Manufacturing Surged When Tariffs Were Lifted

Tariffs raised costs and manufacturing jobs disappeared. Now, the administration is declaring victory for partially filling the hole it dug. 

By David Hebert of AIER. 

"The New Right is taking a victory lap. Treasury Secretary Scott Bessent says that manufacturing is “roaring back at its fastest pace in years.” He followed that up, calling this a “manufacturing renaissance.” And when the August payroll data showed factories adding jobs, the White House called the report “explosive” and proof that the tariff agenda is working. Checkmate, economists.

Not quite. An honest comparison of 2025 and 2026 reveals the economists were right.

In 2025, the US ran what can only be described as the largest, most aggressive tariff experiment in nearly a century. The average effective tariff rate peaked at 22.4 percent in April, which was the highest since 1909. By comparison, that figure was about 2.4 percent in 2024. But the worst part of 2025 was not the increase in the tariff rate; it was the chaotic manner in which trade policy shifted. Rates could be announced one week, doubled the next, paused a few days later, and then reinstated at an altogether new number months later. They could be imposed due to trace amounts of fentanyl crossing a border, other countries not buying enough of our products, or because President Trump didn’t like a person’s tone during a phone call. Americans were told that tariffs were going to apply to countries with which the US ran trade deficits in order to reduce those deficits. But then tariffs were imposed on the UK and Australia, with both of which the US runs trade surpluses.

Unfortunately, this wasn’t even the beginning of the uncertainty. Americans were told by Commerce Secretary Howard Lutnick that tariffs were “here to stay,” but later that same week, President Trump himself said that he was ready to negotiate with affected countries. In another instance, President Trump said that tariffs would be deployed to create jobs, but then Lutnick said that the jobs brought back would be automated. 

“The army of millions and millions of human beings screwing in little screws to make iPhones — that kind of thing will come back to the America,” Lutnick said, “it’s going to be automated, and great Americans, the tradecraft of America, is going to fix them, is going to work on them.” 

Likewise, Americans were told that tariffs would bring in trillions of dollars in revenue. But at oral argument before the Supreme Court, Solicitor General John Sauer said, “these are regulatory tariffs. They are not revenue-raising tariffs. The fact that they raise revenue is only incidental. The tariffs would be most effective, so to speak, if no person ever paid them. They achieve their goals and so forth.” Here, Sauer is pointing out that if a tariff is generating revenue, then it is not blocking imports and, by extension, not leading to domestic consumers shifting to buying domestically made products. Thus, the goal, according to Sauer, was to not raise revenues at all. 

Others associated with the Trump administration saw things differently. 

In a lengthy post on X and in The Wall Street Journal, Stephen Miran — formerly the chair of the Council of Economic Advisers and Federal Reserve board member — wrote that “it would have interfered with the legal case if I had said that tariffs were good for revenue and tax purposes, even if that’s not actually the reason we gave in law for the tariffs.” In other words, the tariffs were about revenue, except they weren’t, but really they were.

In 2025, Scott Bessent described tariffs as a “gun [that] will always be loaded and on the table, but rarely discharged.” The reality is that in 2025, there was no clear explanation of why the US was using tariffs, nor was there any clear indication of what the tariffs were ultimately trying to accomplish.

The combination of high tariffs with uncertain start dates and unclear goals proved disastrous for firms looking to make long-term investments. As a result, the manufacturing sector shrank. The ISM’s Manufacturing PMI fell into contraction and stayed there for ten months. Factory payrolls fell for eleven straight months, resulting in a loss of about 92,000 manufacturing jobs. Economists had predicted these outcomes and warned that the tariff agenda would produce them.

2026, by comparison, has brought the exact opposite: tariff relief. In February, the Supreme Court struck down the IEEPA tariffs. The White House immediately replaced these with a 10 percent tariff under Section 122. At the same time, the White House announced Section 301 investigations were beginning. While the findings of those investigations were almost certainly predetermined, they resulted in tariff rates of between 10 and 12.5 percent, which were (again) still lower than those in 2025. In other words, tariff rates in the US fell in 2026 compared to 2025.

But the remarkable thing about 2026 is how stable tariff policy has been compared to 2025. If anything, the uncertainty surrounding 2026 is characterized more by which tariffs the president is going to reduce, not impose. When beef prices rose, President Trump lowered tariffs to help ease the burden on households. When the price of steel, aluminum, and copper threatened domestic industry, the president lowered tariffs to “more effectively address national security threats, spur investment in American agriculture, housing, and manufacturing, and facilitate US production of related products.” Certain provisions of the Big Beautiful Bill, such as full expensing even for construction, took effect. Where 2025 can only be described as “raising taxes,” 2026 is a paragon of lowering taxes.

And what happens when taxes, especially those that affect manufacturing formation and expansion, are lowered? Manufacturing expands. And that is exactly what has happened in 2026. The ISM’s Manufacturing PMI crossed into expansion in January and has stayed there for eight months. Factory payrolls, which bottomed out in December 2025, have grown by 58,000 jobs. What’s more, the manufacturing job growth is concentrated in the very industries that are less exposed to tariffs.

None of this should surprise anyone who has sat through an economics course. A tariff is a tax. It makes Americans poorer by forcing us to pay more for less. Given the composition of US imports, tariffs land disproportionately on two groups: low-income households and manufacturers, since roughly half of all US imports are either raw materials or intermediate inputs used in American production. Tariffs make those goods more expensive. Take steel as an example. US steel prices have increased dramatically as tariffs have priced out foreign suppliers. As a result, manufacturing (which uses steel) becomes more expensive, too. It doesn’t take an economist to understand that when the cost of production rises, production slows down. 

