Alex Osola (3:39)

If we look at the automobile example, right, the Automobiles get a 10% tariff in Europe. What is the stated purpose of that tariff?

Mary E. Lovely (3:48)

For the Europeans, the stated purpose is to really offset cost differences that they see between their production onshore inside Europe and production elsewhere. The Europeans have already come forward and saying, we're happy to lower it on that. Europe is a car exporter. And so they have quite a bit of comparative advantage in automobiles. Now, there is another thing which might be important here, which is that automakers have to design to the market. So, for example, Ford, we think of Ford as kind of a quintessential American company. But Ford is also in Europe and Ford designs and produces in Europe. For Europe, because the streets are more narrow, people want smaller, less powerful vehicles. Those vehicles don't find a large market here in the United States. Often we're driving on superhighways.

Alex Osola (4:40)

Trump has said he's looking to create fairness in tariffs. What is his goal with reciprocal tariffs?

Mary E. Lovely (4:46)

So I think the President is tapping into a word fairness that people automatically respond to. Fairness is a good thing. But it turns out that fairness is something that needs to be defined. And in this case, he is, I think, really changing the definition of the word reciprocity. Reciprocal and trade negotiations really focused on reciprocal cuts. When you think about it, there's 166 countries in the World Trade Organization and they don't all have the same domestic constituencies that want to be protected. So for example, in the European Union, it tends to be agricultural interests. U.S. big agricultural exporter. While we do have high tariffs on Certain agricultural products like sugar, we tend to have higher tariffs on very labor intensive things like apparel. So these differences really reflect differences in each country's sensitivities. And so when we are negotiating, I may want to increase my exports by $5 billion to your market, and you say, okay, but I want to increase my exports by 5 billion to yours, and then we can trade across the different sectors. So there was never any understanding that the word reciprocal or fair meant that of the thousands of terrorist lines, they would match across all of these countries.

Alex Osola (6:07)

You mentioned increasing exports. One of the reasons President Trump has given for imposing tariffs is to reduce the trade deficit. How would that work?

Mary E. Lovely (6:16)

There have been uses of tariffs and other instruments regarding US Aggregate trade deficit, but they were under very different system, in particular, a different currency system. So what we see here is a world where the US has floating exchange rates. Many of our partners have floating exchange rates. What I would say 99% of economists will predict, which is that all else equal, the tariff is going to appreciate the dollar. That will decrease our imports, but it will also decrease our exports. The trade deficit is the difference between exports and imports. That might not change at all. So most economists would never suggest that tariffs should be used to solve the problem with the trade deficit.

Alex Osola (7:06)

All right, when we come back, we get into another of Trump's reasons for tariffs to increase domestic manufacturing. And Mary tells us what signals she'll be keeping an eye on to see if tariffs are achieving Trump's goals. That's after the break.

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Alex Osola (7:59)

Mary, let's talk about this idea of using tariffs to boost domestic manufacturing. That tariffs could move manufacturing jobs from abroad back to the US have tariffs been used to do this in the past?

Mary E. Lovely (8:10)

Yes. You have to go way, way back to the late 1800s, the early part of the 1900s. We have lots and lots of evidence, not just from the United States, but from other countries. Tariffs will protect a given industry. So if you put tariffs in, say, on steel, which is a very important sector that we have had protection on for many, many decades, that will, in some sense protect the price from falling below a certain amount and it will allow the industry to basically stabilize. Sometimes there'll be some job growth, but usually not that much. Oftentimes protection is put on industries or sectors that are no longer really globally competitive. It may be because a competitor like China rises, or it could just be because the country is shifting to higher value activities. I don't think we've really stared hard in the face what it means to re industrialize America. What are we talking about? I think people imagine, oh, we're going to have semiconductor factories or we're going to have high tech auto sector. They're going to pay $50, $60 an hour for most of the goods that are being taxed right now. The import taxes that President Trump has placed on China, both in his first administration and now 20% more just since his inaugural, those goods are not coming back to the United States. We saw that in the first trade war. Clothing manufacturing went to places like Vietnam, snapping together your cell phones went to Vietnam or Mexico or Indonesia, didn't come back to the United States. So kind of broad based tariffs that President Trump is talking about are being justified as rebuilding America. Americans really need to come back and say, rebuilding America how and for whom? Because we have alternatives. We have better jobs that are out there. We really want to be creating jobs for people that have good working conditions and at least a living wage. And many of these activities simply can't do that unless we have such high tariff walls that you and I will never wear another silk blouse in our life.

Alex Osola (10:21)

We've walked through a bunch of the reasons that President Trump has given for his tariffs. Do you see any other motivation?

Mary E. Lovely (10:26)

One of the things that he has talked about in the past, but hasn't talked about a lot recently, is the need to raise revenue. They're getting ready to pass legislation that will extend the tax cuts that were first enacted in Trump's first administration. This would be income tax cuts for corporations and for high earning individuals as well as various other types of income, and replacing that with an import tariff, which is basically a kind of sales tax. And what we know is that this burdens low income families much more than the income tax overall. So while President Trump is focused on what I think of as the sins of our trading partners, they do this to us, they do that to us behind the scenes is a very large shift in who's going to bear the burden of funding government.

Alex Osola (11:19)

So you're saying that who will be funding this will essentially shift, right?

Mary E. Lovely (11:24)

Yes, it's really a shift in who bears the burden of funding the government because the tax extensions that the Trump administration is getting through Congress with his support of congressional GOP is going to benefit corporations and higher income Americans. Meanwhile, tariffs will raise prices. Higher income people will see this along with middle class and working people. We'll all see the higher price, but as a share of our income. That's going to fall more heavily on people who basically spend their entire paycheck.

Alex Osola (12:03)

So looking forward, what kind of indicators will you be looking at to see if Trump's tariffs are having the effect that he intends or really just what impact they're having overall?

Mary E. Lovely (12:16)

It's going to be very tricky to track this, Alex. So first, we'll be looking for things that everybody's looking for, like announcements of new investment, but also looking for signs that other types of businesses are under stress. On the consumer side, clearly, we'll be watching not just the cpi, but individual components of the cpi, because the CPI includes a lot of things that are not imported, like haircuts. We're going to be looking at things like food prices, prices of clothing and children's toys and home goods and lumber and home renovation, home building, all of those things.

Alex Osola (12:55)

Mary E. Lovely is a senior fellow of the Peterson Institute for International Economics. Mary, thank you for being here.

Mary E. Lovely (13:02)

Thank you, Alex.

Alex Osola (13:05)

And that's what's News for Sunday, March 30. Today's show was produced by Charlotte Gartenberg with supervising producer Michael Kasmides. We got help from deputy editors Scott Salloway and Chris Insinsley, as well as WSJ's head of news audio, Falana Patterson. I'm Alex Osola. We'll be back on Monday morning with a new show. Thanks for listening.