Tariff’s backfire on the U.S. economy is yet to unfold: American economists
By
Qaiser Nawab
“Though front-loading by American importers has delayed the full impact of tariffs, the long-term economic drag—marked by hesitant investment, declining capital flows, and inefficient allocation of labor and capital—could ripple through the U.S. economy for a generation or more,” warned Robert Koopman, former Chief Economist of the WTO and now a senior lecturer at American University, at this week’s World Economic Forum (Summer Davos) in Tianjin.
As U.S. policymakers double down on reshoring and decoupling, economists warn that short-term political wins could come at the expense of long-term economic vitality. What appears as economic self-reliance may in fact be the slow erosion of America’s global economic edge.
Reshoring, but at what price?
Admittedly, efforts to pull companies back to invest in the U.S. might achieve partial success, but economists agree that any gains are unlikely to offset the broader damage caused by protectionist policies.
“Ultimately, it’s the importer who pays the tariff,” Koopman confirmed. “Trump liked to claim exporters would bear the cost. But in reality, during the previous administration, only about 5% of tariff costs were paid by foreign exporters. About 50-55% was absorbed by firms through profit margins, and the remainder was passed directly onto consumers.”
“The struggle is vivid, and the likelihood of continuing inflation is significant,” Graham Allison, Professor of Harvard Kennedy School of Government, opined.
More importantly, having companies set up factories in the U.S. is not the end of the story. Economists doubt the narratives of job creation and industry revitalization.
“Companies looking to relocate to the U.S. will face several challenges, foremost among them the shortage of skilled labor. American firms report persistent difficulties in finding workers with the specific expertise required for modern production. This skills gap is not a temporary issue—and it’s unlikely to disappear anytime soon,” said Jeffry Frieden, Professor of International and Public Affairs and Political Science, Columbia University.
Since its peak of 19.6 million workers in 1979, American manufacturing has lost over a third of its workers. As of 2023, about 25% of all manufacturing workers were immigrants. “Our immigration policy has dramatically reduced the supply of unskilled labor in the U.S., which is a major obstacle for firms seeking to expand or return production to U.S. soil,” Frieden noted.
A likely scenario is that reshoring may not yield a net increase in employment at all. “The number of jobs brought back to the U.S. may not counterbalance the number of jobs cut from a shrinking export market,” he said.
More damaging is the dampened foreign investment in this country. “Tariffs distort capital allocation,” Koopman explained. “They redirect investment from highly productive and competitive sectors into protected industries like textiles or footwear, which are often less efficient. What fills the gap is often automation, not jobs.”
The result, he argued, is a gradual erosion of the innovation ecosystem. “Over time, we lose dynamism, reduce our capital stock, and misallocate resources—hurting long-term