The manufacturing renaissance that is happening right now is not because we imposed tariffs on the rest of the world. It’s because we lowered tariffs and made it easier for American workers to get access to the materials they need to produce. 

That the New Right would rush to claim this moment as a victory was not hard to foresee. Last December in The Wall Street Journal, I wrote that “When tariffs don’t deliver the promised renaissance, administration officials push back the timeline. First it was weeks, then months. Now, we need ‘the right timeline’ and must not grade policy ‘on a news cycle.’” I argued that they were “buying time until the economy improves despite tariffs, at which point the administration will claim victory.”

This is exactly what is happening. The timeline was stretched from weeks, to months, to “don’t grade us on a news cycle.” The economy, and specifically the manufacturing sector, improved the moment the tariffs were lowered. The officials who spent a year explaining away the damages their policies were causing are now taking bows after mitigating the harms of their own policies.

So let’s just be clear. Manufacturing shrank when tariffs were high and erratic. Manufacturing rebounded when tariffs fell and became more stable. Far from being tariff-induced, the “manufacturing renaissance” is what happens when you lower taxes on steel, chips, and components. None of this takes a crystal ball. Ironically, all of this matches exactly what the standard economic textbooks — the very textbooks that the New Right insists are wrong and in desperate need of updating — have been saying all along. All that the administration has done is dig a hole and then partially fill it back in. 

If we want to see manufacturing continue to rebound, we need to be cutting tariffs even further and making sure that they are stable and predictable."

 

How ancient Athens benefited from international trade

See What Rubio Missed in Athens by Don Boudreaux.

"Here’s a letter to the Wall Street Journal.

Editor:

Marco Rubio rightly defends western civilization and acknowledges debts owed to the ancient Athenians (“The Birth and Rebirth of Western Civilization,” October 9). But he omits an essential feature of ancient Athens – a feature that he, President Trump, and all Americans would do well to recall: Athens’s rise and excellence were rooted in its openness to, and reliance upon, international trade. As Will Durant explained in The Life of Greece (1939),

Foreign commerce advances even faster than domestic trade, for the Greek states have learned the advantages of an international division of labor, and each specializes in some product; the shieldmaker, for example, no longer goes from city to city at the call of those who need him, but makes his shields in his shop and sends them out to the markets of the classic world. In one century Athens moves from household economy – wherein each household makes nearly all that it needs – to urban economy – wherein each town makes nearly all that it needs – to international economy – wherein each state is dependent upon imports, and must make exports to pay for them….

[I]t is this trade that makes Athens rich, and provides, with the imperial tribute, the sinews of her cultural development. The merchants who accompany their goods to all quarters of the Mediterranean come back with changed perspective, and alert and open minds; they bring new ideas and ways, break down ancient taboos and sloth, and replace the familial conservatism of a rural aristocracy with the individualistic and progressive spirit of a mercantile civilization. Here in Athens East and West meet, and jar each other from their ruts. Old myths lose their grasp on the souls of men, leisure rises, inquiry is supported, science and philosophy grow. Athens became the most intensely alive city of her time."

Domestic Energy Shipments Are Breaking Records Under the Jones Act Waiver

By Colin Grabow of Cato.

"The Jones Act is a de facto tax on Americans trading with one another. By requiring domestic waterborne commerce to use vessels that cost far more to build and operate than their international counterparts, the law raises shipping costs. That’s a real burden given the significance of transportation in a country as vast as the United States and helps explain why relatively little freight moves by water.

Conversely, economic logic holds that lowering these costs will expand commerce, which is exactly what has happened since the Trump administration issued a Jones Act waiver for energy and fertilizer shipments in March. Freed from the law’s constraints, domestic fuel shipments have surged to unprecedented levels.

PADD 5 Receipts Nearly Set a Record in Five and a Half Months

One of the most dramatic examples of this increase has been to the West Coast, Alaska, and Hawaii, collectively known as PADD 5. According to a recent Energy Information Administration analysis, waterborne shipments of crude oil and petroleum products from the Gulf Coast to PADD 5 in April and May 2026 were more than four times their level in the same months of 2025. April’s volume was more than double the previous monthly record, and shipments remained elevated in May. 

That increase has been sustained. US Maritime Administration (MARAD) data show that in less than six months, waiver shipments have already exceeded the Jones Act fleet’s annual total in every year from 2000 through 2025, with one exception. Only 2024 remains narrowly ahead (by 2.2 percent), and it appears on the verge of being surpassed." 

Jet fuel: More jet fuel has been moved to PADD 5 under the waiver than in the preceding 35 years combined (1990–2025). 

Gasoline blend stock and alkylate: More gasoline blending components and alkylate have been moved into PADD 5 than the Jones Act fleet moved from 2010 through 2025 combined. 

Finished gasoline: The waiver has seen more finished gasoline moved to the West Coast than the Jones Act fleet has moved in the last eight years combined."

"East Coast-bound shipments topped 1.2 million barrels a day in April, which was the highest monthly figure on record and about 11 percent above anything seen pre-waiver."

"In 2017, the CEO of Overseas Shipholding Group, a major Jones Act tanker operator, admitted to the Financial Times that the law was suppressing domestic oil flows: “If there was not a Jones Act, then there probably would be more movements of crude oil from Texas to Philadelphia.”" 

