Politicians sell tariffs as job protection, but economist Kimberly Clausing cuts through the spin: They’re a direct assault on working families’ wallets while destroying the very manufacturing jobs they claim to save. The former Treasury official and UCLA professor dissects how Donald Trump’s trade war has become an expensive lesson in economic self-sabotage.

Clausing walks through the real costs: $2,500 annually per household from existing tariffs, with over half of our imports being materials that American companies need to stay competitive. When those costs rise, US manufacturers become less competitive globally, leading to layoffs rather than job creation.

The contradictions run even deeper. The same administration putatively concerned about offshoring maintains a tax system that rewards companies for moving profits overseas — American firms actually pay higher taxes on domestic income than on foreign income.

Clausing puts the current trade panic in perspective. While China trade may have cost 1-3 million jobs over a decade, that’s a fraction of the 7 million jobs the US economy naturally loses and creates every single quarter through normal business cycles. Yet we’re responding with 1930s-style protectionism in today’s interconnected global economy, where supply chains cross multiple borders and create far more complexity and disruption than existed during the Great Depression.

The conversation reveals how political rhetoric about trade obscures where the money actually goes — from working families paying higher prices to corporations and governments collecting tariff revenues, funding a policy approach that economists broadly agree makes little economic sense. 

Clausing offers a clear-eyed look at what’s really happening behind the tariff wars and why the promised benefits aren’t materializing.

Apple PodcastsGoogle Podcasts RSS

Full Text Transcript:

(As a service to our readers, we provide transcripts with our podcasts. We try to ensure that these transcripts do not include errors. However, due to a constraint of resources, we are not always able to proofread them as closely as we would like and hope that you will excuse any errors that slipped through.)

[00:00:09] Jeff Schechtman: Welcome to the WhoWhatWhy podcast. I’m your host, Jeff Schechtman. The great irony of our current moment is that as the world becomes more interconnected than ever, the politics of disconnection has never been stronger. From Brexit to Trump’s tariffs, to the rising chorus of voices on both left and right calling for America to retreat from the global economy, the consciousness that dominated policymaking for decades is under assault.

Helping shed light on this debate steps my guest, Kimberly Clausing , a scholar who occupies a unique position in our economic discourse as both a rigorous academic economist and a former Treasury Department official who helped craft policy during the Biden administration. She bridges the gap between ivory tower theory and Pennsylvania Avenue reality. Her book Open makes what she calls the progressive case for free trade, an argument that puts her at odds with significant portions of both parties.

Clausing brings an unusual combination of technical expertise and moral urgency to questions that often get trapped in either academic abstractions or political sloganeering. Her work on corporate tax avoidance has revealed how multinational companies shift hundreds of billions in profits to tax havens, costing governments worldwide the revenue they need to address inequality and invest in their future.

Yet rather than retreating internationalism, she argues for more sophisticated international coordination. Her perspective challenges the conventional political categories. She’s a fierce critic of Trump’s tariffs, but not because she’s indifferent to working class struggles. Instead, she argues that protectionism is a false solution that makes those struggles worse while enriching the wealthy. She supports globalization, but paired with progressive taxation and robust safety nets. She wants America engaged with the world economy, but on terms that don’t allow corporations to play countries against each other in a race to the bottom. Kimberly Clausing is the Eric M. Zolt Professor of Tax Law and Policy at UCLA School of Law and a non-resident senior fellow at the Peterson Institute for International Economics. And it is my pleasure to welcome Kimberly Clausing here to the WhoWhatWhy podcast. Kimberly, thanks so much for joining us.

[00:02:29] Kimberly Clausing: Thanks so much for having me. It’s a pleasure to be here.

[00:02:31] Jeff Schechtman: Well, it is a delight to have you here. I want to talk first about tariffs, because they seem to be top of mind for so many people of late, and really the contradiction that seems to be so inherent in them. The fact that they raise the cost of goods, they create global tension, they were once upon a time responsible for starting a world war. It’s hard to find a whole lot good in the notion of tariffs. Talk a little bit about why, in fact, there’s even a debate about tariffs at this point.

