Latest news with #Capitolism
Yahoo
19-02-2025
- Business
- Yahoo
‘Reciprocal Tariffs' Are Trump's Worst Trade Idea Yet
From the Capitolism on The Dispatch Among the now-regular Trump tariff announcements is his plan for eventual 'reciprocal tariffs'—a concept championed by the president and his loyal trade adviser Peter Navarro that would, if enacted, set U.S. tariffs on goods from foreign counties at levels approximating the countries' tariff and nontariff discrimination against American exports of the same products. The idea, repeatedly teased by Trump and officially announced last week, has a certain seductive simplicity: Isn't it only fair that 'we' charge 'them' what 'they' charge 'us,' and that if 'they' want duty-free access to 'our' market, then 'we' should have the same in 'theirs'? Alas, you will be shocked to learn that it is not actually that simple, and that—in the real world—'reciprocal tariffs' would be a catastrophically bad idea for all sorts of reasons, most of which have nothing to do with one's stance on tariffs, free(ish) trade, or U.S. trade agreements. Those other concerns have been covered at length—here at Capitolism and elsewhere by trade experts of all stripes—so instead we'll focus today on the mainly practical reasons why the Trump/Navarro plan for reciprocal tariffs makes little sense. (And that's being kind.) The first and most basic problem with the proposed system is simply administering it. Tariffs in the United States (and elsewhere) are applied on a product-specific basis per a 'tariff schedule' that assigns each product an identifying number up to 10 digits (the most granular level) and a corresponding tariff rate, depending on its origin. The Harmonized Tariff Schedule of the United States (HTSUS) lists more 5,000 items at the somewhat-detailed six-digit level and has three different tariff rates for each item: general (the standard 'most favored nation' rate for World Trade Organization members); special (lower, 'preferential' rates for trade agreement partners and a few others); and Column 2 (high/discriminatory rates for non-WTO members like Iran). Here's a random example: By applying a different tariff rate for each country (based its own tariff equivalent on the same product from the U.S.), Trump's reciprocal system would replace the three columns on the right side of the image above with more than 150 of them. (There are 186 nations in the World Customs Organization.) That potentially translates to 150-plus tariff rates for thousands of different products listed in the HTSUS, or about 750,000 tariffs (six-digit level) in all. Do it for all 17,000 lines (10-digit) in the schedule and all 183 WCO countries, and you're talking more than 3.1 million different tariffs, plus any special duty rates (punitive or preferential) for various U.S. trade programs, including ones Trump himself is implementing on Chinese and other imports. As recently laid out by Jennifer Hillman and Edward Alden at the Council on Foreign Relations, this complexity raises two immediate problems. The first is simply the public and private resources—time, money, manpower—to maintain the new system: Customs and Border Protection would require different tariff schedules for each country—close to impossible for a short-staffed agency. Already, the Trump administration was forced to delay the immediate elimination of the de minimis exception for goods from China, which allows shipments of less than $800 to enter tariff-free under a truncated process, because Customs could not handle the volume of work associated with reviewing import documents and assessing duties on so many shipments. As one trade lawyer recently told the New York Times, simply creating and monitoring these new tariff lists would be 'a herculean task' requiring countless hours and numerous new government employees tracking thousands of different tariffs. And their task would only get more difficult after the system is implemented, countries change their tariff and nontariff policies, or, as discussed next, supply chains shift in response to the new reciprocal tariff regime. Private parties would need to stay caught up too. Cindy Allen, CEO of Trade Force Multiplier and bona fide customs compliance guru, sums it all up in an email: Updating tariff numbers by the government would be a weekslong process instead of the few days it takes now. And then the private sector would need to download the duty rate updates individually as well. This would be a massive endeavor for both the government and the private sector to keep track of on an ongoing basis and extremely challenging for any post entry activities trying to figure out which rate applies. In short, simply maintaining the new tariff system would be a bureaucratic nightmare for everyone involved (someone alert DOGE!). Second, Hillman and Alden add, there's the increased paperwork and costs associated with tariff compliance and enforcement: [M]ost companies and the Customs brokers that facilitate exports and imports do not pay much attention to the fine print of exactly where products are made, the so-called rules of origin. Rules of origin matter greatly for imports from free trade partners, for products covered by country-specific antidumping or countervailing duties, for goods coming from non-favored countries (such as Belarus, Cuba, North Korea, and Russia), and for preventing the import of products made with child or forced labor. But for all other shipments, there is no need to ensure rules of origin declarations are 100 percent correct, because it does not matter. Under the [current Most Favored Nation] rules, the tariffs are the same no matter where the goods were made. As I can tell you from experience, a single customs ruling on a product's country of origin or its applicable tariff rate can take months of work and loads of evidence. Fortunately, they're relatively rare under the current system: Even with all the recent tariff threats, CBP issued just 106 rulings in the last 30 days. Under a reciprocal system, however, these and other customs rules and procedures would matter not for a few products and countries but for every single thing entering the United States—trillions of dollars' worth of goods each year—no matter their origin or their complexity. Related costs would accordingly skyrocket. Finally, there's the similarly herculean task of defining and quantifying all the nontariff barriers supposedly blocking U.S. exports and then converting them all into a single 'tariff equivalent' for an entire country. As Trump may or may not be aware, trade-distortive foreign subsidies (e.g., government grants to domestic exporters) can already be investigated and subjected to remedial measures under both the U.S. 'countervailing duty' (CVD) law and WTO rules, but these cases take more than a year—along with piles of documents, armies of lawyers, and multiple government-to-government consultations—to carry out for just a single product. In the CVD context, moreover, it's often discovered that foreign exporters under investigation didn't receive some of the subsidies being alleged, entitling their goods to lower U.S. duty rates (or none at all). Other times, alleged subsidies didn't even exist, and—even when they do—they're often product specific, not country-wide (e.g., subsidized logs going to foreign lumber producers). In these common cases, slapping a single 'subsidy tariff' on an entire economy would be absurd. Then there are domestic government policies with highly uncertain and indirect trade effects. Economists will tell you, for example, that value-added taxes are—contra the Trump team—trade neutral in theory, but whether a nation's VAT system affects imports and exports in practice can depend on the tax's structure and whether, for example, local currency adjusts fully and quickly. Labor, environmental, intellectual property, and other domestic policies also can have indirect trade effects, even though they're non-discriminatory on their face. Heck, even the metric system can be a nontariff barrier. Mimicking the CVD process for 150-plus countries, thousands of products, and thousands of government programs—not just tariffs and subsidies!