"Ronald Reagan wanted the government to stay out of the economy. Under Donald Trump, the opposite is happening."
Sep 2025
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The threat of favoritism
In the US president's economic policy, relationships with the White House count for more than good products. This undermines the efficiency of US companies, says economist David Dorn in an interview with Neue Zürcher Zeitung.
This interview by Jürg Meier & Lorenz Honegger was originally published in NZZ on 8.9.2025 in German. Translated and edited for layout purposes by the UBS Center.
Mr. Dorn, US Treasury Secretary Scott Bessent cited your studies in the Wall Street Journal as justification for higher tariffs and a departure from free trade. Was that your intention, or did he simplify your research for political purposes?
He quotes research selectively. In fact, my studies have shown that import competition from China in particular has led to significant job losses and social upheaval in the US. However, in another research paper, I also demonstrate that the tariffs imposed during Donald Trump's first term in office did not lead to the promised job gains. Tariffs cannot simply be used to revive industries that are no longer competitive on the international market.
Trump argues that the US followed the rules, while other countries—especially China—took advantage of the system. Is that true?
No. The US played a leading role in establishing the WTO rules. Nevertheless, not only China but also the US subsequently violated the rules particularly frequently. There is justified criticism of China's trade practices – for example, because of subsidies, currency manipulation, or the lack of protection for intellectual property. However, it is a distortion of the facts to say that the Americans are the "good guys" and everyone else is the "bad guys."
But American industry—from automobiles to textiles to electronics—has indeed suffered dramatically. What was the reason for this, if not China's tricks?
The big shift began in the 1990s, when countries that had previously used a communist planned economy system started opening up to global trade. China, a huge country, quickly became competitive. This put pressure on many industries in the US. While countries such as Switzerland and Germany tapped into new export markets in China, the US mainly felt the impact of import competition and hardly benefited from exports. This is also due to the fact that American companies traditionally focus strongly on the large domestic market.
Was the American economy simply too inflexible for the new, globalized markets?
You could see it that way. Europe and Switzerland have expanded their export industries, while the US has done less so. And that was by no means solely due to unfair practices. It was simply because other countries were more innovative or, thanks to their existing export orientation, were better positioned to benefit from the changed market conditions.
But the fact is that the US is earning a lot of money thanks to Trump's tariffs – and the economy has not collapsed. Isn't that a success?
In April, the US government had to put its announced tariffs on hold in order to calm the financial markets. Instead of imposing huge tariffs of 145 percent on Chinese goods, it later introduced significantly lower rates in some cases. However, the fact that there was no economic slump does not mean that the tariffs were an economic success. Research on the tariffs imposed during Trump's first term has since shown that hardly any new jobs were created in the industries he wanted to protect. Companies tended to use the tariffs to raise their prices.
So tariffs were already ineffective during Trump's first term in office?
The economic results were not positive for consumers or businesses. But politically, tariffs are attractive. In the regions that Trump sought to protect with tariffs, his support among voters increased. His trade policy must therefore be understood as a domestic political maneuver rather than an economically sensible strategy.
Trump promises much more: he wants to use tariffs to establish a completely new trading system. Is that realistic?
I don't see Trump's policies putting global trade on a new footing overall. So far, there are few signs that other major economic blocs are following suit. Only China has imposed counter-tariffs to any significant extent. On the contrary, Europe, Switzerland, and many other countries are committing even more strongly to free trade.
However, tensions are also rising between China and Europe because China is exporting more and more to the EU.
That's right. China, for example, has aggressively declared its intention to become the world market leader in electric cars. The US responded to this last year with a 100 percent import tariff. This led to concerns in Europe that Chinese manufacturers would now flood Europe with their cars – a glut of cheap vehicles. That is why the EU also introduced tariffs, albeit in a much more targeted and moderate manner than the US. This shows that when the going gets tough, other countries can also introduce protectionist measures.
So is there a threat of spiraling global trade conflicts after all?
There is a certain risk. But the key point is that Europe does not subscribe to the American argument that every trade deficit is automatically unfair. Instead, specific industries, such as the automotive sector, are examined and limited measures are taken. This is a completely different approach. In this respect, I do not expect a complete erosion of world trade, but rather isolated conflicts. The WTO has lost some of its clout as an institution because the US disregards its rules. However, the WTO system remains intact outside the US.
The US is not only relying on tariffs, but also on government subsidies and direct intervention in the economy. How do you assess this development?
The subsidies are part of a fundamental shift in American economic policy. President Biden has already invested heavily in certain industries, such as semiconductors and green technologies. Under Trump, this is going even further: the state is taking stakes in companies or attempting to intervene in the decisions of individual companies. This is a form of state capitalism that contradicts the traditional Republican line. Ronald Reagan wanted the state to stay out of the economy. Under Donald Trump, the opposite is happening: there is state intervention down to the smallest detail, a real micromanagement.
Where does this change of course come from?
One motivation is China. There, a strongly state-controlled economic system has led to impressive successes, especially in key technologies. In the US, the thinking is: if China can do it, we have to try it too. But in the US, it is much less coordinated. While China clearly communicates which industries and technologies are strategically important, the US government acts without any clear objectives. For example, it is cutting research funding for all university departments instead of concentrating resources in important research fields, as the Chinese do. And it is not specifically promoting future industries, but rather spreading tariffs and subsidies widely – which is inefficient and often contradictory.
What is the risk associated with this development?
The main problem is the threat of favoritism. This was already evident during Trump's first term in office, when more and more companies were granted individual exemptions from tariffs – depending on how good their contacts in Washington were. This undermines efficiency and creates incentives for companies to invest in lobbying rather than innovation. If governments also hold shares in companies, there is a risk of a major conflict of interest: following the US investment in chip manufacturer Intel, who can guarantee that this company will not receive preferential treatment from the government, even if it performs poorly? Competition is shifting. It is no longer the best products that matter, but the best connections to the White House.