The self-defeating trade policy affecting memory chips

By DJ Hatch of CEI. Excerpt:

"Federal policy from the Biden administration’s CHIPS and Science Act to the current Trump administration’s trade policy demonstrates an overarching desire to reshore American semiconductor manufacturing. Putting aside any merits this form of industrial policy may have, successive presidential administrations have made clear their intentions to build upon and expand the productive and manufacturing capabilities of the US semiconductor industry. Unfortunately, the current administration’s trade policy undermines this goal.

Much of the relevant tariff regime relies on Section 232 of the Trade Expansion Act of 1962, which authorizes the Commerce Department to investigate whether imports of a given product threaten national security and empowers the president to impose tariffs in response. Crucially, Section 232 is an ongoing statutory authority rather than a one-time policy. The Trump administration has invoked it in separate proceedings covering different products, each with its own investigation and tariff schedule. Two of those proceedings have implications for American memory chip production, with one targeting semiconductors and the other targeting metals (such as steel, aluminum, and copper).

The rationale behind the semiconductor proclamation is what makes the tariffs on metals difficult to reconcile. The Commerce Department found that the United States manufactures only about 10 percent of the chips it needs and treated that dependence on foreign supply as a national security risk (the very risk reshoring is meant to address). Yet the same Section 232 authority, invoked against steel, aluminum, and copper, raises the cost of the domestic production that the semiconductor finding says the country needs.

Semiconductor fabrication plants (“fabs”) are particularly metal-intensive industrial structures, built with heavy steel frames, extensive copper wiring, and large cooling systems. Micron, the only major American manufacturer of memory chips, reports that its Idaho fab has a structural backbone framed with some 70,000 tons of steel. The recent Section 232 metals tariff raises the cost of that material across the board. As of April, those tariffs bite harder as the duties are now assessed on the full customs value of covered steel, aluminum, and copper articles and their derivatives, rather than only the value of the metal content. Thus, the tariff falls on fabricated components and finished structural inputs, not just raw metal. Even when sourcing domestic material, fab developers face inflated prices. Micron is building new DRAM fabs in Idaho and New York under precisely these conditions. If the goal is to expand domestic memory chip production, taxing the plants that produce those chips is counterproductive.

The tariff regime itself all but acknowledges the problem. The same proclamation carves out metal-intensive industrial and electrical-grid equipment, capping the combined duty on those goods at 15 percent through the end of 2027, well below the 50 and 25 percent rates that fall on other covered goods. It is hard to explain the existence of a special, lower tier for exactly the equipment a domestic buildout requires as anything other than a tacit admission that these tariffs raise the cost of building American industrial capacity.

Both the Biden and Trump administrations have made reshoring American chip production a national priority. But current trade policy runs counter to that goal. It raises the cost of building the fabs that reshoring requires, under the same statutory authority invoked to protect the industry (a contradiction the administration effectively concedes by capping the tariff on the equipment those fabs need). By taxing the construction needed to expand domestic memory chip production, this tariff regime delays the very supply increases needed to ease the shortage."

Don Boudreaux vs. Peter Navarro on transshipments

See Peter Navarro Is to Economics What Trofim Lysenko Is to Genetics by Don Boudreaux.

"This letter was sent ten days ago to the New York Times; it was not published there.

Editor:

Trump administration trade official Peter Navarro’s attempt to justify the White House’s crackdown on transshipments fails on several counts (“It Was a Great Scam While It Lasted,” August 13). First, these transshipments are the inevitable result of a trade regime – such as Trump’s – that, by rejecting the largely uniform tariffs that arise under a policy of most-favored-nation status, imposes wildly different tariff rates across different countries.

Second, while Navarro is correct that transshipping reduces U.S. customs revenues, he neglects to mention that these revenues are paid overwhelmingly by Americans. His complaint about transshipping, therefore, is really a complaint that transshippers are successfully easing Americans’ tax burden.

Third, Navarro is also correct – trivially so – that all motors, pumps, and other goods that Americans import are goods that Americans don’t produce. Yet he’s incorrect to imply that this reality indicts U.S. trade. Trade of course allows us Americans to acquire these goods at costs lower than we’d incur were we to produce these goods ourselves. But by releasing resources in the U.S. from the production of the goods that we import, trade also allows us to produce other goods that, were we to import less, we’d be unable to produce. Like all protectionists, Navarro is utterly blind to the production and jobs that are made possible in the domestic economy only by trade."

Did the Plaza Accord Cause Japan’s Lost Decades?

Paper from the IMF.  

"The rebalancing debate has sparked renewed interest in Japan’s experience since the 1980s. Some argue that this is a cautionary tale, exemplifying the dangers of reorienting economies through currency appreciation (People’s Daily, 2010). They claim that the appreciation of the yen after the Plaza Accord forced the authorities to introduce an offsetting macroeconomic stimulus, which then led to an extraordinary asset price boom followed by an extraordinarily painful bust. Japan was one of the world’s fastest-growing economies for three decades but has averaged only 1.1 percent real GDP growth since 1990, while prices have steadily declined. Consequently, the size of Japan’s economy today is about the same as in the early 1990s. The sequence of events is clear and striking. But there are reasons to doubt that it was truly inevitable, whether the Plaza Accord was really the direct cause of Japan’s “Lost Decades.” 

What Happened? 