—is simply impossible. So, either the Trump team will fake it, or they'll give up. Let's hope it's the latter. The system's complexity leads to its second big problem: Given the money at stake, companies and countries will inevitably work to circumvent new U.S. tariffs, adding even more pressure on customs enforcement along the way. Companies might, for example, reroute supply chains through countries that suddenly face lower U.S. tariffs on certain products (because those countries had lower tariffs on the same products from the United States). Or they'll engage in 'tariff engineering' to slightly change a product from one with a high tariff to one with a lower one. Or they'll find other legal loopholes—and illegal ones, too—to continue shipping goods to the United States. And, of course, they'll hire lobbyists to convince administration officials that they deserve special tariff treatment one way or another. As the Financial Times' Alan Beattie notes, a system with widely varying tariff rates across dozens of countries (and with corporate armies looking to game it) would cause U.S. trade policy and enforcement to quickly devolve into a 'truly global game of whack-a-mole' that the United States can't easily avoid: If the US genuinely tries to close its overall deficit with big tariffs all round, it will cause a crunching recession. If Trump discriminates between trading partners, the heavily tariffed ones can nip through the side door of those who escaped more lightly. We've recently seen this exact outcome play out repeatedly on a smaller scale. As we discussed last year, for example, U.S. tariffs on Chinese imports have been less effective than advertised because companies have found creative (mostly legal) ways around them. Logistics professionals proved similarly nimble when the pandemic and other disasters hit, quickly rerouting goods and supply chains to keep trade flowing. And trade lobbying has skyrocketed in our new era of tariffs and policy uncertainty. Overall, tariff evasion is as old as the republic itself, and—as we've learned quite well with our domestic tax system—smart lawyers, accountants, lobbyists, and other professionals make a killing (for themselves and their clients) exploiting regulatory complexity. A reciprocal tariff system would be complexity on steroids. As Beattie acknowledges, supply chain adjustments in response to reciprocal tariffs wouldn't be painless, and—as with China—the result would likely be less efficient, less resilient, more costly, and less transparent than our current system. But in the end, it's a safe bet that, as Beattie puts it, 'the world's supply chain superheroes' (and their friends on K Street) will eventually outfox Peter Navarro. Assuming, of course, that—as with the administration's failed attempt to block de minimis shipments from China—the whole Rube Goldbergian thing doesn't collapse first. The system's third big problem is its treatment of U.S. trade barriers. As we've discussed repeatedly, the United States has relatively low average tariffs but plenty of high ones on politically sensitive products like sugar, dairy products, textiles and apparel, footwear, and pickup trucks. Just as importantly— Washington uses many 'non-tariff' measures to impede foreign competition. This includes subsidies, quotas, 'Buy American' restrictions, the Jones Act (drink!), and regulatory protectionism like the FDA's blockade on baby formula. We're also one of the biggest users of 'trade remedy' measures (anti-dumping, especially) and today apply more than 700 special duties on mainly manufactured goods like steel and chemicals. According to the independent Global Trade Alert, which monitors nations' trade liberalization and protectionist policies, the United States has had the most 'harmful' trade interventions—tariffs, nontariff barriers, subsidies, etc.—of any nation since late 2008. Nitpick the organization's methodology all you want, but the fact remains that the United States has plenty of its own barriers to trade—most of which are hardwired into domestic law and usually backed by powerful domestic constituencies (Big Sugar, Big Steel, Big Auto, Big Dairy, Big Ship, Big Peanut, etc.) and large congressional majorities. Some major exporting nations, by contrast, have low tariffs on these very same products. For example, Japan's tariff on U.S. pickup trucks is 0 percent, while our tariff on Japanese trucks is 25 percent; Brazil's tariff on raw cane sugar is 14.4 percent, but ours is around 81 percent at current market rates; New Zealand has no tariffs on milk, butter, and cheese, while U.S. tariffs are in the double digits. A truly reciprocal system would lower U.S. tariffs to match the tariffs of these and other trading partners, but, given the politics here, there's effectively zero chance of that ever happening. Instead, the most likely outcome is that U.S. tariffs move only one way—up—and foreign countries respond to our trade barriers with new ones of their own. Fourth, the reciprocal system ignores nations' natural comparative advantages in ways that would produce absurd results. For starters, the United States would end up applying high tariffs to things that we don't make for reasons that have nothing to do with trade policy. Take coffee, for example. Because of climate and geography, the United States produces relatively little coffee, imports a ton, and—to the delight of caffeine addicts everywhere—applies no tariff on imports of green coffee beans. Brazil, on the other hand, is the world's largest coffee exporter and applies a 9 percent tariff on imports. Under a reciprocal tariff regime, the United States would mindlessly match Brazil's tariff, thereby accomplishing nothing for U.S. exports while harming millions of American coffee roasters and consumers. Plenty of other food and beverage products, along with specialty or name-brand manufactured goods, are made only by specific countries and companies and would thus suffer the same fate. How silly is that? Just as importantly, the Trump/Navarro reciprocal system ignores all the services industries in which the United States is a global leader and export powerhouse. (We have a big trade surplus in services, if you're into that sort of thing.) Major U.S. exporting industries include information technology, financial services, professional services (accounting, law, etc.), entertainment, tourism, and as the White House's Council of Economic Advisers explained last year, manufacturing: Economic activity in the United States has transitioned from manufacturing towards services over the past five decades. Notably, U.S. manufacturing firms account for almost a third of this transition—reflecting the importance of services throughout the manufacturing process. In fact, manufacturers are an important source of the U.S. comparative advantage in digitally-enabled services. Manufacturers are the second largest exporter of digitally-enabled services after the finance and insurance sector (figure 4). A 'reciprocal' system that focuses myopically on tariffs and trade in goods will miss all this important economic activity and the real barriers to U.S. services exports in key foreign markets—barriers that the United States government has long documented and that harm some of the nation's biggest and most important companies, including American manufacturers. In short, we'd obsess over nations' banana tariffs while ignoring their barriers to American AI. That's just crazy. Dartmouth economist Doug Irwin explains the final problem with simplistically applying the same tariffs on other countries' imports as they impose on U.S. goods: It amounts to outsourcing U.S. tariff policy to other countries. They would dictate what our tariffs would be. If other countries put high tariffs on American goods, then we would impose high tariffs on their goods. So much for American sovereignty. So much for deciding what's in our own national interest. The British economist Joan Robinson once said that a country shouldn't throw rocks into its own harbors just because other countries have rocky coasts. The same principle applies here: The U.S. shouldn't have stupid tariff policies just because other countries have stupid tariff policies. In general, the United States should remain free to improve its economy without the need to wait for other countries to do likewise. Regardless of whether you think the United States needs higher or lower tariffs, the decision should be based on what's best for most Americans and the nation as a whole, not what some random government official in some random country decides on a random day (often for political, not economic, reasons). A reciprocal approach to policymaking is particularly wrongheaded today, given the United States' continued economic outperformance versus its global peers. And it's especially weird coming from 'America First' proponents who decry—sometimes rightly—'globalist' policies that cede U.S. policymaking and sovereignty to foreign powers and international organizations. Indeed, Trump literally just withdrew the United States from an international arrangement