[00:03:01] Kimberly Clausing: Yes. For someone who’s versed in the economics literature, it’s hard to see why there would be a debate. And in fact, if you had 100 economists on your show, 99 of them would agree with almost every word of what I’m about to say on tariffs. The reason that there’s still a debate about this is that it’s not always intuitive to a layperson why a tariff would be a bad idea. First, you might think, well, it’s providing a preference for things made here in the United States. That’s going to increase stuff in the United States. And that’s roughly the level of argument that the Trump administration is offering, suggesting that this will lead to a renaissance in US production. The reason economists are skeptical of this is really twofold. One is that, let’s say you are just interested in production. You’re taking tariffs and you’re putting them on every good that we import. More than half of our imports are intermediate goods that are used by US firms to make final products. When those goods become more expensive, the US firm becomes less competitive in the global marketplace.

There was a story just today in The Washington Post about a manufacturer in Wisconsin. They make products out of aluminum that are manipulations of basically raw aluminum that people can buy for various purposes. But their costs have gone up by 30, 40, 50 percent due to these tariffs. And they’ve seen a reduction in orders for their product. And this has actually caused layoffs at their firm because the tariffs have really hurt their manufacturing production. And we’ve seen manufacturing employment be very disappointing compared to prior trends.

So that’s one reason. I think the more obvious reason that tariffs are harmful is they’re really a tax that’s disproportionately borne by those further down in the income distribution. Make no doubt in your mind, there should be no doubt in your mind, that tariffs are a tax. The dictionary definition is it’s a tax on imports. What that does is it raises prices, not just for the imported goods, but for any domestic good that competes with the import. So if the foreign wine has a higher tariff, so does the California wine that competes with it.

Economists and others have calculated what this translates into. And if tariffs stay at their current level for a whole year, it would be about $2,500 for the typical American household. That’s a big tax increase. And it’s going to take a much bigger bite as a share of income out of lower income people, because higher up in the income distribution, people save a lot of their income. And the part of your income that’s saved isn’t subject to any consumption tax, and that includes tariffs. So there’s a lot of reasons to dislike them, even before you get to the international tensions you mentioned, although those are very real, too. And the United States has lost a lot of friends in recent months with all of these tariff threats.

[00:05:57] Jeff Schechtman: There is also the reality of a deeply interconnected and globalized world. That no matter how much somebody may not like the notion of globalization, the fact is that here in the 21st century, these things are interconnected, that supply chains are complex and interconnected. And really it has passed the simplicity of a simple tariff.

[00:06:21] Kimberly Clausing: That’s definitely true. And you mentioned earlier experience with tariffs in history, when we were levying such large tariffs. The last time we did this was during the Great Depression, the so-called Smoot-Hawley tariffs that generated a lot of recessionary impact in the US economy and abroad and led to widespread trade wars and distrust. But as bad as those tariffs were, if you compare them to what the United States is doing now, at a similar effective tariff rate as we had in the 1930s, we’re applying that to a lot more trade. Because if you go back into the 1930s, we were a more domestic economy than we are now. We’ve had a lot of growth in international trade, not just in final goods, but like you mentioned, in the supply chain itself. A lot of sophisticated US products have parts that come from other countries. Some of our best ideas are the root tasks associated with creating them into products. Some of that is done throughout the world. You can have a product like a Boeing 787, which has parts of the wing, parts of the tail, parts of the instrumentation, made in other countries. And it’s more efficient to do it across the world than to do it all in one plant. You’re getting a lot more supply chain disruption and also just a bigger tax increase, too, because imports are just more important than they were in the 1930s.

[00:07:46] Jeff Schechtman: Part of the pitch for globalization several years ago was that it would create more peace in the world, that countries that traded together would get along better. Was that a mistake in thinking?