The events began in September 1985, when delegates from the G5 countries met at the Plaza Hotel in New York, declared the U.S. dollar overvalued, and announced a plan to correct the situation.1 The essence of the plan was that the main current account surplus countries (Japan and Germany) would boost domestic demand and appreciate their currencies. In effect, this agreement marked a major change in policy regime: the Federal Reserve was signaling that after a long and successful fight against inflation, it was now prepared to ease policies, allow the dollar to decline, and focus more on growth. This signal was backed by coordinated currency market intervention and a steady reduction in U.S. short-term rates. Accordingly, it triggered an exceptionally large appreciation of the yen, amounting to 46 percent against the dollar and 30 percent in real effective terms by the end of 1986. (The deutsche mark appreciated similarly.) As a result, Japan’s export and GDP growth essentially halted in the first half of 1986. With the economy in recession and the exchange rate appreciating rapidly, the authorities were under considerable pressure to respond. They did so by introducing a sizable macroeconomic stimulus. Policy interest rates were reduced by about 3 percentage points, a stance that was sustained until 1989. A large fiscal package was introduced in 1987, even though a vigorous recovery had already started in the second half of 1986. By 1987, Japan’s output was booming, but so were credit growth and asset prices, with stock and urban land prices tripling from 1985 to 1989. Then, in January 1990, the stock price bubble burst. Share prices lost a third of their value within a year, and two decades of dismal economic performance followed (Figure 1.4.1). Today, nominal stock and land prices are back at their early 1980s levels, one- quarter to one-third of their previous peaks.

The critical question is whether this sequence was inevitable. In other words, did the appreciation force Japan to introduce a powerful stimulus to sustain growth, which then triggered a bubble, which caused the Lost Decades when it collapsed? Let’s consider each step in turn. 

Was Such a Large Stimulus Needed? 

Studies suggest that, in fact, the monetary policy easing may have been excessive. Estimates by Jinushi, Kuroki, and Miyao (2000) and Leigh (2010), among others, suggest that the policy rate was up to 4 percentage points too low during 1986–88 relative to an implicit Taylor rule based on the output and inflation outlook. Why, then, did the central bank sustain such a policy? A key reason is that current inflation remained reasonably well behaved, which led some economists to argue that soaring growth rates did not represent a cyclical boom but rather a “new era” of higher potential growth. This growth was particularly gratifying because it was led by domestic demand, a key commitment under Plaza. 

But IMF reports at the time suggest another factor was also at work. The authorities worried that higher interest rates would further strengthen the yen and feared that appreciation would eventually have serious effects on the economy. In the end, external demand did indeed diminish. But it did not collapse. Real exports continued to grow in the five years after Plaza, by an average of 2½ percent a year (half the rate of the previous five years), while the current account surplus diminished by a moderate 2 percentage points of GDP. (Similarly, Germany’s currency appreciation failed to derail its export or GDP expansion, even with a smaller monetary response.) Put another way, excessive stimulus was adopted in part because there was excessive concern about the impact of appreciation. 

Did the Stimulus Cause the Bubble? 

Although the monetary easing was certainly large, it is far from clear that it alone was responsible for the asset price bubble. Chapter 3 of the October 2009 World Economic Outlook and Posen (2003) have examined the link between monetary policy and asset price booms in advanced economies over the past 25 years. They conclude that policy easing is neither necessary nor sufficient to generate asset price booms and busts. In Japan’s case, two other elements seem to have played a large role. As Hoshi and Kashyap (2000) explain, financial deregulation in the 1970s and early 1980s allowed large firms to access capital markets instead of depending on bank financing, leading banks to lend instead to real estate developers and households seeking mortgages. As a result, bank credit to these two sectors grew by about 150 percent during 1985–90, roughly twice as fast as the 77 percent increase in overall bank credit to the private sector. Finally, because the dangers of real estate bubbles were not well understood in those years, the Japanese government did not deploy countervailing regulatory and fiscal policies until 1990. 

Did the Bubble’s Collapse Cause the Lost Decades? 

The aftermath of the bubble proved extraordinarily painful for Japan. But the collapse of a bubble does not inevitably have such powerful and long-lasting effects. What was special about Japan’s case? A key factor was the buildup of considerable leverage in the financial system, similar to what occurred in the United States before 2008. Tier 1 capital of Japanese banks in the 1980s was very low, much lower than elsewhere, as global standards (the Basel I accord) had not yet gone into effect. Moreover, much of the collateral for loans was in the form of real estate, whereas under the keiretsu system a significant portion of bank assets consisted of shares in other firms from the same group. So, when real estate and share prices collapsed, the banking system was badly damaged.

This underlying vulnerability was exacerbated by a slow policy response. The authorities delayed forcing banks to recognize the losses on their balance sheets and allowed them to continue lending to firms that had themselves become insolvent, a process Caballero, Hoshi, and Kashyap (2008) call “zombie lending.” This process continued into the early 2000s, stifling productivity growth and prolonging Japan’s slump. Why did the authorities not force faster restructuring? Possibly because restructuring would have required additional bank capital, which they were not in a position to provide in light of the strong political backlash after an initial injection of public capital in 1995. Consequently, the authorities exercised forbearance instead. 