that would've tied the United States' hands on corporate tax policy, but now he wants to tie our own hands on VATs and tariffs? Make it make sense. As noted at the outset, these are not the only problems with the Trump/Navarro reciprocal trade plan. It defies, for example, the WTO's bedrock nondiscrimination principle and could therefore implode a multilateral trading system that's been around since the 1940s. It leads to higher U.S. tariffs, raising costs and stifling growth (see new analysis here). It misunderstands that—thanks to global supply chains, multinational investment, and intrafirm transactions—bilateral trade flows are rarely a simple case of 'their' exports versus 'ours.' It ignores all the U.S. laws already in place to handle 'unfair' trade policies—laws Trump himself has used—and the many other tools at the United States' disposal to address other countries' protectionism without harming its own citizens. It whiffs on the real causes and effects of U.S. trade deficits (spoiler: it's not tariffs), as well as the utter meaninglessness of bilateral trade balances for assessing national trade policies. It misses fundamental differences between tariff-centric developing country trade policy and nontariff-centric developed country policy—differences driven mainly by resources (money, manpower, etc.), not economics or 'fairness.' And it fails to grasp how traditional trade agreements—and the standard version of reciprocity that seeks an overall balance of concessions among parties, with different carveouts for nations' specific political sensitivities—have historically done a pretty good job reducing tariff and nontariff barriers and adjudicating specific bilateral trade irritants, while leaving nations adequate domestic policy space to tax and regulate as they see fit. These are all good and valuable critiques, and I'm sure there are others. But, perhaps even more important than all the wonky law and economics is the simple fact that a reciprocal tariff system would be an unworkable, impractical, nonsensical mess. It's the type of thing you'd expect from a dorm-room bong session, not an official policy document issued by the head of the world's most powerful nation. For now, the president has merely directed various agencies to study the feasibility of these reciprocal tariffs and determine the way forward. For all our sakes, let's hope there is none. Plane crashes are still, umm, falling Pass the SALT? Noncitizens—including illegal immigrants and those on visas—consumed 54 percent less welfare than native-born Americans: How the System Works Homebuilder sentiment collapses on tariff worries (more) Automakers crank up the lobbying to avoid Trump tariffs, keep EV subsidies Tariffs on TSMC's semiconductors make no sense Draghi on growth-killing EU regulation and internal barriers to trade U.S. manufacturing output and capacity utilization dropped in January 'The bazooka diplomacy of Trump's tariffs' Aldi keeps expanding across America, now third-largest U.S. grocery chain Amid IRA uncertainty, clean energy investments drop, and cancellations rise Small business uncertainty spikes ICE struggles to meet its deportation targets; promptly stops publishing them U.S. steel prices already up 20 percent since tariff announcement Could stubborn inflation check Trump's tariff impulses? 'Italy's Superbonus: The Dumbest Fiscal Policy in Recent Memory' Paper: Western sanctions didn't stop the bad guys' oil Paper: Pay-as-you-go financing boosts consumer welfare Amazon workers overwhelmingly reject unionization in North Carolina Maids in Raleigh make $25/hour Ugh, NIMBYs KFC moves from Kentucky to Texas
Yahoo
13-02-2025
- Business
- Yahoo
The IRA Has Made a Little Climate Bang for a Lot of Taxpayer Bucks
From the Capitolism on The Dispatch Given my schedule and intense desire to avoid writing about tariffs again, now's as good a time as any to check in on the Inflation Reduction Act, which has been in the news lately because Republicans are considering whether to trim the law's subsidies as part of their big tax/spending package. As readers of Capitolism surely know, I am and remain skeptical of the IRA as an industrial policy bill designed to boost American manufacturing and make the United States a clean energy powerhouse (or whatever), and we'll surely revisit where those efforts stand later this year when more data are in about the factories and jobs at issue. For now, however, it's worth examining the IRA in terms of simply its budgetary cost and primary objective of reducing carbon emissions to fight climate change. As an excellent new report from the Breakthrough Institute documents, this is not going well. And none of it should be surprising. As the Breakthrough report documents, the IRA's subsidies have already become way more expensive than the already-high $383 billion price tag the Congressional Budget Office originally calculated (which itself was billions more than what Senate Democrats first claimed). 'More recent estimates,' the report notes, 'project the total cost of these programs to run closer to a trillion dollars, with the cost of wind and solar subsidies alone substantially exceeding the cost of the original estimates not only for the clean energy subsidies but for the entire cost of the package, inclusive of non-climate related spending.' Even these revised totals, however, substantially undershoot the IRA's actual costs because they stop counting after the 10-year budget window closes. Thus, as my Cato Institute colleague Travis Fisher discussed in 2023, energy firm Wood Mackenzie has estimated that the IRA's energy subsidies could hit $3 trillion through 2050, and his own forthcoming estimates push the number even higher—to as much as $4.7 trillion over the same timeframe. Even in Washington, that's a lot of money. As to why the subsidies' budgetary costs are so high, the Breakthrough report cites two big, fundamental drivers. First, the law subsidized 'mature, widely commercialized technologies,' meaning that public uptake (and thus taxpayer cost) would inevitably be substantial: Solar now accounts for roughly 5% of US electricity generation and almost 25% in California. Wind accounts for over 10% of US generation and almost 30% in Texas. EVs will likely account for around 10% of US vehicle sales this year. With federal tax credits covering a third (or more) of the cost of wind and solar installations and $7500 for every EV that automakers sell, the aggregate costs of this approach to bringing down the unit costs of clean energy gets really expensive really fast. Put simply, the IRA subsidizes stuff millions of Americans already want and can already access relatively easily. So, of course they're gonna take advantage, and the taxpayer tab's gonna climb—a lot. Second, the law transformed what were originally supposed to be temporary subsidies intended to drive the innovation of new energy technologies into 'quasi-permanent' subsidies intended to drive long-term reductions in CO2 (and, for technical reasons that we'll avoid digging into today, to keep the continuing deployment of wind and solar energy economically viable). So, even though wind and solar technologies are already relatively cheap and available (thus eliminating any need for innovation subsidies), the report notes that IRA's subsidies are 'scheduled to expire only when economy-wide US emissions are 75% below 2022 levels, which translates to almost 80% below 2005 levels, or 40 percentage points lower than the IRA's 2030 emissions goal.' (Emphasis mine.) That's a recipe for never-ending subsidization, especially because the IRA's emissions goal looks increasingly unlikely (again, emphasis mine): Despite this significant escalation in the projected cost of the IRA, US emissions appear likely to significantly undershoot the original emissions reduction estimates that proponents of the IRA argued the package would achieve. After passage, Princeton's Net Zero project estimated US emissions would fall 50% below 2005 levels by 2035. Last year, they softened this projection to 40% below 2005 levels. A 2024 report from Princeton, Rhodium, Energy Innovation LLC, and MIT found that deployment trends in low-carbon electricity were insufficient to achieve the goal of 40% reduction in emissions by 2030 established by the IRA. And as we found last year, taking these revisions into account, IRA investments would likely sustain the existing pace of US emissions reductions, not significantly accelerate them. Given that reducing carbon emissions is supposedly the IRA's No. 1 goal, missing this target is a rather serious problem—especially when the subsidies will continue