[00:08:00] Kimberly Clausing: I don’t think it was a mistake in thinking. And I think one good example of how that process works comes from Europe, where if you look at the history of that continent, there was very frequent conflict between countries within Europe. And in the last period of time, since 1945 up until the Ukraine invasion, very little in the way of conflict in Europe. And we could even say that Russia’s invasion of Ukraine is a little bit peripheral to central Europe. It’s certainly not EU members, either one of them. But what the European Union intended to do was basically make it very costly for countries to fight each other. It started with steel and other key commodities that were key to making weapons. Back in 1957, a core group of European countries decided to do that. Then it eventually expanded to be a customs union, which is like a free trade area. And it’s gone even deeper since then.

Now Germany and France, who were bitter enemies as recently as 1945, have the same currency in their pockets, and they have completely free trade across the borders. And it’s inconceivable that those two countries would engage in a war. Not just because they have too much to lose due to trade, but because they’ve become closer together through this whole process. And I think when countries do trade, it causes a lot of business connections, it causes other types of connections, and that builds more goodwill than you would have if people were operating in isolation.

And the counter example would be North Korea, which is a country that’s really embraced the anti-trade approach. It’s a target country, which means it’s almost doing no trade. And it has a pretty bellicose outlook relative to most of the rest of the world by going it alone. I think while it’s too simplistic to say that trade creates peace, I don’t think it’s that simple. I think trade creates mechanisms that, controlling for everything else, might tilt the playing field a bit in favor of peace.

[00:10:27] Jeff Schechtman: And what we see, particularly in the US now with Trump’s trade policies, and what we see taking place in China, is trade not being used as an economic lever, but being used as a geopolitical strategic lever, which makes it more problematic, arguably.

[00:10:45] Kimberly Clausing: Yeah. One thing that really bothers me and many observers when we look at the Trump administration’s approach to international trade is the sheer transactionalism of each and every negotiation. It’s not really based on any theoretical principle. Aside from maybe grievance. There seems to be a sense among the Trump administration’s core that the United States has somehow been disadvantaged by the system that we ourselves created and propagated over a period of 70 years. I’m highly skeptical of that claim. I don’t think the international system has disadvantaged us. On the contrary, I think it’s provided us enormous benefits over decades. And I think the United States government is always quite capable of taking care of its own interests in negotiations.

But what you see right now is Trump going to nations that are very close partners of the United States, including, as one example, Korea, that has a free trade area with the United States. As well as Canada and Mexico. Again, free trade-area partners. And as another example, the European Union. Some of our closest allies and friends. And even in those countries, which you might think, well, these are really good friends of the United States, or Japan or Australia. We’re levying these tariffs despite really having quite open, quite friendly relations with them and really no reason to have any beef with them. I think they feel somewhat betrayed and singled out. And it’s a little bit belittling to have to go through these negotiations where it’s sort of like you’re dealing with a used car salesman, bargaining over this and that and the other thing, and the deal keeps changing. And a lot of it’s very unclear.

These are not your father’s trade deals, if you want to take that phrase. These are not carefully crafted, reciprocal negotiations where countries are working on legitimate trade issues. This has a feel of a shakedown where they’re like, OK, well, if you invest this much and you change this rule and you let our troops be based on this base, then we can lower your tariff from a pretty high level to a somewhat less high level. And I don’t think countries are really enjoying being subject to the whims of such a mercurial process.

[00:13:15] Jeff Schechtman: Talk a little bit about the mythology of the relationship between trade and manufacturing, and manufacturing loss in the US. Because to put the burden on trade really neglects so many other factors that have entered into that today.

[00:13:31] Kimberly Clausing: Yes. It’s a really pressing and concerning problem that many regions of the country, very legitimately, feel left behind from the economic success of other regions of the country. And so, as an example, the coastal regions tend to be more economically prosperous than some of the inland regions. And we might identify even particular counties that have experienced more job loss and slower wage growth than others.