The postbubble slump may also have been exacerbated by the macroeconomic policy response and adverse external shocks. Some argue that premature monetary tightening and the lack of a clear commitment to raising inflation led to unduly high real interest rates (Ito and Mishkin, 2006; Leigh, 2010). In addition, the tightening of fiscal policy in 1997 may have undercut the nascent 1995–96 recovery (Posen, 2003; Corbett and Ito, 2010). Finally, adverse external shocks played a role, including the 1997–98 Asian financial crisis. 

In sum, Japan’s experience shows that currency appreciation does not, in fact, inevitably lead to “lost decades.” The appreciation did not inevitably require such a large macroeconomic stimulus. The stimulus did not inevitably lead to the bubble. Nor did the bubble’s collapse inevitably lead to the Lost Decades. Instead, it was the particular combination of circumstances and choices that led to that result.

Lessons for Rebalancing Today 

Calibrating a policy response to exceptionally large appreciations and movements in asset prices remains an extraordinarily difficult task. But some pointers can be gleaned from Japan’s experience. The keys are to

• avoid an excessive macroeconomic response to currency appreciations; 

• use prudential policies to prevent vulnerabilities from building up, especially in the form of leverage; 

• address banking problems quickly if they do materialize; and 

• provide significant macroeconomic support when banking systems and economies come under stress.

An even broader lesson is that bubbles can prove dangerous. Accordingly, Japan has introduced a two- perspective framework for monetary policy, with one pillar focusing on price stability and the other looking out for financial imbalances such as asset price bubbles. 

But even as Japan’s experience offers lessons to countries considering rebalancing today, the direct parallels are limited. Most notably, circumstances in China today differ from those in Japan in the 1980s in ways that should help it avoid Japan’s disappointing outcomes (Figure 1.4.2). First, the leverage of households, corporations, and the government in China is lower now than it was in Japan before the bubble (N’Diaye, 2010), and the risk of excessive borrowing may thus be smaller. Second, as Chapter 4 of the April 2010 World Economic Outlook and Igan, Fabrizio, and Mody (2007) find, climbing the quality ladder helps offset the impact on growth of currency appreciation, and China has more room to climb the export quality ladder than Japan did. (At the same time, the impact on labor-intensive industries may be greater.) Third, Japan had a floating exchange rate regime in the 1980s, but China has a managed exchange rate supported by vast foreign currency reserves and strong restrictions on capital inflows. This difference in currency regimes should help China avoid the sharp appreciation observed in Japan. Most important, China should be able to reap the benefits of learning from Japan’s experience."

 

How “Liberation Day” Cost America Its Tourists

By Alfredo Carrillo Obregon of Cato.

"Perhaps one of the most puzzling developments in the aftermath of the Trump administration’s multiple tariff salvos has been the lack of retaliation by the governments of affected countries. Most US trading partners have (so far) refused to impose duties on American exports, and many have even negotiated “reciprocal” trade agreements with the administration. Yet, as my colleague Scott Lincicome explained in a column for The Dispatch last year, amid this lack of tit-for-tat response by foreign governments, private individuals abroad are pushing back against Trump’s trade policies by limiting their consumption of American goods and services—most notably, tourism in the United States. 

While survey and government data already pointed to declines in foreign visits to the United States (see figures 1 and 2), a recent working paper finds that the “Liberation Day” tariff announcements in April 2025 led to a significant decline in tourism to the United States, costing the sector over $1 billion in lost revenue per month.

Using the “Liberation Day” announcements as a quasi-experiment and benchmarking tourist arrivals in the United States against those in Canada, the study measures the impact of singling out 75 countries and assigning them a “reciprocal” tariff rate higher than the universal 10 percent baseline. Controlling for origin-country income and bilateral exchange rates, the authors calculate that 315,000 fewer tourists from these 75 countries (i.e., “Annex I countries”) visited the United States each month through September 2025, relative to tourists from countries subject only to the 10 percent baseline rate. 

The finding that Trump’s announcement of the “reciprocal” tariffs led to substantial declines in tourist arrivals from these countries—and thus tourism revenue for the US economy—also holds when the authors alternatively benchmark US tourist arrivals against those in Spain. The authors also rule out increased Immigration and Customs Enforcement (ICE) arrests, USAID cuts, and other Trump-era policy changes as alternative explanations. Importantly, because the authors’ estimates only capture the incremental effect of the “reciprocal” tariffs above the 10 percent baseline, the actual tariff-driven decline in tourist arrivals to the US might be even larger.

More notable than the study’s topline estimates, though, is its finding that the tariff-induced decline in tourism in the United States resulted less from foreigners being unable to afford US travel and more from foreigners having a diminished view of the United States following the “Liberation Day” announcements. On the one hand, other studies have found that Americans bore most of the tariffs’ costs and that the dollar weakened in the aftermath of the 2025 tariffs. On the other hand, the authors calculate that among tourists from the 75 countries assigned a higher “reciprocal” tariff rate than 10 percent, those from North Atlantic Treaty Organization (NATO) countries (i.e., “long-standing US allies”) reduced their travel to the US more than tourists from non-NATO countries. 

The authors also find that tourists from countries assigned an above-median “reciprocal” tariff rate reduced their travel to the US to a similar degree as tourists from countries assigned a below-median “reciprocal” tariff rate. In sum, the authors’ results, differing “by the strength of existing geopolitical relationships but not by the magnitude of the tariff rates,” suggest that the decline in US tourism from these 75 countries is connected to a decline in America’s reputation abroad.