until the target is reached! As to why the law has proven less effective at curbing emissions than was advertised, Breakthrough zeroes in on something we've discussed here repeatedly: the IRA's total failure to tackle supply-side impediments to the dissemination of renewable energy, particularly permitting, transmission, and interconnection regulations: Wind and solar are not economically viable without subsidies not because solar panels and wind turbines aren't cheap but because it has become increasingly difficult to site them in many places and to get the power they generate to the places where it is needed when it is needed. Democratic leaders in the last Congress ultimately abandoned the opportunity to pass a legislative package inclusive of permitting and transmission reform, at the behest of an unholy alliance of environmental groups adamantly opposed to any meaningful reform of the National Environmental Policy Act and investor-owned utilities wary of competition that grid interconnection would bring. These supply-side reforms, they add, were probably more important for U.S. renewable energy deployment and carbon emissions than the IRA's demand-side subsidies, and the policies' omission has contributed greatly to the law's failures (and cost): In the absence of forever subsidies for wind and solar, permitting reform and interstate transmission are essential if those industries are going to thrive. No one appears to have done any modeling directly comparing the emissions benefits of solar and wind with subsidies and without permitting reform and transmission versus with permitting reform and interstate transmission and without subsidies. But given that Jenkins' modeling at Princeton's Net Zero project, conducted shortly after passage of the IRA, found that 80% of the estimated total emissions reductions through 2035 vanished without major expansion of transmission, we suspect that transmission, interconnection, and cheap battery storage are much more critical to the future of wind and solar, and the emissions benefits that additional wind and solar deployment might bring, than are the IRA tax credits. In short, an IRA focused on supply-side reforms alone may have done more for the environment than the subsidy-focused law we got, while saving American taxpayers trillions in the process. And the fact that, as noted above, no one in power in 2021-2022 even considered modeling this alternative approach is a policy failure of epic proportions. Adding insult to injury are all the other things unmentioned by Breakthrough that are further inflating costs and slowing deployment of renewable technologies in the United States—some of them baked into the IRA itself. As we've discussed, for example, tariffs and 'Buy American' restrictions have dramatically inflated solar panel prices in the United States and have increased the cost of solar energy generation, too. Per the latest Energy Department report, in fact, U.S. solar modules at the end of last year were selling at a 190 percent premium over world market prices—driven, the agency notes, by U.S. tariffs and domestic production costs that are more than double those in Southeast Asia (where most solar imports come from these days): Protectionism—tariffs, the Jones Act, Buy America rules, etc.—and regulatory hurdles also have burdened the offshore wind industry and related U.S. manufacturers, whose struggles have only intensified since we examined the problems in late 2023. And, as Jeff Luse notes over at Reason, U.S. tariffs—both old ones and the brand new taxes Trump has proposed—hobble advanced nuclear power and transmission lines, too. As one energy expert said about the new tariffs, 'This really is one of the dumbest things we could be doing.' Indeed. Bureaucracy is also slowing things down. For example, various reports indicate that U.S. EV uptake would accelerate if charging stations were more widely available, but the rollout of a national EV charging station network has been smothered in red tape. As of November of last year, in fact, National Electric Vehicle Infrastructure program had only 214 operational chargers of the 500,000 that were promised when the initiative launched two years earlier. Bureaucracy is a big reason why: Under that program, states apply for funding and then private companies make bids to install chargers. However, the charging companies who receive NEVI funds must comply with a complex web of local regulations, work with utility companies and get required permits—a process that can vary wildly from community to community. The charging station rollout has been further slowed by a Federal Highway Administration rule 'requiring that workers for most projects be certified by the electricians union, or another government-approved training program'; federal guidance dictating silly things like the distance between charging stations in a state and the number of charging ports at each station; cumbersome Buy America requirements for certain iron and steel components; and a federal requirement that half of all grant money be set aside for 'disadvantaged communities that are marginalized by underinvestment,' instead of places with actual high EV usage rates. Industry players, meanwhile, have expressed confusion about various IRA tax credit conditions. In one particularly egregious example, 'billions of dollars' of potential investments were stalled because, 'Two years after President Joe Biden's landmark climate law promised to kick-start green hydrogen production with generous tax credits, companies still don't know who will qualify.' Most recently, American EV drivers have struggled to provide the paperwork needed to receive EV tax credits as part of their 2024 tax returns—struggles created by a midstream change to rules on how dealers report EV sales to the IRS. Finally, political uncertainty regarding the Trump administration's and congressional Republicans' plans for the IRA continues to weigh on the renewables sector and the law's implementation. As we discussed in October, investment in the U.S. clean energy sector had slowed because companies were waiting to see who won the 2024 presidential election, and, as economist Brian Albrecht reminds us in a new piece, policy uncertainty has a long and ignominious history of sapping U.S. business investment, industrial production, and employment. Now that Trump's in office, the Financial Times reports, uncertainty about the IRA's future has slowed things down even further: Dealmaking in the renewables sector has been hit particularly hard, according to one banker who specialises in energy deals. 'Green energy investments have been decimated because you've got a guy who's saying he doesn't like windmills and is pulling permits for wind energy. It's impossible for the big infrastructure funds, in particular, to get comfortable committing to multiyear projects,' said the person, who did not want to be named. These doubts should persist for much of 2025 (if not longer), as the Trump administration and Congress mull spending and tax cuts that could take a chunk out of the IRA or consider regulatory changes to various subsidy conditions they don't like. And, of course, this kind of uncertainty is all but inevitable in an energy market driven by government, not private, actions. So, the IRA costs much more than advertised and, in terms of its main goal of 'tackling climate change' (in the Biden White House's own words), delivers much less. These disappointing outcomes are owed to what's in the law (endless subsidies to common technologies and more protectionism), what isn't in the law (supply side reforms on permitting, transmission, interconnection), and other needless rules and regulations that further impede the rollout of supposedly critical goods and services. And none of it is the least bit surprising. As the Breakthrough report notes, for example, many energy experts in the late 2000s warned against trying 'to use public clean energy subsidies as a reverse carbon tax' because it would be 'an inefficient and expensive way to cut emissions,' and they're being proven right today. Meanwhile, as I detailed in a 2021 paper, U.S. industrial subsidies like those in the IRA have routinely fallen victim to budgetary overruns and failed objectives, thanks to poor (often politicized) design and implementation, political uncertainty, and pre-existing laws and regulations that contradict or thwart the subsidies' goals. Sounds familiar! But this is more than just a case of I-told-you-sos; it matters greatly for assessing the IRA's merits and future. At a piddly $400 billion (ha!), for example, the factories and jobs