But aren't there legitimate reasons for such interventions, such as national security?
Of course, that's an important argument. If a key technology such as semiconductors is crucial to defense, the state can intervene. The problem, however, is that the US government uses this argument excessively. Trump's tariffs on steel and aluminum in 2018 were justified on the grounds of security interests – even loyal allies such as Canada were targeted. This dilutes the argument. Instead of specifically protecting security-relevant sectors, tariffs are even being imposed on T-shirts. But T-shirts contribute little to national security.
Let's take an example: rare earth raw materials are crucial for the construction of military missiles. But China has a virtual monopoly on these materials. That's a massive problem for the US.
Exactly. China is the dominant supplier, but the US can hardly exert any pressure on the country because it is so dependent on imports. In this area, it would be crucial for the US to establish alternative supply chains. Since the pandemic and the start of the war in Ukraine, many companies and governments have been working to make their supply structures more resilient. But tariffs cannot solve this problem. Tariffs make imports more expensive, but they do not create new mines.
So is Trump's security policy argument a pretext?
In many cases, yes. The security arguments are not entirely wrong, but they are greatly overstated. Essentially, it is a rhetorical device to make protectionist measures easier to sell.
Republicans boast that tariffs will generate new government revenue.
In the short term: yes. Every new tariff initially generates revenue. But in the longer term, it slows down economic growth. And when economic growth slows, tax revenues also rise more slowly. It is therefore by no means certain that tariffs will improve public finances in the long term. What is true, however, is that tariffs are politically easier to sell than new taxes. The US government can tell its voters: "Foreign countries will pay for this" – even if, in reality, domestic consumers will bear the burden. In truth, Donald Trump's tariffs are disguised taxes.
Does that mean that customs duties are unlikely to disappear again?
I assume so. Biden's administration has not withdrawn the tariffs imposed during Trump's first term in office. Politically, it is almost impossible to simply abolish tariffs given the current anti-globalization sentiment in the US. That is why the country will retain many of them – even if they are economically questionable.
Could the tariffs be dropped due to court rulings?
An American appeals court has ruled that the comprehensive tariffs cannot be justified on the basis of a national emergency law. However, the Supreme Court can still overturn this decision and has interpreted government powers very broadly in other areas. If the ruling should stand, the US government will likely reintroduce some of the tariffs on other legal grounds.
What are the consequences of US customs policy for Switzerland?
The situation is delicate. Switzerland initially assumed that the US would not impose so-called "reciprocal" tariffs because it doesn’t distort bilateral trade through tariffs on imports of US manufacturing goods, or by unfairly subsidizing domestic industries. However, because the Americans consider any trade deficit to be unfair, Switzerland was hit hard with rates of over 30 percent.
Many Swiss companies hope that tariffs will soon be lowered. Is there a chance of this happening?
Even the EU was only able to negotiate a reduction from 20 to 15 percent. I doubt that Switzerland will be able to drastically reduce its tariffs in talks with the US.
In the US president's economic policy, relationships with the White House count for more than good products. This undermines the efficiency of US companies, says economist David Dorn in an interview with Neue Zürcher Zeitung.
This interview by Jürg Meier & Lorenz Honegger was originally published in NZZ on 8.9.2025 in German. Translated and edited for layout purposes by the UBS Center.
Mr. Dorn, US Treasury Secretary Scott Bessent cited your studies in the Wall Street Journal as justification for higher tariffs and a departure from free trade. Was that your intention, or did he simplify your research for political purposes?
David Dorn (46) is UBS Foundation Professor of Globalization and Labor Markets at the University of Zurich. He heads the university-wide research program Equality of Opportunity. His work focuses on the consequences of globalization and technological change for labor markets and society. Dorn is considered one of the most cited economists of his generation and was awarded the Hermann Heinrich Gossen Prize in 2023. Visiting professorships have taken him to the University of California at Berkeley, Harvard, and the National University of Singapore, among others.
Researcher
UBS Foundation Professor of Globalization and Labor Markets
David Dorn is the UBS Foundation Professor of Globalization and Labor Markets at the University of Zurich and the director of the university-wide interdisciplinary research priority program “Equality of Opportunity.” He was previously a tenured associate professor at CEMFI in Madrid, a visiting professor at the University of California in Berkeley, and a visiting professor at Harvard University.
Professor Dorn’s research spans the fields of labor economics, international trade, economic geography, macroeconomics, and political economy. He published influential studies on the impacts of globalization and technological innovation on labor markets and society.
David Dorn is among the 100 most highly cited economists worldwide in the last decade. In 2023, he was awarded the Hermann Heinrich Gossen Prize for the most accomplished economist in German-speaking countries under the age of 45.
UBS Foundation Professor of Globalization and Labor Markets
David Dorn is the UBS Foundation Professor of Globalization and Labor Markets at the University of Zurich and the director of the university-wide interdisciplinary research priority program “Equality of Opportunity.” He was previously a tenured associate professor at CEMFI in Madrid, a visiting professor at the University of California in Berkeley, and a visiting professor at Harvard University.
Professor Dorn’s research spans the fields of labor economics, international trade, economic geography, macroeconomics, and political economy. He published influential studies on the impacts of globalization and technological innovation on labor markets and society.
David Dorn is among the 100 most highly cited economists worldwide in the last decade. In 2023, he was awarded the Hermann Heinrich Gossen Prize for the most accomplished economist in German-speaking countries under the age of 45.