The End of American Exceptionalism: Trump's Tariff Policy

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.