supposedly spurred by the law might be worth its cost, even if U.S. emissions reductions are meager. At a total price tag more than 10 times that original amount, such results—even assuming they materialize and are owed to the IRA—make far less economic sense, while repealing the IRA subsidies makes much more. According to one recent estimate, for example, 'Each new Inflation Reduction Act job 'created' costs taxpayers between $2 million and $7 million.' That is objectively not good deal, no matter how you slice it—but especially when you consider that, as the Breakthrough authors calculate, as much as three-quarters of all projected IRA spending over the next 10 years will go toward subsidizing just three mature technologies that don't need any more subsidization (wind, solar, and EVs). Cutting those subsidies could alone save American taxpayers between $300 billion and $650 billion over the same timeframe—a nice chunk of change in an era of trillion-dollar deficits—and could in the process put federal energy policy on a better, more sustainable path going forward. Or, we can just keep handing out billions to companies and people who don't need the money, while distorting U.S. energy markets and waiting for emissions reductions that never actually come about. Seems like an easy call to me. Wow. Make Libya Great Again Americans would like Trump to focus more on lowering prices: Ah, memories Inflation ate the infrastructure law Trump doesn't really want 'reciprocity' Documenting steel tariff costs The U.S. has never been a free trade fundamentalist country On the expensive futility of Trump's washing machine tariffs Inflation, tariffs, and supply chains New life for Nippon Steel? Trump isn't mainly arresting/deporting criminals OOPS: Trump suspends 'de minimis' import ban after millions of packages pile up at U.S. ports Protectionism will kill Detroit Anti-American backlash continues in Canada DeepSeek and the AI 'monopoly' The occupational licensing racket New data on AI and jobs Apparel companies leave China for places with lower quality The post-neoliberal delusion Another protectionist talking point bites the dust CEOs and bankers sour on Trump Fact v. fiction in Panama Vermont gets old because of high housing costs Growth alone can't fix the deficit
Yahoo
05-02-2025
- Business
- Yahoo
Lessons From the Great Almost Trade War of 2025
From the Capitolism on The Dispatch Well, that wasn't fun. While most of you were, I hope, enjoying your weekends, thousands of journalists and trade dorks like me spent our 'free' time Saturday and Sunday glued to our smartphones and frantically tweeting out charts in anticipation of and response to Donald Trump's latest tariff shenanigans. For those who were (blessedly) checked out, Trump signed three executive orders Saturday declaring a 'national emergency' related to fentanyl and illegal immigration and implementing across-the-board tariffs, effective midnight Tuesday, on all imports from Canada, Mexico, and China under the International Emergency Economic Powers Act (IEEPA). Since then, Trump has suspended for 30 days the orders for Mexico and Canada—mostly following the script I laid out in November, by the way—while the China tariffs are in force (for now). Though the China tariffs remain, the biggest drama—and biggest economic blowback—was avoided with the delay of the Canada/Mexico tariffs, which would have affected about $800 billion in imported goods from our two largest trading partners and wreaked havoc on trilateral food, energy, and manufacturing supply chains that developed over three-plus decades of relatively unfettered trade. Yet, even with that mess paused, there are at least five important things we can learn (or for devout Capitolism readers, relearn) from the Great North American Almost Trade War. First, U.S. tariffs impose real and significant costs on businesses and companies—something has now admitted. One Trump admission was explicit, when he acknowledged over the weekend that there would be 'some pain' from his new tariffs (but, of course, that it'd be worth it in the end). More important than this, however, was Trump's implicit admission of tariffs' economic costs, which came in the form of a 10 percent tariff on Canadian energy—oil, gas, uranium, etc.—instead of the baseline 25 percent he planned to implement on other goods. Why is this a big admission? Because such a discount obviously wouldn't be necessary if Canadians were, as Trump always claims, paying the tariffs. In reality, of course, the energy tariff discount reflects several unavoidable and, for Trump and other protectionists, uncomfortable facts about how imports help the U.S. economy and American consumers—and how protectionism hurts them. In this case, many U.S. refineries in landlocked states—see Petroleum Administration for Defense Districts 2 and 4 in the image below—rely on Canadian heavy crude oil that they can't cheaply or easily replace with the lighter American version. As a result, U.S. demand for Canadian crude oil (as well as for energy generally) is relatively 'inelastic,' meaning we'll keep buying it even if tariffs increase prices. So, contra the MAGA spin, a full 25 percent tariff on Canadian energy wouldn't have been paid by Canadians; it'd have been paid by millions of ticked-off American energy consumers, with experts predicting that the full 25 percent tariff on oil could've boosted Midwestern U.S. gas prices by as much as 70 cents a gallon. Given the longstanding politics surrounding gas prices in the United States and Trump's own promises to lower prices (especially for energy) instead of raise them, his Canadian tariff discount bows to the market and economic realities surrounding the win-win nature of international trade (especially in North America), the benefits of imports, and the foolishness of autarky (especially in energy). And it's especially funny given that Trump cited the U.S. trade deficit with Canada as one of many reasons for his tariffs—a trade deficit owed entirely to the very energy products his tariff discount encourages: There are other harms to U.S. companies and consumers from these tariffs—see, e.g., these back-of-napkin estimates of how Apple will pay—but this example should prove particularly useful in the weeks ahead since Canada remains on tariff watch. Second, tariff-related U.S. price increases can come very quickly on both imported domestic products—and can even happen of tariffs being implemented. The speed and magnitude of such price moves depends on lots of factors, such as how much of an item U.S. companies stockpiled in advance, how perishable an item is, and the availability of domestic or imported alternatives. But in general, prices of most tariffed goods are gonna rise, and, for energy and steel at least, the moves were basically instantaneous. Dartmouth professor Doug Irwin posted a weekend notice from his local energy supplier, Canada-based Irving Oil, informing him of an immediate 10 percent increase in his propane bill, thanks to the new U.S. 'tax' on imports from Canada. (Many New Englanders get their energy from Canadian suppliers.) Gas Buddy's Patrick De Haan, meanwhile, noted on Sunday that gasoline prices shot up 7 cents in advance of the tariffs. ('Trade wars are BAD NEWS for the economy. … Don't be fooled- there are no winners here,' he added.) They were up even more on Monday before Trump and Canadian Prime Minister Justin Trudeau announced the temporary truce. On steel, the Wall Street Journal reported Monday morning—in what may be the least surprising headline ever—that the tariffs, which would have affected almost 40 percent of all imports, had given domestic (yes, domestic) steelmakers and aluminum producers the 'green light' to raise prices, too: Steel prices started rising for some U.S. companies even before President Trump announced tariffs on Canada and Mexico. Executives said they are bracing for more to come. … Higher prices for imported steel are often followed by domestic suppliers raising their own prices, which then get passed through supply chains, manufacturing executives said. … The Trump administration's tariff on aluminum from Canada and Mexico will get absorbed in the U.S. through a delivery surcharge attached to all aluminum transactions. The higher charge could be a windfall for U.S. aluminum companies that don't have to pay the tariff but get to collect a higher delivery premium from customers as if they did. Leaving aside Capitolism's intense desire to dunk on Big Steel and misguided U.S. tariff-backers (but I repeat myself!), the lessons here extend beyond the commodities at issue. We see how tariffs are paid by American consumers in two ways: a visible tax on imports and an invisible tax on U.S.