliationPolicyBrief.pdf.
14 For instance, see Flaaen, Aaron and Justin Pierce, Disentangling the Effects of the 2018-2019 Tariffs on a Globally Connected U.S. Manufacturing Sector, Federal Reserve Board, December 23, 2019 https://www.federalreserve.gov/econres/feds/files/2019086pap.pdf; Barattieri, Alessandro and Matteo Cacciatore, Self-Harming Trade Policy? Protectionism and Production Networks, National Bureau of Economic Research, July 2020, https://www.nber.org/papers/w27630.
15 Varas, Jacqueline and Jonathan DeDomenico, The Impact of the President’s Tariffs on Consumer Goods, American Action Forum, July 29, 2019, https://www.americanactionforum.org/research/the-impact-of-the-presidents-tariffs-on-consumer-goods/.
16For instance, see Fajgelbaum, Pablo D., Pinelopi K. Goldberg, Patrick J. Kennedy, and Amit K. Khandelwal, The Return to Protectionism, National Bureau of Economic Research, March 2019, https://www.nber.org/papers/w25638; Amiti, Mary, Stephen J. Redding, and David E. Weinstein, The Impact of the 2018 Tariffs on Prices and Welfare, The Journal of Economic Perspectives, 33(4): 187-210, Fall 2019, https://www.jstor.org/stable/26796842.
17 Moran, Tyler, Tariffs Hit Poor Americans Hardest, Peter Institute for International Economics, July 31, 2014, https://www.piie.com/blogs/trade-investment-policy-watch/tariffs-hit-poor-americans-hardest.
18 Amiti, Mary, Stephen J. Redding, and David E. Weinstein, The Impact of the 2018 Tariffs on Prices and Welfare, The Journal of Economic Perspectives, 33(4): 187-210, Fall 2019, https://www.jstor.org/stable/26796842.
19 Baughman, Laura M., and Joseph F. Francois, Trade and American Jobs, The Impact of Trade on U.S. and State-Level Employment: 2020 Update, Trade Partnership Worldwide LLC, October 2020, https://tradepartnership.com/wp-content/uploads/2020/10/Trade_and_American_Jobs_2020.pdf.
21 Varas, Jacqueline, The Impact of U.S. Imports on Manufacturing Employment, American Action Forum, May 11, 2020, https://www.americanactionforum.org/research/the-impact-of-u-s-imports-manufacturing-employment/.
22 Costinot, Arnaud and Andrés Rodríguez-Clare, The US Gains From Trade: Valuation Using the Demand for Foreign Factor Services, National Bureau of Economic Research, March 2018, https://www.nber.org/papers/w24407.
25 For instance, see Alcalá, Francisco, and Antonio Ciccone, Trade and Productivity, The Quarterly Journal of Economics, 119(2): 613-646, May 2004, https://www.jstor.org/stable/25098695; United States International Trade Commission, Trans-Pacific Partnership Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors, May 2016, https://www.usitc.gov/publications/332/pub4607.pdf; Hufbauer, Gary Clyde, and Zhiyao (Lucy) Lu, Increased Trade: A Key to Improving Productivity, Peterson Institute for International Economics, October 2016, https://www.piie.com/publications/policy-briefs/increased-trade-key-improving-productivity.
26 Wolla, Scott A., How Do Imports Affect GDP?, Federal Reserve Bank of St. Louis Economic Research, September 2018, https://research.stlouisfed.org/publications/page1-econ/2018/09/04/how-do-imports-affect-gdp.
27 Author calculations using real imports of goods and services and real Gross Domestic Product (GDP) from Q1 1947 to Q3 2020, retrieved from the Federal Reserve Bank of St. Louis. Data on real imports can be found at https://fred.stlouisfed.org/series/IMPGSC1; data on real GDP can be found at https://fred.stlouisfed.org/series/GDPC1.