Are Trump Tariff Proposals the Answer for Struggling Manufacturing Sector?

President-elect Donald Trump’s promise of higher tariffs and targeted tax breaks could potentially boost underperforming U.S. factories, but economists say those policies could also come with perils.

For several months, manufacturing survey data has shown that the industry is contracting. The monthly Institute for Supply Management (ISM) manufacturing purchasing managers’ index (PMI) survey has been below 50% in every month over the past year except for March, when the index squeaked over the line at 50.3.

A reading below the 50% threshold indicates more respondents reported business contracting than those who said it is expanding. Economists have attributed the decline mainly to high interest rates and tighter lending standards. 

One of Trump’s main economic proposals during his campaign has been raising tariffs on goods imported from other countries, which he said would help attract more companies to relocate factories back to the U.S.  So, will Trump’s policies help rejuvenate the struggling manufacturing base?

The answer is unclear, and the outcome could depend on how tariffs are implemented. 

Targeted Tariffs Can Help, But Broad Taxes on Imports Come at a Price

If tariffs are targeted to specific products or industries, they can help serve some goals, like protecting local goods producers. However, broad-based tariffs can actually undermine local manufacturing, according to a note by International Trade Economist Fariha Kamal.

“Evidence shows that the dramatic rise in U.S. import tariffs between 2018 and 2019 lowered exports and employment in the U.S. manufacturing sector,” Kamal wrote. 

Broad tariffs also raise costs for imported materials that U.S. manufacturers use to make their products, she wrote.

“While tariffs on foreign goods provide protection to import-competing industries, they can have a net negative impact on output and employment because U.S. manufacturers rely on foreign inputs in their goods production processes,” Kamal wrote. 

Manufacturers More Likely to Reroute Trade than Reshore

Bernard Yaros, lead U.S. economist at Oxford Economics, was also skeptical that the tariffs would lead to a significant amount of “reshoring” of American manufacturing capacity.

Aging equipment at factories that would need replacing, along with high labor costs, make it unlikely that companies would bring factories back to the U.S., Yaros said. Import taxes could, however, lead to businesses expanding their lines of supply to avoid some of these costs.

“Tariffs by themselves, especially if they are targeted as we expect, are more likely to lead to trade rerouting, rather than outright reshoring,” Yaros said in an email.

However, while tariffs may not revive manufacturing, Trump could help the struggling sector through his tax policy.

“Policies such as 100% bonus depreciation and a 15% corporate tax rate for domestic manufacturers would provide a boost to US manufacturing, particularly production of business equipment,” Yarros said.