-made goods, with the latter simply paid directly to producers (via higher prices) instead of to the U.S. Treasury. And simply 'buying American'—as so many MAGA fans on Twitter keep telling me to do!—doesn't avoid immediate tariff pain. These real-world price increases also show why reported Trump administration plans to slowly ratchet up tariffs to minimize their economic harms won't work in many (most?) cases. Market participants are paid handsomely to track price-related trends, and they'll surely anticipate future tariff moves well before they actually happen. This means traders and sellers in the U.S. market will often increase prices if they see additional tariffs coming, and—adding insult to injury—will often reduce prices more slowly (as the classic saying goes) if the tariffs never materialize or are later removed. For American consumers still reeling from inflation, none of this is good news. Third, many foreign governments retaliate against U.S. tariffs, but not always and not necessarily in direct, dollar-for-dollar ways. Mexico seems to have followed the playbook I set out in November, warning of sticks—a carousel of TBD tariffs—but also offering up some superficial, easily-digestible carrots (ones offered months ago, in fact) that let Trump declare momentous victory and turn his focus elsewhere. Canadian officials eventually got to the same place on Monday with similarly minor concessions but were more direct in the meantime: Ottawa published a plan for immediate retaliation against a relatively small number of politically sensitive products and promised even bigger tariffs to come in a few weeks, and various Canadian provinces targeted similarly sensitive American goods and services too. This approach sought to minimize their immediate economic pain, maximize ours (just as occurred in 2018), and show to rightfully pissed-off Canadians, as well as to Donald Trump, that they won't simply cave to American pressure: Take Canada, which despite being knee-deep in a political crisis has responded to the threat of tariffs with newfound unity across the political spectrum, from Trudeau's center-left party to those on the right formerly seen as close to Trump's positions, such as Ontario Premier Doug Ford. He has pledged to pull U.S.-made alcohol from shelves in his province, and scrapped a high-speed internet contract he had signed with Elon Musk's Starlink. Canadian MP Charlie Angus put it even more bluntly on CNN: 'We'll make concessions on something he can write a press release about, but Canadians would hunt our leaders down if they bowed and kissed the ring.' (Canadians were literally booing the U.S. national anthem at an NBA game in Toronto and NHL game in Ottawa.) Just as Trade Policy 101 predicts. China, meanwhile, initially vowed a vague response and offered up meaningless concessions or things Beijing was already doing. When the tariffs finally hit Tuesday night, however, Beijing responded with tariffs on U.S. coal, liquefied natural gas, crude oil, agricultural machinery, cars, and pickup trucks—about $20 billion in total imports—as well as asymmetric retaliation: new export controls on 'critical minerals' used in various electronics; new restrictions on the in-China operations of U.S. fashion company PVH Corp. and biotech firm Illumina; and antitrust investigations into Google and Nvidia (with one also threatened against Intel). Chinese regulators may now be targeting Apple too. Experts speculate that the Chinese government will quietly discriminate against U.S. commercial interests in other ways as well, but for now Beijing seems to be signaling that it, too, can inflict pain on various U.S. commercial interests while also trying to avoid a major confrontation. Fourth, we quickly learned the emptiness of Trump's latest tariff justifications—fentanyl streaming across porous U.S. borders— the risks that an open-ended IEEPA presents. Granted, the 'emergency' declaration's foundations were never solid to begin with. The drug war has gone on for decades; U.S. drug overdoses and illegal border crossings have been dropping for a while now; and fentanyl use and smuggling concerns are subsiding too (or, in the case of Canada, never really existed). There also are far better, more effective, and less damaging—economically and politically—ways to address drug and border issues than tariffs (which would actually make fentanyl cheaper!); and, as my Cato Institute colleague Colin Grabow helpfully reminded me, it's rich for Washington to pretend Canada and Mexico can effectively keep dime-sized pills carried mainly by American citizens from crossing multi-thousand-mile borders when it can't even keep drugs out of our own federal prisons. But you don't even need such facts and logic to understand the emptiness of this new 'emergency', because—while White House aides were on TV Sunday making this all about fentanyl—Trump himself had already pivoted to just throwing mercantilist junk at the wall to justify his tariff actions: The charade continued on Monday when Trump—clearly laser-focused on solving our northern border crisis—brought up U.S. banking and dairy market access in his first call with Trudeau and, when asked later that day about what Canada could do to escape the tariffs, fired off a 70-second response—covering lumber, autos, Canadian statehood (of course), and other topics—that never mentioned the border or fentanyl even once. And he topped it all off by writing on Truth Social that the Canada tariffs 'will be paused for a 30 day period' not to see if Canada follows through on fentanyl but instead 'to see whether or not a final Economic deal with Canada can be structured.' Given this stuff and the 'wins' that secured the Mexico and Canada tariff pauses, the 'fentanyl' emergency is pretty clearly a sham—a pretext to invoke a vague, constitutionally suspect law that, until neutered by a court or Congress, lets the president threaten sweeping tariffs against close allies and trading partners, dominate the headlines, and demonstrate his great power over foreign governments to an adoring (and gloating) fan base. Whether this reality has actual legal ramifications is an open question. There's no precedent for using IEEPA to impose tariffs, especially not ones against an ally like Canada, and, along with big constitutional (separation of powers) questions, courts may look at whether there's any 'causal connection between the emergency—fentanyl and migrants—and the remedy: universal tariffs.' Maybe courts won't consider Trump's statements severing this connection, and maybe they will. As a practical matter, however, the issue is clearer: This ain't about fentanyl and never was; Trump will continue to abuse IEEPA in similar ways until the courts or Congress stop him; and the U.S. economy will suffer—from tariffs or just uncertainty—as a result. Fifth and finally, we learned that—as long as Trump is president and IEEPA and similar U.S. trade laws are on the books—the United States government is simply not a trustworthy trading partner. Canada and Mexico are the United States' two largest trading partners, with deeply integrated economies thanks to geographic proximity and 30-plus years of relatively free and friendly trade under the North American Free Trade Agreement and its successor, the U.S.-Mexico-Canada Agreement. The latter deal, of course, was negotiated and signed by none other than Donald J. Trump (who praised it as 'the best and most important trade deal ever made by the USA'), and was—certain problematic provisions aside—agreed to by Canada and Mexico and overwhelmingly approved by Congress in large part because of the security and predictability it offered to more than $1 trillion in annual trilateral commerce. The deal even had a novel provision for negotiating, amending, or terminating the deal, via negotiations scheduled to start next year (not this one). With two quick signatures on Saturday, Trump blew up all of this for basically nothing, in the process signaling—not just to Canada and Mexico but every government in the world—that trade deals Washington signs aren't worth the paper on which they're written. Given how important policy certainty is to markets (and to Federal Reserve decision-making), Trump's behavior will have real-world economic harms, regardless of whether we see more tariffs in 30 days. But, by devaluing current or future trade agreements, it'll also have serious implications for future U.S. trade policy. As I told the New York Times earlier this week, Trump's tariff shenanigans are sure to 'dissuade other countries from negotiating trade pacts with the United States out of fear that the president could arbitrarily scrap them by using his emergency powers.' That's particularly the case because, by opening up domestic farmers, companies, and workers to new foreign competition, trade agreements usually impose real political costs on democratically elected officials. (See, e.g., the insane protests in Seoul when the U.S.