The End of American Exceptionalism: Trump's Tariff Policy
|in:Viewpoints
Trump's tariff theory suggests that by placing substantial costs on imports, it can alter the competitive dynamics in manufacturing, especially in the automotive sector. However, he and his economic team are mistaken. The transition from being a net exporter to a net importer is a typical evolution of a mature industry like the automotive business. American prosperity has historically been fueled by creating new products and technologies and importing other goods that others produce more cheaply. Trump's tariff policy will not lead to better balanced growth or an increase in manufacturing jobs; instead, it will raise costs and harm American companies and consumers.
Half a century ago, US companies dominated the motor vehicle industry, with General Motors, Ford, and Chrysler, the big three, making up about 70% of total sales. Currently, only two of these companies remain, and their market share has dropped to less than one-third, despite significant direct and indirect support from the federal government over the past several decades.
The US experiences a trade deficit in motor vehicles with both high-wage countries like Germany and Japan, as well as low-wage countries such as Mexico and South Korea, including those with which it has a free trade agreement.
The transition to becoming a net importer of U.S. motor vehicles aligns with the product life cycle theory proposed by economist and Harvard Business School professor Raymond Vernon. His theory suggests that products are initially developed in countries with capital, demand, and income. Eventually, as production and technologies become standardized, they are adopted or replicated in other regions, leading the country that originally created the product to become a net importer. This is a common outcome—consider the product life cycles of cars, computers, televisions, textiles, and so on.
Attempting to reverse this strong trend would lead to economic disruption, be extremely costly, and possibly the greatest disappointment is that it won't generate additional manufacturing jobs.
In the early 2000s, I published a study on global manufacturing employment in the largest 20 largest economies. My research discovered that from the mid-1990s to the early 200s over 22 million manufacturing jobs were lost, and the biggest decline occurred in China, with a net loss of 16 million manufacturing jobs. Since that study was published the US lost another quarter of its manufacturing jobs but so did other countries.
The study on manufacturing employment should send a straightforward message to Trump's economic advisors: improving the manufacturing sector is done by increasing production and quality with new technologies, rather than by elevating costs. Over the past 20 years, manufacturing output has grown by more than 40% with fewer jobs.
Trump's tariff policy is expected to increase costs and raise the prices of both new and used vehicles, without necessarily boosting production or job creation. In essence, it will do more harm than good, and if fully implemented, it could certainly end America's exceptionalism.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.