Wisconsin, Trump, Trade & Tariffs

The Effect of Tariffs

Tariffs are taxes placed on imported goods. Like all taxes, a tariff increases the price paid by the buyer, and reduces the revenue earned by the seller. The difference between what is paid and what is received is the revenue collected from the tax.

The purpose of a tariff is generally one of two things: first, either to increase the tax revenue collected by the government; or two, to discourage the purchase of imports and encourage the purchase of domestic goods.

In the early days of the United States, tariffs were imposed principally for revenue purposes. In recent history, however, their purpose has generally been to induce foreign adversaries to change their behavior, or otherwise to protect and encourage domestic producers by raising the relative cost of competing foreign goods.

For a revenue-raising tariff to be effective, the tariff must be low enough that consumers do not stop purchasing the import altogether. It is also best practice to ensure that the tariff is applied universally to prevent consumers from switching to un-taxed imports. Finally, revenue tariffs are best suited for goods which are not produced domestically.

For protectionist tariffs to be effective, the tax must be imposed on those goods whose production the government wishes to encourage. They must also apply to close substitutes to prevent domestic consumers from switching to substitutes. And lastly, the protectionist tariff must be high enough that a significant portion of consumers choose to buy domestically rather than internationally. In the extreme, an outright prohibition of a foreign import would best accomplish the goals of a protectionist policy but would suffer more intensely from the lack of competitive forces.

In practice, both revenue and protectionist tariffs discourage the purchase of foreign goods and incentivize the purchase of domestic goods. The effect of this is to reduce trade deficits to levels higher than they otherwise would be.

The Trump Tariffs

Foreign trade was one of President Trump’s top priorities when he came into office in 2017. He had three goals. First, he wanted to bring steel and aluminum production back to the US to create high-paying jobs and to secure the military’s industrial supply chains. Second, he wanted to renegotiate the North American Free Trade Alliance (NAFTA), which he said resulted in massive offshoring. Finally, he wanted to reduce the trade deficit with China. By and large, Trump's goals for his second term haven't changed. He and the Republicans plan to double down and ramp-up tariffs on imports from other countries, especially China.

So how have these tariffs impacted Wisconsin so far?

This paper looks at the import and export data for Wisconsin and examines the effects of the Trump and Biden tariffs on Wisconsin's trade balance. We focus on the total volume of Wisconsin trade, the state's principal trading partners, its main exports and imports, and the effect of tariffs on state employment.

These data come from USA Trade Online, a product of the U.S. Census Bureau and the official source of U.S. trade statistics.

Wisconsin's Trade Balance

A state or country's trade balance is determined by subtracting the value of all imports from the value of all exports (TB = X - I).

If exports are greater than imports then the country has a "trade surplus." If imports are greater than exports then the country has a "trade deficit." While trade deficits are a common cause for concern among politicians, economics teaches that trade surpluses and deficits do not matter. That is, each have their costs and benefits and a country's total trade balance with the world will always be zero.

Why? Because when a trade deficit emerges between, say, the U.S. and China, more Dollars flow out of the U.S. via imports than flow in via exports. China is then in possession of U.S. Dollars which it can use either to buy goods from other countries; stuff under its mattress to depreciate in value; or invest back into U.S. industry. Holding the Dollars is a boon to Americans who then experience the benefits of a currency with greater purchasing power, while investing that money in American industry results in a growing economy with more jobs and higher wages. If those Dollars are used to buy goods from other countries, they are then in the same position as China, and eventually those Dollars flow back into the U.S.

Whenever a trade deficit emerges, therefore, the money sent overseas finds its way back to the U.S. in the form of U.S. exports or U.S. investment. The end result, therefore, is a wash. Trade deficits don't matter.

All of this is to set the stage for Wisconsin. Wisconsin has been in a trade deficit since 2015.

The trade deficit stood at $1 billion in 2016, grew to $6 billion then $8 billion in 2017 and '18, peaked at $14 billion in 2022, and now stands at $10 billion as of October '24. Of note here is the fact that the first round of Trump's tariffs on Steel and Aluminum began in March 2018 and exemptions for Canada and Mexico weren't given until May 2019.

These results might be surprising considering the effect of a tariff is to reduce a trade deficit. However, tariffs weren't the only forces at play between 2018 and today. Recessionary concerns manifested in 2019, lockdowns lasted from 2020 to '22, a European war began in 2022 and a migrant crisis in the U.S. emerged and is still ongoing. 

The Trump-Biden tariffs have been overpowered by other causes and have not managed to create a net positive trade balance for Wisconsin, but they have managed to reduce the trade deficit to levels higher than they otherwise would be.

Wisconsin Imports

From whom does Wisconsin Import goods? And what kind of goods? Wisconsin is similar to other states in the U.S. in that it trades in large volumes with our neighbors Canada and Mexico, and with China in the far East.

In sheer Dollar terms, the primary source of imports have been China, Canada and Mexico, in that order.