Having estimated a substantial reduction in monthly tourists due to the administration’s tariffs[i], the authors then calculate that the tourism sector lost more than $1 billion in monthly revenue after April 2025. But as if this were not enough, the authors also calculate that tourism firms—“firms where inbound foreign tourism plausibly represents a meaningful share of revenue (e.g., hotels, airlines, entertainment)”—experienced lower stock returns (by two to three percentage points) than other firms one to three days after “Liberation Day.” In sum, the decline in visitors also translated to financial hardship for the sector—both from actual foregone revenue and from negative investor expectations.

With more US tariffs coming down the pipeline and more uncertainty about the future of bilateral trade deals negotiated by the Trump administration with foreign countries, we will see whether foreign governments retaliate more aggressively against US exports. Yet, studies like the one discussed in this blog post confirm what anecdotal evidence has long suggested: Private individuals abroad are not waiting for their governments to respond before they adjust their consumption of US goods and services. More concerningly for the US and Americans, if such actions stem from a diminished US reputation abroad, repairing the damage from the Trump administration’s trade policies might be less straightforward than simply removing existing tariffs.

---

[i] In addition to estimating 315,000 fewer monthly travelers from the 75 countries subject to “reciprocal” tariff rates higher than 10 percent, the study finds that the implementation of “fentanyl” tariffs on Canada and Mexico in March 2025 led to a 20 percent decrease in the average number of monthly visitors from Canada and to slower growth in monthly visits from Mexico. Though these results are less definitive than those of the authors’ main model given the limited sample size and the absence of control destinations, their findings on Canadian tourism are consistent with other evidence that Canadians avoided travel to the US in 2025 in response to Trump’s tariffs. In fact, a recent Statistics Canada report finds that leisure-related visits by Canadians to the United States declined by 21.5 percent in 2025 (about 3.2 million visits) while leisure-related visits by Canadians to overseas destinations increased by 12.2 percent in 2025 (about 1.1 million visits). The same report finds that spending on leisure-related visits by Canadians to the United States decreased by $2.2 billion in 2025, while spending on leisure-related visits by Canadians to overseas destinations increased by $3.6 billion."

Trump’s New Tariffs Aren’t About Forced Labor—They’re About Restoring the Tariff Wall

By Scott Lincicome and Chad Smitson of Cato.

"The “Section 122” tariffs, imposed after February’s Supreme Court ruling against President Trump’s “emergency” tariffs, expired last night and were immediately replaced by “Section 301” tariffs of roughly the same amount. The new duties range from 10 to 12.5 percent, cover goods from 60 economies, and are justified as a crackdown on “forced labor.” 

In my new column at The Dispatch, I show why these tariffs have almost nothing to do with forced labor and instead are just “a ham-fisted way to reinstall Trump’s tariff wall and protect it from another IEEPA-like defeat in federal court.” Five issues stand out:

1. The administration said the tariffs were coming before the investigation ended. President Trump, Treasury Secretary Bessent, and US Trade Representative Greer all publicly and explicitly promised that the tariffs and their revenue would replace the struck-down IEEPA regime before the investigations even started.
2. The requisite report on “forced labor” is remarkably thin. USTR’s investigation only took 82 days and generated a 98-page report to cover 60 economies, devoting little more than half a page to each, much of it the exact same empty passages copied and pasted 60 times—far short of the rigor demanded of such a consequential and far-reaching trade action. The report also contained no evidence or analysis – none – of targeted economies’ forced labor policies causing actual harm to US companies or commerce. It’s all just assumed. Nor did the USTR explain why it applied the same punitive 12.5 percent tariff rate to Angola, Libya, Russia, Venezuela, and Kazakhstan—developing countries that rank low on the Walk Free forced labor index (and have other issues!)—as it did to developed, “good actor” countries like Norway, Japan, Switzerland, and Australia.
3. The United States is hardly a forced labor angel. Section 307 of the Tariff Act of 1930 has prohibited imports made with forced labor, but was lightly enforced for over 80 years due to wide exceptions, and the Trump administration’s enforcement of the law has been much more lenient than the Biden administration’s efforts. Furthermore, the US ranks 19th among the 60 economies for the prevalence of forced labor. 
4. The tariff cure dramatically overshoots the forced labor disease. Some back-of-envelope math puts a proportionate tariff at 0.5 to 0.84 percent; Peterson Institute economist William Cline, using a different model, gets 0.23 to 0.25 percent. USTR is proposing 10 to 12.5 percent, a rate and resulting revenue (see figure below) that far exceed what could be considered a proportional response to the problem.
5. There’s no off-ramp. Section 301’s statutory goal is the removal of the offending foreign policy, yet USTR offers no benchmarks for compliance that would remove the tariffs. Indeed, a country with the United States’ exact forced-labor framework could still get slapped with duties.

As I explain, the Section 301 tariffs on Chinese imports that Trump imposed during his first term provide a telling contrast: 

Trump’s case against Chinese intellectual-property and industrial policy wasn’t without fault, but it still required an eight-month investigation and produced a nearly 200-page report on a single country. And the recommended tariffs—initially set at $50 billion to match/​offset the alleged harm from the targeted Chinese policies—came only after U.S.-China negotiations collapsed.

Forced labor is a real and complicated problem, but disingenuously dressing tariff revenue recovery in human rights language discredits the tools that might actually address it, setting a precedent for Section 301 to be an all-purpose tariff generator that any future president can invoke for any reason. Congress should fix the law before President Trump—or his successor—does even more damage.

Read the full column here.

