The studies he coauthored have explosive power in the United States: the Swiss economist explains Trump’s triumph.

This interview by Markus Diem Meier was originally published in German in Handelszeitung on 21.3.2024. Translated and edited for layout purposes by the UBS Center.

Donald Trump stands a good chance of being re-elected President of the US. Swiss economist David Dorn, along with US researchers, has published a series of studies that are causing a stir in the political world of the US. They explain a part of Trump’s success, as well as the causes and consequences of his trade war – and show why a continuation is imminent. Handelszeitung met David Dorn in Zurich for a conversation.

Mr. Dorn, together with colleagues in the USA, you once again published a sensational study that is politically explosive there. In it, you conclude, among other things, that Donald Trump's import tariffs during his last presidency failed to achieve the goal he had set.

Donald Trump's government introduced surprisingly high import tariffs in 2018 and 2019, particularly on imports from China. The countries affected responded with correspondingly high tariffs on American products. One of the declared aims of the US government was to use this tariff protection to create additional jobs or regain lost ones.

And that didn't work?

Our study shows that hardly any additional jobs were created in regions with industries that were protected by import duties. There was even a slight decrease in employment in other regions where retaliatory tariffs from abroad affected exports.

Donald Trump has already announced that he will again and even more strongly back tariffs if he is elected - and Biden also continues to back tariffs. How has the study been received in the USA?

The study has had a lot of resonance in the USA and was cited in an article in the "New York Times" and other major media. As a result, the Biden administration was also quick to comment on the study, as the present administration has maintained the tariffs Donald Trump introduced. Secretary of Commerce Katherine Tai has argued that the tariffs serve a strategic interest of the US.

What do you think?

This is obviously a pretextual assertion. It is difficult to explain the strategic interest in tariffs on imported clothing, for example.

A second much-noticed statement in your study was that the tariffs were politically successful even though they were economically damaging.

Our results show that the Republicans and Donald Trump personally made significant electoral gains in those regions where import tariffs protected industry. In contrast, the Republicans only lost a small number of votes in areas that suffered job losses due to retaliatory tariffs other countries imposed.

So the trade war paid off for Trump?

In net terms, the trade war was a political success in terms of voter support. This can be interpreted to mean that voters do not approve of these tariffs primarily because of their economic impact, but because they see China as a strategic opponent. They therefore think it is right to take tough measures against China.

In other words, people were in favor of the tariffs for patriotic reasons, even though they knew they were hurting them economically?

There are indeed surveys that show that some Republican voters support the Trump administration's tariff policy, even though they consider these tariffs to be harmful to the US economy. They wanted to send a signal to China and were prepared to accept their own economic losses in order to damage the Chinese economy at the same time.

Despite the harmfulness of the tariffs, it is therefore unlikely that they will disappear again for political reasons - regardless of who is in power.

The tariffs are clearly harmful for the USA. The hoped-for job gains have not materialized, and prices have risen because many imported products now cost more. But if the Biden administration were to reverse the tariffs as a result, it would look to the public like a friendly gesture towards China. This would be interpreted as weakness on the part of the Biden administration.

Explain to us why tariffs have no effect on domestic employment. At first glance, this is surprising, as it makes goods from foreign competitors more expensive and less attractive.

Tariffs indeed have a politically attractive characteristic that their fundamental mechanism is very intuitive. Nevertheless, tariff protection does not automatically lead to an increase in employment. One of several reasons is that most tariffs only affect Chinese goods. However, imports from China are not necessarily replaced by American goods, but partly by imports from other low-wage Asian countries such as Vietnam.

What effect do tariffs have beyond employment?

Extensive studies show that after the tariff increase, prices for Chinese goods rose pretty much in line with the tariffs. This means that the American buyers were asked to pay more because of the tariffs.

Neither the Chinese companies nor the sellers in the USA have lowered prices?

The higher costs are partly absorbed by American importers or supermarkets. The price increase is not fully passed on to consumers. However, Chinese companies have not had to significantly reduce their prices.

What is the impact of the Chinese retaliatory tariffs?

In particular, China responded to the US tariffs with counter-tariffs. Industrial goods play a small role in US exports, but agricultural goods play a very large role. China is the USA's most important export market for soy, cotton, and sorghum. China's retaliatory tariffs on these agricultural goods therefore hit some rural regions of the USA hard.

And even then, did Trump's following not shrink significantly?

Correct. One interpretation of this is that voters assessed the damage caused by foreign retaliatory tariffs as the fault of foreign countries rather than the fault of the president.

Trump has also supported the farmers financially ...

Yes, when his government realized that farmers, an important group of Republican supporters, were coming under pressure, it decided to make very substantial subsidy payments to them. However, these payments only compensated for the consequences of the decline in employment to a very limited extent.

In other words, the overall economic impact of the tariffs is negative, even beyond the impact on employment.

This conclusion is obvious: Prices have risen and there has been no net gain in employment, even though that was the reason for the tariffs.

The trade war came about because the Chinese trade surpluses in particular caused serious damage. You and your US colleagues have written the decisive studies on this.

The 1990s and 2000s saw a huge wave of globalization. During this time, many economists argued that this globalization would largely produce winners, as all participating countries would benefit from the international division of labor and that appropriate redistribution within countries would ensure that the entire population would share in these gains.

Has China's behavior changed that?

