How Economists’ Central Anti-Tariff Prediction Collapsed
In yesterday’s Breitbart Business Digest, we examined a new working paper from Jared Bernstein and Daniel Posthumus that documented the decline of U.S. manufacturing employment, particularly the devastating 2000-2010 “China Shock” period when 5.7 million factory jobs disappeared.
While the authors called this period “destructive” and urged preventing future shocks, they insisted that “sweeping” tariffs were not the right policy. Their reasoning was undermined by a significant contradiction: they claim tariffs would disrupt American manufacturing because we’re too dependent on foreign inputs, yet they simultaneously advocate for subsidies for sectors vulnerable to foreign export controls. They’ve essentially documented that our industrial base is dangerously hollowed out while arguing we’re too dependent to fix it.
As we explained, the real-world evidence further undermines their anti-tariff position. Despite President Donald Trump’s sweeping tariffs imposed in April 2025, the predicted “tarifflation” never materialized. Prices on tariffed imports haven’t risen as economists predicted. In fact, prices on non-tariffed domestic goods rose more than tariffed imports, while domestic goods competing with tariffed imports are actually down since Liberation Day. There certainly has not been any widespread inflation created by tariffs. The central economic case against tariffs—that they raise consumer prices—has collapsed in the face of actual data.
What we’re actually seeing is something economists have long theorized as “optimal tariff theory.“ A country with a globally dominant consumer market can employ tariffs to force foreign manufacturers to lower prices to maintain their exports. It can also successfully pressure other countries to reduce their own import barriers by threatening even higher tariffs. Finally, the household sector can force a redistribution from the corporate sector by refusing to accept the pass-through of tariff costs.
Today we look at the rest of the anti-tariff case and how it fares even worse under scrutiny. The paper warned that tariffs would spark devastating retaliation and trade wars. Six months into Trump’s tariff regime, that retaliation never materialized. Countries lined up to negotiate instead. We’ll examine why the paper’s preferred approach—targeted subsidies for “strategic sectors”—is actually more likely to provoke conflict than sweeping tariffs, and why the “strategic” label turns out to be little more than a cover for liberal policy preferences. Finally, we’ll see how the real-world evidence after Liberation Day contradicts every theoretical objection the authors raised.
The Retaliation That Didn’t Happen
The paper warns that tariffs “lower both imports and exports, through other countries’ retaliation.” This is a now-familiar trope of anti-tariff economics. Tariffs ignite trade wars and tit-for-tat escalation, the critics claim.
But six months into Trump’s tariff regime, where is the retaliation?
For the most part, it didn’t happen. Countries lined up to negotiate. The European Union cut a deal. Japan came to the table. South Korea made concessions. Rather than launching a trade war, our trading partners discovered they need the American market, often admitting that the status quo ante had been unfair to the U.S. and created unbalanced trade patterns.
This is the most important development in the entire debate. Many economists insisted that retaliation was inevitable. That never really made much sense. In the first place, many of the same economists insisted that tariffs were damaging to countries that imposed them, hurting their own consumers through higher prices and inefficient production. But if that were so, why would anyone retaliate? It would be like gouging out your own eye in retaliation for your rival gouging out his eye.
More importantly, the theory of retaliation had no basis in economics. It was a political theory that got smuggled into economics. It was about how foreign national governments would react to a change in U.S. policy not about how prices, supply, demand, labor, or capital react.
The real world was not kind to this errant orthodoxy. The United States remains the world’s largest and most lucrative consumer market. Countries want access to American consumers. They’ll adjust their policies to get it.
But here’s the deeper point Bernstein and Posthumus miss: Sweeping tariffs are actually less likely to provoke retaliation than the targeted tariffs and subsidy regimes they claim to prefer.
The paper endorses subsidies and targeted tariffs for semiconductors, batteries, and clean energy, calling these “strategic sectors.” But strategic to whom? These are exactly the industries China aims to dominate globally—solar panels, electric vehicles, and advanced batteries. Beijing has spent hundreds of billions building these sectors. When you target those specific industries with tariffs or subsidies, you’re directly challenging another country’s strategic ambitions. That’s when you get retaliation. China cares deeply about solar panel exports. They’ve built an entire industrial policy around dominating that market. Why would they passively accept a targeted tariff or subsidy aimed at thwarting their strategy?
A tariff on game parts? China doesn’t care much. A tariff on furniture? Annoying, but not strategic. But solar panels? That threatens core national priorities.
And, once again, the idea that targeted tariffs will not provoke retaliation but sweeping tariffs will is not economics at all. It’s political science being practiced by economists, with predictably embarrassing results.
Things Liberals Like Are Strategic
The paper argues for subsidies targeted at “strategic sectors.” Clean energy gets the label. So do semiconductors and batteries.
But the authors never explain what makes something strategic. Markets supposedly underinvest in clean energy—but underinvest compared to what? Steel is essential for defense. Pharmaceuticals are life-or-death necessities. Food security matters. Why don’t these qualify?
The honest answer: These are the sectors Biden subsidized, so the analysis works backward to justify them. They are things liberals like. Liberal policy preferences get smuggled into industrial policy as “strategic sectors” based on nothing other than the fact that liberals really want to have more of the stuff produced here.
Clean energy is pretty close to the opposite of strategic. The Untied States never needs clean energy. We can thrive as a nation on fossil fuels until the end of any reasonable time horizon for our Republic. We may someday prefer to move to cleaner energy—although the election of Donald Trump and Republican majorities on Capitol Hill make it questionable whether that is a realistic expectation—but we do not have to.
This reveals the core problem with the subsidy approach. It requires government officials to pick winners—to decide which industries deserve support and which don’t. That process inevitably becomes political. Clean energy companies lobby. Trade associations make their case. Members of Congress push for their districts. The “strategic” label goes to whoever has the best connections.
Sweeping tariffs, by contrast, let the market sort it out. Apply a uniform tariff, and domestic producers across all sectors get a level playing field. Companies that can compete will grow. Those that can’t won’t. No bureaucrat picks winners. No lobbying decides who gets subsidized.
The authors prefer subsidies precisely because they give credentialed experts control. But the track record of experts picking industrial winners is dismal. Tariffs are a rule-based, market-process based way of protecting domestic production without reliance on the opinions of experts.
The Path Forward Is Paved with Tariffs
Bernstein and Posthumus have written a paper that inadvertently makes the case for exactly the policy they oppose. They’ve documented our dangerous dependence on imports, shown that the China Shock devastated communities, demonstrated that subsidies haven’t revived manufacturing, and predicted disaster from tariffs that hasn’t occurred.
The evidence is in. Six months after Liberation Day:
- Prices on tariffed goods haven’t risen more than other goods
- Countries are negotiating rather than retaliating
- Companies are announcing reshoring plans that could eventually narrow the trade deficit
- Manufacturing incentives have shifted
Meanwhile, Biden’s subsidy approach—implicitly endorsed by the paper—produced billions in spending, out-of-control inflation, a brief construction boom, and then declining factory employment.
The paper warns that tariffs raise input costs, but we’re currently so dependent on imported inputs that we’re vulnerable to devastating supply cutoffs. The paper warns about retaliation, but sweeping tariffs have proven less provocative than thought, and there’s every reason to believe that targeting other countries’ strategic sectors would ignite backlash. The paper warns about price increases, but the data shows prices on tariffed goods rising less than non-tariffed ones.
At every turn, the real-world evidence contradicts the theoretical objections. An open-minded reader of the paper will come away grateful American’s voted for Trump’s trade policies rather than the industrial policy favored by Bernstein, Postuhumus, and the Biden administration.
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