Note: On July 24, the Liberty Justice Center filed a lawsuit in the US Court of International Trade challenging the administration’s replacement tariffs imposed under Section 301 of the Trade Act of 1974."

 

The China dish industry claimed it was a militarily strategic good in 1951

Tweet from Daniel J. Smith.

"A representative from the fine China dish industry lobbying for protectionism as a militarily strategic good during congressional testimony in 1951"

  

The Macroeconomic Effects of Tariffs

From Jeffrey Miron. 

"A recent study points out the dearth of historical research on the macroeconomic effects of tariffs, especially as a tool to analyze modern-day tariffs. The study

addressed this challenge by analyzing all major US tariff rate changes from 1840 to 2024. Drawing on historical research, congressional records, and statutes, we identified … 21 tariff rate changes, which we used to examine the macroeconomic effects of tariffs.

These examples

reveal that increasing tariff rates contracted the US economy. … tariff increases did not shield domestic industry despite their protective intent. Additionally, trade contracted markedly.

While tariffs might be expected to cause large price increases,

[o]verall prices increased [only] by around 0.5 percent at their peak. … [T]he simultaneous presence of supply-side inflationary pressures and demand-side pressures that slowed price growth could explain the muted overall change in aggregate prices.

To sum up, the

research indicates that tariff increases reduce domestic output and trade. While tariffs may protect some domestic industries, they ultimately reduce aggregate output, manufacturing activity, and the global competitiveness of US goods."

How Trump’s Tariffs Really ‘Work’

He hails Toyota’s investment, but what about the higher costs and manufacturing job losses?

WSJ editorial. Excerpts:

"Toyota may have made the decision for business reasons unrelated to his tariffs."

"The Japanese car maker’s press release lavished praise on Texas’s pro-business environment and included statements from the state’s political leaders (Attorney General Ken Paxton excepted). No mention of Mr. Trump or his tariffs. Toyota says the new plant will provide “flexibility” from “advanced manufacturing technologies,” which may offset the relatively higher labor costs in Texas."

"The U.S. has lost some 75,000 manufacturing jobs since January 2025, including 25,900 in motor vehicle and parts production. Manufacturing jobs have been declining since early 2023, so not all of these job losses stem from Mr. Trump’s border taxes."

"there’s no question his tariffs are raising costs for U.S. manufacturers. At the same time, foreign retaliation has hurt America’s farmers"

"evidence shows that U.S. companies, workers and consumers are picking up most of the tab."

"auto tariffs on Canada and Mexico alone added about $1,600 to the cost of each car made in the U.S. last year."

"tariffs drove a 10.4% increase in the average suggested retail price of a new car."

"Auto dealers—most of which are small businesses—absorbed about 4.5% of the manufacturer’s price increase."

"Dealers have shed 6,100 jobs since Mr. Trump became President."

"New vehicle sales have averaged 15.9 million in the first half of this year, down from the 17 to 18 million in the five years before the pandemic." 

‘How to Win a Trade War’ Review: The Times of Tariffs

Germany before World War I provoked backlash because of its rise in exports and overproduction, similar to China today.

By Theodore Bunzel. He is the head of Lazard Geopolitical Advisory. He has worked in the political section of the U.S. Embassy in Moscow and at the U.S. Treasury Department. Excerpts:

"“How to Win a Trade War” shows us that, even in the age of Trump, many of today’s trade tensions are a historical rerun. Germany before World War I provoked backlash because of its sharp rise in exports and overproduction, similar to China today. Its cornering of an “extraordinary 90 percent of global production” of chemicals and dyes sparked fears of dependency among the Allies. Even the White House’s coercive Liberation Day tariffs have an echo in history: 1870s France hiked tariffs 24% on its neighbors and demanded they negotiate more favorable trade deals within six months, a gambit that—like Mr. Trump’s—largely succeeded in forcing trade partners to submit to new treaties.

With protectionism becoming more fashionable, Ms. Keynes and Mr. Bown provide a helpful reminder that tariffs are, generally speaking, economically destructive and rarely achieve their stated goals. Such policies impede growth, chill investment and—outside of commodities—are overwhelmingly paid for by the importing country. Even on trade deficits, the authors remind us, tariffs have historically had largely insignificant effects. While the evidence on tariffs and their effects on industrialization is more mixed, for every Japan or South Korea—which used barriers to turbocharge manufacturing in the postwar era—there are the smoldering examples of Brazilian personal computers or Indian autos."

Hamilton Was No Protectionist

The first Treasury secretary backed tariffs mostly to raise revenue and promote free trade

By Phil Gramm And Donald J. Boudreaux. Excerpts:

"the 21st century, when the average trade-weighted tariff rate of Organization for Economic Cooperation and Development member countries was below 3% and almost identical to that of the U.S., and the OECD found that the nontariff barriers of U.S. trading partners aren’t significantly higher than America’s nontariff barriers, it’s highly doubtful that Hamilton would support Trump policies."

"It’s true that Hamilton endorsed some elements of the infant-industry argument for tariffs, but he did so because American industry then was indeed in its infancy. America today occupies a completely different position"

"The conditions that led Hamilton to support tariffs have long since disappeared. He never saw protection of domestic manufacturing as a long-term policy but rather insisted that “continuance of bounties on manufactures long established must almost always be of questionable policy.”"

"among the greatest forces fostering U.S. industrialization was its trade deficit and resulting capital surplus"

"Hamilton described net inbound foreign capital as “a precious acquisition . . . a most valuable auxiliary, conducing to put in Motion a greater Quantity of productive labour, and a greater portion of useful enterprise than could exist without it.”"