Then the question is, well, what explains these worse outcomes? There’s been a number of studies that have focused on trade with China as a key causal factor where they said, hey, look at some of these counties that were more exposed to trade with China. It looks like the employment loss was somewhat higher. They’re pretty good studies, and they come up with an estimate. It’s pretty rigorous. It’s in the neighborhood of one to three million, depending on how broadly you define job losses due to trade over a period of about a decade. So that’s a substantial amount of job loss.

But to put it in context, the United States economy, in a typical quarter, loses in the neighborhood of seven million jobs and creates seven million other jobs. Capitalism itself leads to a lot of churn in such a massive economy as ours. Every quarter, we’re losing and creating many multiples of this China shock number that occurred over a decade, right? It’s really silly to say that such a small thing created all the discontent when you’ve got a lot of other things you could blame. So as an example, technological change has really shifted demand away from some workers and toward other workers. We’ve seen domestic competition that has really moved manufacturing jobs around within the country. We’ve seen domestic competition that has resulted in more market power in some instances, where some firms and some industries get very large and use their additional bargaining power to reduce the gains for labor. We’ve seen changes in tax and regulation. We’ve seen decline in unions, right? So a lot is going on, right? All of those factors probably contribute to some discontent. It seems a little odd to say that something that happened now 25 years ago, which is China joining the WTO, and created maybe 140th the churn that we’re seeing over the course of a decade, is really solely responsible.

And I think part of the reason that people have glommed on to that explanation is it seems like a pretty easy one to fix. Well, if China is the problem, just tariff China and easy peasy, we can return to the halcyon days of yore. But the problem with that logic is the tariffs themselves are going to hurt some of the same communities that you’re trying to help. What we saw when Trump did the China tariffs in the first term was that on net they cost jobs in these communities because the little, almost non-existent job creation in the industries that were protected was more than offset by job loss due to these competitiveness and supply chain effects that we talked about earlier, as well as the effects of retaliation.

It’s really hard to use tariffs as a remedy for what’s hurting people. That doesn’t mean that we shouldn’t care that people are being hurt, or that their economic expectations are not being met. And in that book I wrote that you mentioned at the beginning of the podcast, Open, I have several chapters at the end where I talk about ways we can invest in communities. Everything from free community college to more public investment and infrastructure, to a more progressive tax system and a more robust safety net. And I think those kinds of responses are hard. It’s hard work and you have to figure out how to raise the money for it. And reforming the tax system is a big part of that. But they are much more productive solutions than just this culture of blame where we say, oh, it’s all the trading partners’ fault. We’re just going to put it on their shoulders, tariff them and kind of wrap ourselves in the flag and think that’s going to solve the problem.

And I would put immigrant restrictions in that same category of this false blame that’s creating a lot of deep harm in the United States as we remove immigrants and blame them for our troubles. And ultimately is hurting the same communities we’re purporting to help.

[00:18:00] Jeff Schechtman: You mentioned technology a few minutes ago. In fact, automation has cost more jobs than trade by far.

[00:18:07] Kimberly Clausing: Yes, that’s true. And it’s possible that we’re just seeing the tip of that iceberg because it’s not just automation, it’s computerization, and we’re about to see the AI revolution kind of hit the labor force statistics, too. And if AI is anywhere near as productivity-enhancing as we suspect it will be, it will come with benefits, too. But it’s also going to create a lot of disruption, and that disruption will probably sow some discontent, too. I think this is a time where it behooves us to think constructively about how to handle these kinds of transitions, and how to best create a safety net and give people pathways, if they lose their job, to productive lives with integrity.

