Some tariffs are worse than others

My piece in the Financial Times and more thoughts on tariffs

I’m in today’s Financial Times (paywalled, but sometimes it’s open) examining how tariffs should be designed if policymakers are determined to use them. While I’m skeptical of tariffs in general (as I’ve written about extensively), the reality is that they remain a popular policy tool.

So, how can we minimize the damage?

The key argument from my FT piece is that modern supply chains transform how tariffs affect jobs and the economy. As I wrote:

When the Trump administration imposed tariffs on Chinese auto parts in 2018, it did not protect American jobs at all. Instead, it raised costs for US automakers who relied on imported components. Higher input costs led to slower export growth and job losses in affected industries.

Readers of Economic Forces will recognize some arguments; it builds on themes I explored in two previous newsletters. Before the election, I showed how basic economic models can mislead us by ignoring the complexity of global production networks. The standard models treat trade as consumers buying finished goods from foreign producers.

But we can say more than that. The historical record offers important lessons. When tariffs target intermediate goods—like steel, aluminum, or electronic components—they tend to destroy more manufacturing jobs than they create. But tariffs on finished consumer goods, carefully designed, could sometimes achieve their intended goals.

But even those tariffs are not so straightforward. I mention the “chicken tax.”

It helped Ford and General Motors dominate the US pick-up truck market for decades. The tariff worked because it targeted finished vehicles, not parts, and because domestic manufacturers could readily expand production. Over time, it even prompted companies such as Toyota, Nissan, and Honda to build US plants to avoid the tariff.

However, the chicken tax also leads to wasteful workarounds: Ford routinely removes and shreds the rear seats upon US arrival, allowing them to be reclassified as commercial vehicles exempt from the chicken tax.

Here is an area where the economic point of view differs from most others. Lately, discussions around tariffs have focused on prices, sometimes called inflation. But that’s not what matters for economic efficiencies. Higher prices are primarily a transfer from consumers to producers and the government.

The deadweight loss comes because tariffs push companies (and consumers) to change their behavior in ways that use up more real resources for the same outcome—building plants in suboptimal locations, reorganizing supply chains, and developing elaborate workarounds like seat removal. These distortions represent pure economic losses that benefit no one. It’s like forcing someone to take a longer route to work—the extra gas purchases help the gas station (although it hurts whatever you don’t spend money on). But extra time is simply a wasted resource; no one benefits. So even when tariffs “succeed” in moving production to the US, they create waste that goes beyond just higher prices.

I’m very skeptical that tariffs remain a beneficial policy tool overall, but their design matters tremendously for their economic impact. Policymakers considering trade barriers need to carefully weigh these complexities rather than treating tariffs as a simple solution.