Historically, China has been the largest source of imports for Wisconsin, averaging almost $6 billion per year between 2008 and 2018, or 25% of all imports. Canada has trailed close behind with an average $4.2 billion (19%) worth of imports. Mexico during this period accounted for roughly $2.7 billion worth of Wisconsin's imports, or 12%.

However, the source of imports has changed since 2018. From 2018 to October '24, China has averaged $6.4 billion in volume, but accounted for only 19% of all imports. Canadian imports, too, have decreased since 2018, now averaging $5.3 billion per year (15.6%) while Mexico has stepped up to fill the void left by the glut of Chinese and Canadian imports. Imports from Mexico now average almost $3.9 billion per year and account for 11.4% of all imports to Wisconsin but have amounted to $5.5 billion per year since 2023, averaging 15% of all imports to the state.

As for the kinds of goods Wisconsin imports, they tend to be precursor components for downstream manufactured goods.

These five goods are the primary imports accounting for Wisconsin's total import volume, accounting for 54% of all imports since 2008 and 60% of all imports since 2018. These imports are used as inputs in the Wisconsin manufacturing industry and are then sold abroad.

With respect to Chinese goods subject to the Trump-Biden tariffs, the tariffs did as expected: Chinese imports fell and were provided, instead, by other countries. 

The chart below shows that the volume of Chinese imports fell significantly between January 2019 and January '20, again between September '22 and September '23, and has otherwise remained flat since January 2019. Since the beginning of 2019 the share of Chinese imports has steadily declined from a high of 40% to roughly 20% in recent years.

Wisconsin Exports

To where does Wisconsin export goods? And what kind of goods?

Overwhelmingly, Wisconsin exports go to Canada, then Mexico and then China. As a share of the state's total exports, roughly 30% go to Canada, 16% to Mexico and 5.5% to China. 

As with imports from Canada, exports to the North have gradually declined. Since 2004 Canada's share of Wisconsin exports has fallen from 38% to 30%. The share of exports to China have remained relatively constant since 2007 while exports to Mexico have increased steadily between 2002 and '24––rising from 7% to 16%.

As for the kinds of exports Wisconsin sends abroad, these are mostly machinery and other manufactured goods.

The volume of machined goods totaled $6 billion last year, computer & electronics $4 billion, transportation equipment $3 billion, chemicals $3 billion and food $2 billion.

These five categories are responsible for the bulk of Wisconsin's exports––comprising 65% of all exports from the state going back to 2002.

The trade volume for each of these categories has been quite erratic since 2012. Small declines in exports can be seen from 2018 to 2020, but since 2020 nominal trade volumes have increased.

Adjusting these data for inflation can be done but would not clarify the situation regarding the effect of tariffs on Wisconsin. Price indices systematically under-report the change in purchasing power, so a better metric is to look at the employment figures for these exporting industries. More on that below.

Wisconsin Employment in Import-Export Markets

To better understand how industries in the import-export market have weathered these tariffs and changes in economic conditions, we look at employment figures for the construction, manufacturing, retail trade and wholesale trade industries.

The chart below shows that construction and wholesale trade were largely unaffected during any period other than the 2020 lockdowns. On the other hand, manufacturing and retail have suffered the most and the longest with respect to employment.

Total employment in manufacturing has been on the rise but has only just recuperated the job losses incurred since September 2022. Current employment is also exactly what it was in December 2018, signifying no real, sustained job growth in the sector.

Retail trade employment, likewise, has been on the decline since January 2017. The fact that retail trade is the second largest sector in the import-export market and the second largest sub-sector in the economy signifies a general glut in economic activity despite increases in trade volume.

Final Thoughts

The effect of the Trump-Biden tariffs cannot be easily discerned from the data above. The reason for this is that many things apart from tariffs are at work and affecting international trade dynamics.

What the data does show is that tariffs had the intended effect (and always do) of decreasing imports from countries targeted by the tariffs, China in particular.

It also shows that the size and scope of the tariffs imposed since 2018 have had a negligible effect on reducing both the U.S. and Wisconsin trade deficits. Importantly, the deficits for each have grown substantially since 2018.

It can also be seen that the industries and sub-sectors of the economy most exposed to import-export markets (manufacturing and retail trade) have not been helped by tariffs and have experienced significant variability in terms of employment, signifying stagnation and a lack of real growth. Tariffs certainly play a role in establishing this fact (a fact known a priori) but other causes, too, have contributed to the static conditions in these industries; namely, recession concerns, corporate and personal income taxes, regulatory burdens, high interest rates and price inflation, decreases in general labor force participation and of prime age men, regional economic difficulties, international conflicts, pessimistic expectations, and much more.

Finally, it is important for further research to examine whether imports are originally sourced from China and other countries subject to U.S. tariffs. As has been observed with oil and gas exports from Russia, sanctions placed on those exports caused these goods to make their way to India, who then sold them to those European countries sanctioning Russia. The effect of these sanctions was one that enriched Russia, counter to the aims of the Europeans. It is worthwhile to investigate whether this effect is also observable with respect to China, who may simply be using Mexico or other countries as middlemen.