"the British and Dutch invested heavily in America. They grew wealthy on those investments, and so did America."

"Hamilton knew that high protective tariffs, by discouraging importing and encouraging smuggling, suppressed those [tax revenue] collections."

"From 1816 through 1830, industrial production grew at an average annual rate of 4% as tariffs rose. From 1831 through 1860, industrial production exploded by 6.7% a year as tariffs fell." 

"between 1866 and 1900 average tariff rates fell from 41.8% to 27.6% and industrial production grew at an average annual rate of 5.6%."

"Frank Taussig concluded in 1915, it [industrialization] was fueled by “the intelligence and inventiveness of the people; these being promoted again by the breath of freedom and competition in all their affairs.”" 

It’s Time To Legalize Kei Trucks

Restrictions on kei trucks are another way government drives up the cost of living

By Scott Beyer of The Independent Institute. 

"If you’ve spent time traveling the Third World—or Japan—you’ve seen them: tiny pickup trucks, built for cargo, hauling lumber, produce, construction materials, or even groups of workers. They’re ubiquitous in developing countries because they’re inexpensive, fuel-efficient, and well-suited for certain types of work. Yet for decades they’ve been largely absent from U.S. roads. That’s a shame, because the humble Japanese kei truck represents the kind of practical vehicle that would benefit Americans.

Kei trucks originated in Japan after World War II as part of the country’s “kei” (or light vehicle) classification. Manufacturers such as Suzuki and Mitsubishi designed them to meet strict size and engine limits while remaining surprisingly capable work vehicles. Although they typically produce around 50 horsepower, and sometimes only have top speeds of 60mph, they can haul loads approaching 1,000 pounds while achieving fuel economy that exceeds 35mpg. 

The reason Americans rarely see kei trucks has to do with regulation, not lack of demand. Federal law prevents newer kei models because imported vehicles must comply with the same crashworthiness, lighting, and emissions standards that apply to vehicles originally sold in the U.S. Meeting those standards is not worth it for Japanese manufacturers who never intended to sell kei trucks in the American market. 

There is one notable exception: once a vehicle reaches 25 years of age, it is exempt from many of those federal safety requirements. That means Americans who want a kei truck are largely limited to importing vehicles that are at least a quarter-century old. Even then, ownership is not straightforward. Several states—including Rhode Island and Georgia—have refused to title or register many kei trucks for normal highway use, while Maine has enacted restrictions that effectively bar them from public roads. Other states permit registration only under limited classifications, such as off-road, farm, or low-speed vehicle designations. 

The Trump administration has broadly emphasized cutting regulations and boosting domestic industry, and has directed that energy towards kei trucks. During the rollout of the “Freedom Means Affordable Cars” initiative, President Trump called the trucks “cute” and “beautiful” while criticizing barriers that prevent them from reaching U.S. soil. He tasked Transportation Secretary Sean Duffy with clearing obstacles to domestic production, so that kei-style trucks could bypass import tariffs like the 25% Chicken Tax (which specifically targets light trucks). However, this directive remains in early stages and faces hurdles within the federal code.

At state level, a wave of reforms has at least expanded access to the 25+ year-old kei trucks. Last year, Texas Senate Bill 1816 formally legalized titling, registration, and on-road use after earlier DMV inconsistencies. Such reforms typically enable operation, but mandate lower speed limits, require standard insurance/safety inspections, and can vary by jurisdiction. Meanwhile in other states, such as Oregon, reform efforts failed and kei trucks remain illegal to use on public roads. 

There are compelling economic reasons to welcome these vehicles. A brand-new full-size pickup truck now sells for $66,000 on average in America. It’s hard to find even quality used trucks nowadays for under $20,000. Brand new kei trucks are often sold in Japan for under $10,000. Many plumbers, electricians, landscapers, carpenters, farmers, and other small business owners would benefit from this cheaper option and don’t need massive four-door pickups that tow 15,000 pounds. 

Kei trucks are also at times more practical. Some models feature fold-down bed sides that allow forklifts to load pallets directly from either side of the truck. Their small footprint allows them to maneuver through tight alleys, narrow driveways, and crowded work sites that would frustrate drivers of a large pickup.

The most common argument against kei trucks concerns safety. Critics point out that they lack many of the crash protections found in newer American vehicles. That observation is true, but it also raises an obvious question: are kei trucks really so dangerous that Americans cannot be trusted to choose them, while motorcycles—which offer no crash protection whatsoever—remain legal? Society routinely allows adults to accept varying risk levels. 

Environmental objections are similarly unpersuasive. Some critics argue that kei trucks fail to meet modern emissions standards. Yet this argument actually highlights the inconsistency of current policy, which allows 25-year-old vehicles but not cleaner, newer versions. Kei trucks also achieve far better fuel economy than most full-size pickups.

Ultimately, kei trucks serve as a reminder that government regulations make everyday life more expensive. Here is a vehicle that has proven itself on farms, construction sites, and city streets worldwide, and is used by millions. Yet Americans cannot purchase a new one, even though their retail value starts at about 1/10th the average price of a new pickup truck. Nor can they purchase a 25-year-old one without paying thousands in extra taxes and duties. That is because regulators have more say in what consumers can drive than consumers themselves. The Trump administration should move forward with its kei truck deregulation efforts."