Protectionists have a long history of ignoring economics when it comes to trade. Unsurprisingly, their policies often end up mugged by reality, producing awkward unexpected consequences and failing to deliver on their stated objectives: promoting domestic production and jobs.
Trump just handed the global auto market to China
Protectionism secures the domestic market — and makes competing for foreign markets less important.
April 2, 2025 The Washington Post
It’s risky to try to pin down the psychological undercurrents driving Trump’s advisers. Who knows what impelled his trade sage, Peter Navarro, to assert that “cheating” by Germany, Japan and unspecified “other countries” has managed to “turn us essentially into colonies.”
But the “golden age” that he believes Trump’s tariffs will bring about, with “higher wages” and “millions more jobs” and “a strong manufacturing base” to “defend ourselves” from someone, is, to say the least, improbable. Financial markets, in any event, don’t appear to believe him. They seem to think Trump is about to slam the U.S. economy into the ground.
Research stretching back to the Gilded Age finds tariffs played little part in America’s economic rise. Tariffs back then, one study concluded, are “unlikely to have helped the U.S. become a globally competitive manufacturer.”
In particular, they did no favors for the budding automotive industry, where they “had a negative effect on labor productivity, average size of establishments, gross output, value added, the number of establishments, and employment.” Moreover, they arguably delayed the adoption of the internal combustion engine.
The auto industry — longtime champion of American manufacturing — has often lobbied the government for tariffs and other protections from foreign competition since then. This coddling, however, has ultimately distorted the car market. It has shaped a less competitive industry that now finds itself losing badly in critical markets to rivals from overseas.
An entertaining example of this pampering is the so-called chicken tax, a 1960s-vintage tariff of 25 percent on light trucks that was originally aimed at German Volkswagen Kombi minivans and pickup trucks, levied in retaliation against a European tariff on American chicken. Applied across the board to satisfy global trade rules, it has remained on the books.
It goes a long way toward explaining the idiosyncratic structure of the American auto market.
Protected by the chicken tax, U.S. automakers focused on building pickup trucks such as the Ford F-150 series and other muscular SUVs classified as light trucks, which today account for some four-fifths of all new passenger vehicle sales. Cars, behind a meager tariff of 2.5 percent, became pretty much an afterthought. One outcome is that the American brands make some of the least fuel-efficient passenger vehicles on the planet. Another is that they have lost much of their appeal in critical foreign markets, where people are not only concerned about climate change but also often prefer to drive cars — whether due to higher gas prices, narrower roads or other considerations.
Trump’s advisers, obviously, care little about these distortions. In their eyes, the relevant precedent — the gold standard in trade policy — happened during the Reagan administration, when bluster forced Japan into accepting “voluntary” restraints on its car exports to the United States in exchange for preventing something worse.
Fans of the VERs, as these restraints came to be known, argue that they encouraged Japanese auto companies to set up production facilities in the United States, becoming part of the local ecosystem, employing American workers. Indeed, by 1991 Japanese firms accounted for 15 percent of domestic production of cars and light trucks. But Japanese automakers quickly adapted to the American way and focused on enjoying a protected life behind the chicken wall.
There have been moments of enlightened policy. The North American Free Trade Agreement connected the auto industry across the continent, bringing in Mexico to help car companies vie with competitors from cheap labor markets in Asia. But the logic of this arrangement was undermined when Trump replaced NAFTA with the United States-Mexico-Canada Agreement, which required many parts in U.S. light trucks to be made in factories paying at least $16 an hour — meaning not in Mexico. This ensured the trucks remain expensive.
The immediate consequence from Trump’s new levies will be sticker shock on the lot. Though the United Auto Workers leadership supports the tariffs, its rank and file is already worried about layoffs, too, as higher prices and snarled supply chains (given new tariffs on car parts crossing North American borders multiple times) hit demand and gum up production. But the overall damage to the industry is likely to be much more significant.
The auto industry is reaching a moment of truth. Climate change is boosting demand for electric vehicles around the world. China is not only the leader in this industry. It also owns the pipeline, from mining and processing of minerals that go into batteries to battery production and the final manufacture of cheap electric cars. Its leading EV manufacturer, BYD, claims to have developed a super-fast charging system, removing one of the main roadblocks to the adoption of electric vehicles. China is building humongous cargo ships to transport cars to markets around the world.
Americans don’t buy cheap Chinese cars, which are walled off with tariffs and other barriers imposed in the first Trump administration and continued by President Joe Biden. But American automakers just can’t compete with Chinese EVs in many markets overseas. The BYD Seagull, for instance, is expected to retail in Europe for less than half the price of Tesla’s cheapest option. If Trump removes tax incentives to purchase domestic EVs, it’s not crazy to believe that the other American manufacturers will abandon them entirely.
Protected by high tariffs and severed from their North American partners, American carmakers may have no choice but to forget about climate change and cede overseas markets to the Chinese. They would still own the domestic market, selling Americans expensive gas-guzzlers. Tariffs might prevent the United States from becoming a colony, in Navarro’s eyes. But American carmakers would become an isolated island, giving away their footprint on the world.