Few economists have studied the consequences of globalization as extensively as David Dorn. The expert on the US economy explains what will help the country in the current situation - and what will not.

This interview by Simon Schmid was originally published in German in Tages-Anzeiger on 2.12.2024. Translated and edited for layout purposes by the UBS Center.

Donald Trump wants to impose tariffs on China, Mexico and Canada as one of his first acts in office. The announcement is a steep pass for David Dorn: the economics professor at the University of Zurich is a specialist in trade issues and has researched globalization extensively throughout his career - and whether its negative consequences can be reversed through protectionism.

Mr. Dorn, imagine you were Donald Trump's chief economic advisor. What would be your first piece of advice?

I would say: Mr. President, renounce the tariffs you have announced against China and other countries. Which would get me out of my job as an advisor again. (laughs)

Unless you can convince him with good arguments.

Trump already introduced high tariffs during his first term in office – first on specific goods such as washing machines, solar cells and steel, and then on a broad range of products from China. The effects of these tariffs have been extensively researched. They have led to higher consumer prices in the US. Contrary to the US government’s promise to ‘bring back jobs to America’, however, no additional jobs were created in industry. And on top of that, there were job losses in agricultural sectors such as cotton production, where China responded with counter-tariffs.

If they're so bad, why does Trump rely on tariffs?

Because they are popular. Republicans have done well in subsequent elections in the regions whose industries were placed under tariff protection.

Are people voting against their own interests?

Trump is a master at selling his policies: he always claimed that his tariffs have been a great success. Whenever a new factory was built somewhere, he took credit for it – even if the project had been announced years earlier. Some voters were probably misled by this. Others are well aware that tariffs cause harm. But they accept that because China is suffering even greater harm – it is a global political rival of the US.

Where does this destructive attitude come from?

In the 1990s and 2000s, there was a spectacular surge in globalization, with a doubling of the global trade volume. China, the most populous country, entered the global markets energetically. Initially, this development was very much welcomed in the US: people were pleased about the cheaper products for domestic consumers and did not think that the increasing economic interdependence would be problematic for production and the labor market in the US. Later, however, it became clear that factory workers came under massive pressure due to trade. They lost their jobs due to plant closures and suffered significant income losses. In the regions affected by industrial decline, social problems increased: there was more crime, alcoholism and drug-related deaths. This led to skepticism about globalization.

Have economists underestimated the disruptive impact of globalization in industrialized countries?

In the 1990s, leading thinkers such as Nobel Prize winner Paul Krugman assumed that globalization would not have a negative impact on income inequality in the US. It was assumed that workers were mobile and would quickly find a new job if they lost their job due to globalization. However, research has since shown that this mobility is quite limited. Many people cannot easily realign themselves professionally or geographically. This requires major changes in their career and personal life.

So the economy was thought of without the people?

Yes, in a sense. The economic models from that period examined how globalization would affect the average wage levels of workers with or without a university education. They did not take into account that trade could lead to long-term unemployment and the economic decline of cities and regions. Paul Krugman has since admitted this omission himself and changed his views on trade accordingly. For example, he now supports the high tariffs on Chinese electric cars that were introduced under the Biden administration.

What is your position on these tariffs?

I am a bit more skeptical.

Why is that?

Tariffs can be a helpful, temporary instrument that gives an threatened industry the time it needs to adapt to international competition. The problem, however, is the exit strategy: you need a clear roadmap for removing temporary tariffs. Without one, there is a risk of keeping industries alive that are no longer competitive. And that in turn damages the economy: consumers and other companies are forced to buy domestically produced products that are often overpriced and technologically backward. As a result, other industries and the country as a whole suffer from a loss of competitiveness.

The EU has now also introduced tariffs on electric cars. A mistake?

The European tariffs are not as high as those in the US. And they are better justified because their level is linked to the subsidies that China grants its car companies. Nevertheless, the tariffs are dangerous. Many European carmakers have a large presence in China. For some, it is their most important market. If China responds with countermeasures and a tariff spiral develops between the EU and China, it could be very damaging for the European industry.

The West admitted China to the World Trade Organization a good twenty years ago. Would it have been better to have refrained from doing so?

Trade between China and the West was already increasing before the country joined the World Trade Organization in 2001. In this respect, this event alone was not the reason why China has experienced enormous growth over the last few decades and has become by far the world's largest export country.

What was the reason then?

China's rise to become an economic power is ultimately the correction of a historical anomaly. Until the 1980s, this gigantic country was almost completely cut off from the international market. Then, in the 1990s and 2000s, the country opened up more and more and allowed market-oriented economic reforms. This made it a very attractive production location for the world market. New supply chains emerged around the globe. And thanks to the internet, it became increasingly easier to organize the production and trade of goods around the world.

Should this process have been better cushioned? Not only in the US, but also in Europe, there are industries that have suffered greatly from globalization.

Western countries could have relied more on temporary protective tariffs to mitigate economic disruption. Such tariffs are allowed under World Trade Organization rules when there is a threat of severe job losses in an industry. One example of such rapid disruption would have been shoe production: in the US, 80 percent of jobs in this industry have been lost. That's huge.

Were those affected supported enough?

No. Unlike in Europe, the US does not have a strong welfare safety net. Losing a job can lead to homelessness or a loss of access to good health care.

So would that be your advice to Trump: do something for the welfare state?

The welfare state is a controversial topic in the US. People prefer to work rather than be dependent on the state. From a researcher’s point of view, however, it is clear that greater investment in child welfare would be beneficial. Supporting poor families improves children's education and health and enables them to participate more successfully in the labor market later on.

Joe Biden is pumping billions of dollars into the industrial reconstruction of the US. Is this a good response to globalization?

This policy pursues the legitimate goal of strengthening domestic industry in important sectors. It is questionable whether a subsidy race is the right way to achieve this. Will the government really succeed in identifying those industries that can survive and generate growth in the long term without subsidies? The answer to this question is still pending. But at least Biden's subsidy policy, unlike Trump's tariff policy, is creating jobs.

Donald Trump also wants to cut corporate taxes. Will that do any good?

It may give the stock market a temporary boost, and we are already seeing that. But tax cuts don't automatically create jobs and they drive up the government budget deficit.

Let's go back to the initial question. You have now listed various things that Trump should not do as president. But what should he do?

The US economy is in a rather good shape right now. Unemployment is low, inflation is trending down to normal levels, and wages in low-wage sectors have increased a lot since the pandemic. This is actually wonderful for Trump: he can hope for a good development over the next four years without intervening in the economy. So if there is an optimistic scenario, it is this: Trump avoids economic policy experiments and goes golfing instead.