How Economists’ Central Anti-Tariff Predictions Collapsed

In a recent analysis, new findings from Jared Bernstein and Daniel Posthumus were discussed, highlighting the significant decline in U.S. manufacturing jobs following what they termed the “China Shock” from 2000 to 2010, which led to the loss of 5.7 million factory jobs.

The authors labeled this era as “disruptive,” urging caution against future economic shocks, yet they contended that sweeping tariffs were not the solution. This argument, however, carried notable inconsistencies. They expressed concerns about U.S. manufacturing’s reliance on foreign inputs, while simultaneously pushing for subsidies in sectors facing foreign export regulations. Essentially, they illustrated how our industrial base is dangerously weakened, although they maintained that we can’t fix this dependency.

As noted in previous discussions, real-world evidence undercuts their anti-tariff stance. Significant tariffs were introduced by President Trump in April 2025, yet the expected price increases on imported goods didn’t occur to the extent that economists had predicted. In reality, prices for domestic products not subject to tariffs continued to rise. Meanwhile, domestic products competing with imports facing tariffs actually saw price decreases. There hasn’t been widespread inflation linked to these tariffs, challenging the fundamental economic argument that they lead to higher consumer prices.

What we’re witnessing aligns with long-held economic theories, such as “Optimal Price Theory.” This theory suggests that countries with dominant consumer markets can impose tariffs to compel foreign manufacturers to lower their export prices. They can also effectively pressure other nations to reduce their own import restrictions by threatening to increase tariffs further. Moreover, households can push corporations to redistribute profits by refusing to absorb passed-on costs.

Today, we delve deeper into the anti-tariff arguments and how they’re struggling under scrutiny. Critics warned that tariffs might provoke severe retaliation and trade wars. However, six months into Trump’s tariff initiatives, such retaliation hasn’t materialized. Instead, nations have engaged in negotiations. We’ll evaluate why the proposed approach of targeting specific sectors with subsidies may lead to more conflicts than broader tariffs and why the term “strategic” often serves as a euphemism for liberal policy goals. Lastly, we’ll reflect on how real-world outcomes after significant changes contradict the theories presented by the authors.

Retribution That Never Happened

Critics suggested tariffs would reduce imports and exports due to retaliatory measures from other countries, a familiar narrative in anti-tariff discussions. However, where is this retaliation six months after the commencement of the Trump tariffs?

In truth, it largely didn’t happen. Most nations chose to negotiate instead. The European Union and Japan participated in discussions, and South Korea made concessions. Rather than igniting a trade war, our allies recognized their need for access to the American market, often acknowledging that the existing trade dynamics have been unfair to the U.S. and have resulted in unbalanced trading conditions.

This development is crucial to the conversation. Many economists believed retaliation was unavoidable, but such thinking doesn’t hold much water. Numerous experts maintain that tariffs harm the countries that impose them by raising prices for domestic consumers and leading to inefficient production. If that’s the case, why would anyone choose to retaliate? It’s akin to harming oneself in response to another’s actions.

Moreover, the theory of retaliation lacks a solid economic foundation. It seems more rooted in political speculation than economic principle, focusing on how foreign governments might respond to changes in U.S. policy rather than analyzing how supply and demand would adjust.

Real-world experiences have challenged this faulty orthodoxy. The U.S. continues to be the largest and most lucrative consumer market globally. Other nations crave access to American consumers, prompting them to adapt their policies accordingly.

A key oversight by Bernstein and Posthumus is that broader tariffs are less likely to incite retaliation compared to the targeted tariffs and subsidies they advocate.

Their paper supports subsidies and targeted tariffs on items like semiconductors and clean energy technologies, referring to these as “strategic sectors.” But strategic for whom? These sectors are precisely the ones where China seeks global dominance. The Chinese government has significantly invested in these industries, which means targeting them could directly challenge their ambitions, inviting backlash rather than minimizing it.

In contrast, tariffs on less critical imports are unlikely to provoke significant responses. But when it comes to solar panels or electric vehicles, these threats directly intersect with China’s overarching industrial strategy.

The premise that only broad tariffs provoke retaliation, while targeted ones don’t, doesn’t hold true. Instead, this approach reflects more of a political narrative than economic reality.

What Liberals Prefer as Strategic

The authors advocate for subsidies aimed at “strategic areas,” including clean energy and batteries. Yet, they fail to clarify what constitutes “strategic.” While there’s a view that the market underinvests in clean energy, the comparison is vague—is it underinvesting compared to what exactly? Steel has defense significance, and medicines are vital for life; why aren’t these considered strategic as well?

The straightforward answer seems to be that the analysis aligns with liberal interests. The policies supported are the ones they favor, revealing a tendency to weave liberal preferences into industrial policy.

In fact, clean energy isn’t necessarily strategic. The U.S. could continue thriving on fossil fuels for the foreseeable future. While there may eventually be a shift towards cleaner energy, particularly with changing political landscapes, that transition isn’t currently a pressing necessity.

This creates a fundamental issue within the subsidy framework: it requires policymakers to select “winners,” determining which industries deserve support. This process is inevitably influenced by lobbying efforts, where various interest groups vie for attention in Congress. The label of “strategic” often goes to those with the strongest influence.

In contrast, substantial tariffs create a market-driven solution. A universal tariff levels the playing field across all sectors, allowing competitive businesses to flourish, while non-competitive ones inevitably fall by the wayside. This approach avoids bureaucratic interference in selecting industry winners and eliminates lobbying around subsidies.

The authors prefer subsidies because they offer a degree of control to informed professionals. Yet, history shows that experts often struggle to successfully identify winning industries. Tariffs create a foundation based on market processes, safeguarding domestic production without relying on expert intervention.

The Path Forward Is Paved With Tariffs

Ironically, Bernstein and Posthumus’ paper supports the very policies they challenge. They illustrate our precarious reliance on imports, depict the destructive impact of the China Shock on communities, and affirm that existing subsidies haven’t revitalized manufacturing, yet they insinuate that tariff-induced catastrophes are expected, which hasn’t been proven true.

Evidence post-Liberation Day includes:

• The prices of items subject to tariffs haven’t risen more than those of non-subject items.
• Nations are prioritizing negotiations over retaliation.
• Businesses are announcing strategies to bring manufacturing back to the U.S., potentially reducing trade deficits.
• Incentives for manufacturing have shifted positively.

Meanwhile, the subsidy approach endorsed by the paper has resulted in exorbitant spending, rising inflation, temporary construction booms, and subsequent job losses in manufacturing.

While the paper notes that tariffs might elevate input costs, it’s true that our current reliance on imports makes us vulnerable to disruptive supply issues. Though concerns about retaliation have been raised, substantial tariffs have proven to be less inflammatory than anticipated. Furthermore, targeting foreign strategic sectors does indeed risk provoking resistance. The paper suggests that prices of goods subjected to tariffs increase at a slower rate compared to non-subject goods, which contradicts various theoretical objections.

Ultimately, real-world evidence consistently counters these theoretical concerns. Open-minded readers are likely to see that Americans have endorsed Trump’s trade policies over the industrial strategies preferred by Bernstein, Posthumus, and the Biden administration.