I’ve suggested in another piece that wage assurance is also something to think about. Like if you lost a job earning a high wage and you get a lower wage, maybe the government could make up some of the difference for a transitory amount of time. And a policy like that would handle the disruption, whether it’s coming from AI or whether it’s coming from trade, or whether it’s coming from domestic competition. Because sometimes people really do face difficulty, especially older workers, if they lose their job when they’re in their fifties. They may not be able to find another job that’s satisfying, much less paying as much as their last one did. I think we do need to be aware of this kind of suffering and have a policy answer to it. I would just be aware of the sort of snake oil that is protectionism and immigration restrictions, because it’s like telling a sick person that drinking poison is going to make them better.

[00:19:53] Jeff Schechtman: What role have multinationals played in this debate? The fact that in the corporate world, big companies have gotten bigger and bigger and bigger and play a larger role in international trade. Has that been a factor at all?

[00:20:07] Kimberly Clausing: One of the interesting things about the world economy at this point is how concentrated the economic activity is in really not that many firms. If you look at the United States’ case, for instance, we’ve got over a half a million C corporations, but fewer than 2,000 of them account for about 90% of the corporate profits that are taxable in the US tax base. That’s telling you that things are pretty concentrated.

Who are these really big firms? They’re often multinational firms. They operate across borders. They can create untold delight as a consumer. There’s a lot of really nice things that these firms bring us. I’m not trying to say that they should be villainized as part of the problem here. But we do need to have a tax system that’s sensitive to the fact that companies have quite a bit of mobility in their operations. And the current US tax system actually contains large preferences for foreign operations relative to domestic ones. You’re taxed more lightly if you earn your income in Ireland than if you earn it in the United States. And the same is true for many other comparisons that we could make.

You might ask, why does an administration that’s so worried about offshoring and US production tolerate a tax system that has a built-in bias in favor of foreign rather than domestic income and activity? And I think their answer is a really simple one. The multinational shareholders profit from having the ability to shift their profits offshore and to pay light tax burdens in havens abroad. And they are willing to defend those hyper-low tax rates from policy change. Whereas a tariff is not borne by multinational company shareholders. It’s borne by regular citizens who may not even really understand fully what’s causing those prices to rise when they go shopping. It’s a little bit of a mysterious tax. You don’t get a little receipt that says your shoes were 37% more expensive because of the tariff. It might be easier to politically get away with that tax increase than the one that would hit the rich and powerful.

But I think multinational companies are fundamentally a good thing. I’m glad we let companies work across borders. I think that’s a source of efficiency. But I don’t think it makes sense to have multinational companies pay tax rates that are substantially lower than what domestic firms would pay. And I think these companies should contribute to the public purse at a time when we have a lot of really strong fiscal needs.

[00:23:08] Jeff Schechtman: Even among those that argue for tariffs, for extreme tariffs, what is the argument in terms of how the success can be measured? How do we get to that?

[00:23:21] Kimberly Clausing: Yeah, that’s a really good question. And I think, depending on the day, if you ask the administration, what is success here, they would give you a number of different answers. And they’re not all necessarily consistent, even with each other. One answer might be we’re using tariffs as a cudgel to change foreign behavior. But then if you succeed in changing the foreign behavior, that implies that you would then lower the tariff. You’re not going to have the persistent effects of tariffs if the whole goal is to just browbeat other countries into behavioral changes.

A second goal is the revenue, right? The president and his advisors have expressed great delight at the revenue that’s coming in, right? It’s weird. It’s the first time I’ve seen politicians trumpeting a tax increase and being like, hey, the Treasury is getting so much more money from this. They don’t do that when they raise other taxes on us, right? You don’t see them being, like, hey, you paid even more payroll taxes here. Fantastic! It seems a little bit odd. But I think they’re probably assuming people are a little dumber than they really are when they make these announcements.

A third goal is to encourage manufacturing in the United States. We talked earlier about why that might be difficult. And then a final goal that they often mention are imbalances, or the fact that the United States runs trade deficits with many other countries. They take that as kind of root evidence of some unbalanced behavior out there that’s creating this imbalance.