-Korea free trade agreement was signed, or the recent ones in Paris for the new EU deal with South American trading bloc MERCOSUR.) After last weekend, every leader in the world's gotta ask: If Trump can, with the stroke of a pen and for no good reason, completely upend a North American supply chain that has been in place for more than 30 years and involves one of the nation's closest military allies, why should I expend the political capital needed to enter into a U.S. trade agreement? Spoiler: They shouldn't. That's a loss for American farmers, companies, and consumers seeking better access to foreign markets, goods, and services, with U.S. economic growth taking a small hit along the way, too. And it's all but certain to accelerate governments' moves away from the U.S. market (and toward each others'). But, as trade economist and new Cato adjunct Kyle Handley explains, it's also a loss for the resiliency of the U.S. economy during times of global economic turmoil: There was an international economic emergency in 2008 called the global financial crisis. World trade collapsed, almost as if there was a global trade war. US exports also collapsed, but the collapse was much smaller toward destinations where the US had trade agreements like NAFTA. With [economists] Carballo and Limao, I showed these trade agreements were valuable because they provided insurance against protectionism during a crisis. That meant US trade declined less and recovered faster where policy commitments were already in place. You see, often times when there is a real economic downturn, countries turn toward protectionism. … Trade agreements are reciprocal commitments to keep tariffs low that reduce the correlation between tariffs and downturns. If you expect low trade barriers, you keep trading, which US firms did where trade agreements existed. Otherwise, firms exited markets with a history of volatile economic shocks and took longer to re-enter those markets. So now what? The US declares an economic emergency when unemployment is low and growth is high as a pretext for 25% tariffs on Canada & Mexico, after they renegotiated USMCA. I would argue the 'good faith' underpinning the insurance against protectionism that kept US supply chains robust during the last economic crisis have vaporized. We'll be worse off when the next downturn arrives. And…we won't rebuild that credibility {for} some time even if Trump backs off tomorrow morning. Trump indeed backed off—at least on Canada and Mexico. But (much to Beijing's delight, by the way) we'll be paying the price for years to come. U.S. job openings: Japan embraces immigration by necessity: Seven charts showing how NAFTA tariffs would hurt the U.S. automotive industry Sorry, progressives, but the minimum wage has very real costs Chinese firms step up U.S. tariff workarounds Intel still struggling on AI The state is taking over China's housing market Costco increases pay to more than $30/hour for most store workers Lots of early lobbying for exemptions from Trump's new tariffs (Shocking, I know) Proud 'Made-in-America' companies worry about tariffs on needed imports New China Shock research finds affected communities rebounded (but older workers didn't) Egg surcharge at Waffle House Robo umps now
Yahoo
29-01-2025
- Politics
- Yahoo
Trump's Deportations Will Hit American Workers, Too
From the Capitolism on The Dispatch Readers of Capitolism surely know by now that I'm a fan of immigration and believe the United States' illegal immigration problem starts with its legal immigration problem (i.e., that our broken system makes it too darn difficult to move, work, and stay here). Nevertheless, it's also objectively correct that illegal immigration is, well, illegal, and not even a bleeding-heart squish like me would vigorously object to the federal government deporting violent criminals who snuck into the country. It's a more open question, however, as to whether the widescale deportations promised (and seemingly begun) by the new Trump administration are worth the massive amount of government and private resources—years of work, billions of dollars, thousands of people, etc. —needed to deport even a fraction of the 11 million illegal immigrants, most of whom are not violent criminals, that the Trump administration has promised to remove. (And that's even leaving aside the moral, civil liberties, and efficacy concerns that the government's efforts raise.) Many who vigorously shout 'YES IT IS' to that question often point to not just 'the law' but the economic benefits that deportations would supposedly bring to the U.S. economy, particularly for U.S. workers (native-born and legal immigrants) that would—again, supposedly—get better jobs and higher wages if they didn't have to compete with undocumented workers in the U.S. labor market. Yet decades of research on several different periods of U.S. history—both distant and recent—show that the overall labor market effects of the Trump administration's deportation promises should be counted as another cost, not benefit, to any such actions—for not just illegal immigrants and their families but most American workers, too. Indeed, the history of large-scale U.S. government immigration actions gives us plenty to worry about when it comes to the economic effects of the new Trump deportations. Let's start in the 19th century, when concerns about immigrants stealing Americans' jobs in Western states resulted in the first big crackdown on immigration in U.S. history—the Chinese Exclusion Act of 1882, which banned Chinese laborers from immigrating to the United States and pushed out many Chinese laborers already here. According to a recent paper examining the Act's effects on eight Western states, the law unsurprisingly reduced the Chinese labor supply—both skilled and unskilled workers—by 64 percent in the region. More surprisingly, however, was that the act: Reduced the white male labor supply by 28 percent and reduced these workers' lifetime earnings, too. Reduced total manufacturing output in the region by 62 percent, the number of manufacturing establishments in the region 54 to 69 percent, and manufacturing labor productivity by an imprecise amount. (The damage was so substantial because Western factories back then 'were small and mostly relied on labor-intensive production.') Generally acted as a drag on economic growth in the Western U.S. (which was otherwise growing rapidly during the late 19th and early 20th centuries). The authors thus conclude that 'the Chinese Exclusion Act led to negative economic effects for most non-Chinese workers and likely slowed the economic development of the western United States for many decades.' Their main lesson: 'productive immigrant labor may be hard to replace.' Indeed. Of course, the Chinese Exclusion Act's damage back then was likely greater than it'd be today because we've (thankfully!) improved on 19th-century mobility, technology, amenities (AC, especially), and social integration—things that would've amplified the act's economic shock by limiting labor adjustment and something the study's authors readily acknowledge. Fortunately, there's plenty of research on subsequent periods of U.S. history that show similar (though smaller) effects—during economic downturns as well as booms—for similar reasons. Between 1929 and 1934, the United States government deported—some by force and others by persuasion—at least 400,000 Mexicans (many of whom were U.S.