04-09-2025
The sweeping tariffs recently announced by the U.S., and the response from its international trading partners, have reignited a heated debate about the economic effects of protectionist policies, a debate many believed had been settled long ago. According to various estimates, the new levies may raise the U.S. average effective tariff to 20-25%, reduce GDP by 1.5%–2%, and significantly increase the risk of both increased prices and a global recession.
Protectionists across the political spectrum applaud tariffs, arguing they will reverse the loss of jobs and erosion of the U.S. middle class that globalization has supposedly caused. Empirical evidence consistently contradicts this claim, with a plethora of studies showing that tariffs reduce aggregate employment. For instance, one recent study showed that U.S. trade with China has resulted in a net increase in American jobs. Another, that each job saved through protectionist measures costs resources that could have been used to add an additional six. Johan Norberg references both of these studies in in his book, The Capitalist Manifesto: Why the Global Free Market Will Save the World, which I recently discussed in the pages of Commentary.
Protectionists counter that international trade has led to a shift in the mix of available jobs, reducing the number of well-paying manufacturing jobs crucial for U.S. workers without a college degree. It is true that advanced economies lose manufacturing jobs as they grow wealthier. But critics of free trade misidentify the culprit — as Norberg notes, the drop is due overwhelmingly to automation rather than outsourcing, by a factor of almost seven to one. That is how U.S. industrial output has more than doubled over the past 45 years, despite losing about one-third of its manufacturing jobs. In fact, the U.S. has the second-largest manufacturing economy on earth, and its manufacturing output is near an all-time high. Happily, this productivity gain has led to the creation of higher-paying jobs, replacing those that were lost.
And workers are not the only ones harmed by tariffs. Protectionists too often overlook the significant costs their policies impose on American consumers. Free trade allows for specialization and provides the benefits of comparative advantage, maximizing efficiency and resource allocation, increasing choice and lowering prices. In contrast, tariffs and other trade barriers perpetuate inefficiencies and misallocate resources, leading to shortages and increased prices. The consequences disproportionately affect low- and middle-income households, which spend a larger share of their income on internationally traded goods. For example, a 2018 study found that tariffs on imported washing machines increased their cost by 11.5%. And, according to economist Arthur Laffer, the recently imposed 25% tariffs on auto imports could increase costs by almost $5,000. In short, protectionism is a double whammy, reducing employment while raising prices on those least able to afford it.
Recent events lead some to argue that government intervention is necessary to secure supply chains during emergencies. However, as Norberg notes, historical evidence demonstrates that government actions often exacerbate crises related to shortages rather than alleviate them. A review of economic crises since 1992 highlights that government intervention typically worsens the impact of upheavals. This is because centralized decision-making cannot absorb the rapid flow of information and changing conditions necessary to make optimal decisions. As a result, the free-market system, with its ability to instantly synthesize and rapidly act upon dynamic and decentralized information, is much more effective in navigating crises.
The new U.S. tariff program reflects a broader debate about protectionism's role in economic policy. While intended to boost domestic industries, these measures undermine economic growth, increase prices, and harm both workers and consumers. As the global economy navigates these challenges, we should not ignore the long-term implications of trade policies on economic stability and prosperity. To explore these arguments in greater detail, see my Commentary article, Capitalism—Now More Than Ever.
Michael Woronoff joined Purdue in February 2025 as a Business Fellow at the Daniels School of Business. He practices law in Los Angeles and writes frequently about capitalism and freedom.