I think for an economist, it’s hard to take some of these arguments particularly seriously because, we are well aware of the fact that a trade deficit for a country is a natural outgrowth of its savings behavior. Let me just give you a simple example. If a country like the United States borrows a lot, and we borrow several percentage points of GDP from the rest of the world every year. The way that we do this is just the flip side of the trade deficit: by getting more stuff from foreigners than we’re sending to them. That’s how we manage to consume more than we earn. And so our borrowing is really at the root of the trade deficit. Those two things are equal and opposite to each other.

You might say, well, gosh, we can’t do anything about the borrowing, but we can put a tariff on. But a tariff isn’t going to necessarily help that imbalance. Whereas we can do something about the borrowing. The US government, the federal government in particular, is responsible for 6% of GDP deficits these days in a time of prosperity and peace. We’re borrowing 6% of GDP. And not running anything near a balanced budget at the federal level. So that means, of course, we’re spending more than we earn as a country. And so we have to get that difference to get the consumption above the production from somewhere. And that’s going to lead to the trade balance. And the quickest way to reduce that imbalance and to stop running these trade deficits would be to pursue a more fiscally responsible budget.

Whereas a tariff, you run the risk that you’re going to discourage imports, which you think would help the trade balance, but you’re also discouraging exports at the same time. If you’re thinking about the Boeing plane that has parts coming from somewhere else, now the Boeing looks more expensive compared to the Airbus. So we’re going to sell fewer Boeings than we were before. Plus, tariffs can lead to pressure for exchange rate appreciation. They can lead to retaliation abroad. And all of these things mean that our export sector is shrinking, even as our imports are shrinking. And so we can’t be sure that this tariff will even improve the trade balance.

[00:27:13] Jeff Schechtman: And finally, Kim, talk a little bit about the consequences as you see it, if we continue on this tariff path that we’re on now.

[00:27:22] Kimberly Clausing: I think it’ll be interesting to see whether this path continues. First of all, I would just point out that the tariffs are likely not constitutional. The Constitution quite clearly gives the power of purse to Congress in Article 1, Section 8. So these tariffs are under legal challenge because the president has relied on an authority that implies that we have an emergency with every country in the world that’s urgent, and that therefore requires this very mad, haphazard pattern of tariffs that we’re seeing. I think that might be one way out.

But let’s say the tariffs continue the way they are. The Supreme Court decides not to intervene. Then it’s going to have a lot of consequences. For the US economy, the consequences will be particularly dire because we’re the ones facing the supply chain disruption. Our export industries will be hurt. And you’ll see something that economists would refer to as stagflationary pressure, which means that simultaneously, you have upward pressure on prices, but downward pressure on activity. Because you’re moving resources in the economy in an inefficient way. You’re hurting the export sector, you’re creating disruption. That’s the recessionary part. But at the same time, prices are going up. That’s the inflationary part.

It’s not written that we’ll end up in a recession, but it is pretty clear that we’ll end up with both more price pressure and lower growth than we would have had absent this experiment. And I think those are both grave concerns, as is the tax increase that households are bearing. But I think one of the longer run concerns is what this does to the reputation of the United States. What does it mean if we sign a free trade agreement with a country only to turn our back on that agreement a few years later? And this includes the USMCA agreement  [United States-Mexico-Canada Agreement] that Trump himself, or his administration, renegotiated in his first term. And now he’s turning his back on that, too. It really makes the United States’ credibility and leadership on the world stage also, not just at risk, but really depleted for a long time.

[00:29:44] Jeff Schechtman: Kimberly Clausing, I thank you so very much for spending time with us today here on the WhoWhatWhy podcast.

[00:29:49] Kimberly Clausing: Thank you. Thanks for having me.

[00:29:51] Jeff Schechtman: And thank you for listening and joining us here on the WhoWhatWhy podcast. I hope you join us next week for another WhoWhatWhy podcast. I’m Jeff Schechtman. If you like this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to whowhatwhy.org/donate.