-born!) to boost native-born employment during the Great Depression. As a result of this policy, the Mexican population in the United States declined dramatically in the 1930s, but, as economists Jongkwan Lee and colleagues have found, American workers didn't benefit. Instead, 'Mexican repatriations resulted in reduced employment and occupational downgrading for U.S. natives,' particularly for low-skilled workers and workers in urban areas. They cite three likely reasons for the disappointing results: 1) companies in immigrant-dependent industries like agriculture and construction suffered, reducing their demand for native workers; 2) Mexicans' departures reduced urban populations and, in turn, demand for local goods and services, as well as overall economic growth in these areas; and 3) firms that survived the policy's initial economic shocks restructured to utilize more labor-saving technologies instead of hiring native-born workers. In the mid-1960s, the United States ceased its successful Bracero Program that provided Mexican nationals with expanded access to guest worker visas (thus dramatically reducing illegal immigration, by the way). The goal of the program's cancellation—which 'caused the exclusion of roughly half a million seasonally-employed Mexican farm workers from the labor force'—was to increase the wages and employment of American farm workers. Yet, in reviewing novel state-level employment and migration data, economist Michael Clemens and his co-authors found no such effects in the most exposed states. Instead, wages in states with high or moderate levels of Mexican migrant workers (and thus higher levels of bracero effects) 'rose more slowly after bracero exclusion than wages in states with no exposure to exclusion.' Employment levels, meanwhile, showed no significant effects across states. The authors conclude that 'bracero exclusion failed as active labor market policy,' theorizing that—instead of raising wages and hiring more American workers—U.S. farmers turned to harvesting machines or, where rapid mechanization wasn't possible (e.g., for delicate fruits), simply produced less. Most recently, the United States during the Obama years ramped up immigration enforcement and deportations via the 'Secure Communities' (SC) program, which sought to detect and remove illegal immigrants by increasing information-sharing between the federal government and local law enforcement agencies and was revived during the first Trump term. As economist Chloe East recently documented for the Brookings Institution, SC between 2008 and 2014 resulted in the deportation of about 400,000 people, mostly men, and had a broader 'chilling effect' on illegal and legal migrants' willingness to engage in the formal economy. As she documents, 'even people not targeted for deportation became fearful of leaving their house to do routine things like go to work…' because the program—like what Trump's promising today—didn't just target serious, violent criminals but instead deported lots of migrants with minor, nonviolent convictions (or none at all). Once again, however, the removal of several hundred thousand workers from the U.S. labor market was not a boon for the U.S. economy or most native-born workers. Instead, East and her colleagues found that, while SC 'decreased the employment of likely undocumented immigrants' via deportations and the aforementioned chilling effects, the program also slightly decreased U.S.-born workers' employment and hourly wages on average. They posit that these negative effects were driven by two factors: First, firms with increased labor costs decreased their overall output and job creation, meaning that the modest gains experienced by low-wage native workers were more than offset by losses among everyone else; second, fewer people meant less local consumption, which in turn meant less economic activity (and demand for labor) in the localities at issue. Other studies of SC have expanded on these findings in specific industries. In a separate paper, East and others found that SC 'reduced the labor supply of college-educated U.S.-born mothers with young children,' with many working moms unemployed or underemployed for years after their kids were born, because the policy made household services more expensive (by reducing the available workforce) and thus discouraged educated moms from working outside of the home. Relatedly, research shows that SC reduced the wages at formal childcare centers for immigrants and native workers (both low- and high-education), as well as the overall number of childcare facilities, due to a lack of workers and fewer people seeking childcare. SC has also been found to have disproportionately harmed the U.S. construction workforce (immigrant and U.S.-born, across all wage- and skill-levels), thus decreasing residential homebuilding and increasing home prices, with minimal offsetting downward price pressures due to reduced demand for housing. Finally, SC has been found to have harmed entrepreneurship, modestly deterring individuals from undertaking self-employment and significantly reducing the earnings of those who still took the plunge, especially for white, male, U.S.-born entrepreneurs. (And, to top it all off, SC might not have even reduced crime!) In case after case and regardless of period, past U.S. efforts to remove illegal immigrants have proven economically costly—for immigrants, certain industries and localities, and even native-born workers and the economy overall. This raises the obvious question of why, and East provides much of the answer in her piece for Brookings: The prevailing view used to be that foreign-born and U.S.-born workers are substitutes, meaning that when one foreign-born worker takes a job, there is one less job for a U.S.-born worker. But economists have now shown several reasons why the economy is not a zero-sum game: because unauthorized immigrants work in different occupations from the U.S.-born, because they create demand for goods and services, and because they contribute to the long-run fiscal health of the country. We see the first two dynamics repeatedly in the research outlined above. In general, government reductions in illegal immigrants' labor supply didn't draw many American workers into the occupations in which the immigrants mainly worked—occupations that often supported other American workers—but did reduce overall local demand for goods and services. And the relatively few American workers who did fill some of these new vacancies ended up in jobs that were worse than what these workers otherwise would've done. As a result, deportations and related restrictions caused local economic activity to be depressed, while harming many U.S. businesses and workers along the way. (These dynamics also explain why various studies have found new immigrant labor supply, legal or illegal, to have little to no negative wage effects on native U.S. workers, including other immigrants, even though most illegal immigrants are likely coming here for work.) We should expect similar effects this time around—if not more so. For starters, East shows that today illegal immigrants generally work in 'low-paying, dangerous and otherwise less attractive jobs' that U.S.-born workers and legal immigrants tend to shy away from: As we've discussed, moreover, the U.S. labor market—now and likely in the future—remains tight (thanks to demographics and other factors), and there are simply not millions and millions of idle American workers sitting on the sidelines just itching to take these newly open jobs. To the extent Trump's broad deportation promises come to fruition, we can expect many immigrant-dependent industries to suffer, few American workers to gain, many other Americans to lose, and plenty of headlines like this along the way: Maybe you think these costs and others are worth the price, and that no amount of illegal immigrant labor is acceptable in today's United States. Being a devoted cost-benefit guy obsessed with scarcity and opportunity cost and fearful of a big, intrusive state (and being a soft-hearted lib, to boot), I disagree. Regardless, we should all have our eyes wide open about the trade-offs that any big, broad deportation policy entails, beyond simply the ample resources required to (maybe) pull it off. In this particular case, the tradeoffs are real and significant, and they include costs borne by the very people that the policy is supposedly intended to help. Massive (190 percent!) U.S. solar panel price premium, thanks in part to tariffs: Canadian oil effectively replaced OPEC oil in the US market: Agricultural productivity: You heard it here first: world trade is moving on without the USA (more) (more) How Argentina beat rent control Poll: Americans sour on early Trump actions (including re: tariffs) The U.S. trade representative's report on U.S./China shipbuilding is bad 'Anti-elite' nonsense Some important history about Reagan and trade Germany's manufacturing/export-dependent economic model is 'broken' We shouldn't freak out about DeepSeek 'Trickle-down' housing in Austin Hiring a nanny will make you more libertarian Kill protectionism to boost U.S. commercial shipbuilding and natsec Correcting the record—and the economics—re: 'externalities' Brazil cuts tariffs to lower grocery prices 'Gen Z Americans are leaving their European cousins in the dust'Tyler Cowen rips MAGA's favorite trade guy Michael Pettis (Krugman too)