Research later showed that in the USA and also in some European countries such as the UK, imports from China increased so rapidly, particularly between 2000 and 2007, that employment in domestic industries fell by 20 to 30 percent. This led to a huge loss of jobs.

You have also researched the wider social consequences.

In fact, the result was that small towns that were dependent on a few factories virtually collapsed economically. The government only realized these disastrous effects of trade, especially with China, far too late. Moreover, policymakers only recognized late that, in addition to unemployment, social problems such as growing crime, drug problems, and the disintegration of family structures were also making themselves noticeable in these areas.

This was an important reason for Trump's first election victory in 2016.

During the 2016 election campaign, Donald Trump took up these issues and highlighted the negative consequences of trade, particularly trade with China. His promise was to bring back the lost jobs.

What consequences does this still have today?

Our new study shows that the new tariff protection for local companies has led to a particularly significant increase in support for the Republican Party in areas that were particularly hard hit by import competition from China twenty years ago.

There is now also criticism of your earlier study. The well-known economist Larry Summers has argued that the importance of industry is steadily declining, regardless of China's competition.

Larry Summers is very personally affected by this issue as former Secretary of the Treasury under Bill Clinton. At the time, he was a particularly strong advocate of globalization and now maintains the idea that everyone actually benefits from trade, while downplaying the negative consequences.

And what about the importance of the industry?

The question of why it is important for a country to produce industrial goods itself is justified. Industrial production has very attractive characteristics: it is important for innovation and ensures a certain degree of self-sufficiency. The Covid crisis and the war in Ukraine have clearly reminded us of this.

Does this apply to the entire industrial sector?

It is very important to distinguish which goods we are talking about. There are many simple goods, such as T-shirts, which have very little innovation, and which can hardly be described as strategically significant. Computer chips are a completely different matter.

When it comes to high-tech products, Americans of both parties are most clearly against free trade.

Yes, the Biden administration has therefore continued Donald Trump's protectionist policies in a much more focused way. While Trump's tariffs were very untargeted, the Biden administration is now specifically trying to exclude geopolitical rival China from important key technologies. Moreover, the administration supports strategically important industries with subsidies.

Around twenty years ago, it was considered a steadfast dogma that free trade benefits everyone. Now protectionism has become socially acceptable, and politicians believe it is right to distribute massive subsidies, as if governments already knew the technology of the future - even though countries are already heavily in debt.

It is a worrying development that Western countries, which used to be very critical of Chinese subsidies for state-owned companies, have now started to subsidize their own industries on a large scale. The European Union has also softened its own principles in this regard in response to the subsidies in the USA.

What happens next?

In subsidy competition, there is a risk that high costs will ultimately only achieve limited benefits. This is particularly true for subsidies with highly uncertain future economic success. Experience from the last fifty years shows that countries have repeatedly tried to achieve a leading position in the chip industry, for example, at enormous financial expense. However, in view of the high speed of innovation, there is a high risk that a new technological development will be missed and producers that were originally important will quickly lose their strong market position.

Has the view of free trade also changed in economics?

That is correct. On the one hand, because the benefits of globalization have not been distributed as hoped. On the other hand, the focus on the most favorable production conditions worldwide only makes sense if there are no political risks in this calculation. However, these risks have increased significantly.

Is globalization thus effectively at an end?

Global trade has not declined in recent years, but it has not been growing strongly for 10 to 15 years. Nevertheless, the drive towards domestic production is not sufficiently strong to reverse the existing globalization. But there is a lack of political will to promote additional trade facilitation in many places.

What is the threat to Switzerland? We are more dependent on open trade and on rules that apply to everyone.

It is a problem for Switzerland when local companies are active in sectors that are heavily involved in subsidy competition. This puts them at a disadvantage compared to their American and perhaps also European competitors, which are increasingly supported by subsidies.

To what extent does the trade conflict between the USA and China affect Swiss companies?

If the world breaks up into large trading blocs and the USA imposes sanctions on other countries, forcing companies from neutral countries to decide whether to trade with the USA or with the sanctioned countries, this would be a major problem for many Swiss companies.

This is already evident.

As a result of the war in Ukraine, even companies that do not violate sanctions have come under pressure to withdraw from the Russian market. This is of little significance in quantitative terms because, apart from raw materials, Russia is a relatively insignificant economy. However, if a geopolitical conflict with China were to come to a head, the pressure to impose sanctions would have drastic consequences.

The studies you have written with US colleagues have attracted a lot of attention in the USA. As a Swiss citizen, have you also been well received there?

US universities are very international. It is therefore not unusual for the major media in the USA to talk to foreign experts about domestic issues. That's why I regularly receive interview requests from the New York Times or the Wall Street Journal.

In 2017, you also made a high-profile appearance at the Jackson Hole Economic Symposium, the US Federal Reserve's most important event. Does the US government also seek advice from you?

In the USA, the exchange with politicians takes place via advisory bodies that report to the President on current research. I have been in regular contact with advisors to various former presidents. Generally, however, professors are usually not directly involved in the political process, for example by being summoned to parliament.

Last question: You grew up in Dielsdorf, Zurich. Why did you stay in Switzerland?

I have also spent a lot of time abroad as a researcher. I taught in Madrid for several years and was a visiting professor at Harvard University and last year at the University of California in Berkeley.

But in the end, you remain in Switzerland?

Switzerland has a high quality of life.