by: Dr. Muhammad Farhan Basheer
Tariffs have long been a contentious issue in global trade, serving both as a protective measure for domestic industries and a tool of economic coercion. The core idea behind imposing tariffs is simple—tax foreign goods to shield local industries from external competition and generate government revenue. However, history has shown that tariffs can have unintended consequences, leading to economic downturns, inflation, and retaliatory trade wars.
The United States is once again at the centre of this debate, having imposed tariffs on major trading partners such as China, India, Canada, and Mexico to reduce its trade deficit and revive domestic industries. The Trump administration took an aggressive stance, using tariffs as a key foreign policy instrument to address long-standing grievances, including intellectual property theft and unfair trade practices. While these measures promised long-term benefits, they also brought significant risks, such as inflation and economic instability. The use of tariffs in the U.S. is not new. One of the most infamous examples is the Smoot-Hawley Tariff Act of 1930, designed to protect American farmers and manufacturers during the Great Depression. Instead of stimulating the economy, the act triggered widespread retaliation from other nations, reducing global trade and deepening the economic crisis. Similarly, in the 19th century, Britain and France engaged in a tariff war that hurt industries on both sides, illustrating the perils of protectionist policies. That said, tariffs have also played a role in U.S. industrialization. In the late 19th and early 20th centuries, high tariffs helped protect nascent American industries such as steel and textiles, allowing them to grow and compete globally. However, this protection came at the cost of higher consumer prices and trade tensions.
Fast forward to today, and the U.S. faces a significant trade deficit, particularly with China, which reached $295.4 billion in 2024. For decades, American consumers have relied on inexpensive Chinese goods, leading to a trade imbalance where imports vastly exceed exports. In response, the Trump administration-imposed tariffs on $370 billion worth of Chinese products, citing not only economic concerns but also national security risks and intellectual property violations. India, with a $45.7 billion trade deficit with the U.S., has also faced increased tariffs amid broader trade negotiations. Washington has argued that India’s market remains too restrictive for American businesses. Meanwhile, tariffs imposed on Canada ($63.3 billion trade deficit) and Mexico ($171.8 billion trade deficit) under the Trump administration were part of the renegotiation of NAFTA, which resulted in the United States-Mexico-Canada Agreement (USMCA). The objective was to bring manufacturing jobs back to the U.S., particularly in industries like steel, aluminium, and automobiles. Collectively, the trade deficits with these four countries account for nearly 50% of the total U.S. trade deficit, making them key targets for tariff-based policy interventions.
While tariffs aim to protect domestic industries, they come at a price. When foreign goods become more expensive, domestic businesses and consumers bear the burden. Companies that rely on imported raw materials—such as steel and aluminium—face higher costs, forcing them to either raise prices or cut costs through layoffs and reduced investment. Consumers, in turn, pay more for everyday goods, contributing to inflation. For example, during the U.S.-China trade war, studies estimated that tariffs cost the average American household between $500 and $1,300 per year due to higher prices on imported goods. Similarly, after the imposition of steel and aluminium tariffs in 2018, American manufacturers saw increased production costs, leading to higher consumer prices and retaliatory tariffs that hurt U.S. agricultural exports, particularly soybean farmers.
Beyond inflation, tariffs can trigger retaliatory measures from other countries. China, for instance, responded to U.S. tariffs by imposing its own duties on American agricultural products, making it harder for U.S. farmers to compete in global markets. This tit-for-tat strategy creates economic uncertainty, discourages investment, and slows economic growth. A historical parallel can be drawn to the 1980s, when the U.S. imposed restrictions on Japanese automobile imports. While these measures temporarily boosted domestic car manufacturers, they also resulted in higher vehicle prices for consumers.
Despite these challenges, proponents argue that tariffs can be beneficial in the long run. By making foreign goods more expensive, tariffs encourage domestic businesses to expand, invest in new technologies, and create jobs. The Trump administration’s tariffs were also part of a broader geopolitical strategy to apply economic pressure on adversaries and negotiate better trade deals. For example, the USMCA introduced stricter labor laws in Mexico to prevent unfair wage competition, which could ultimately benefit American workers. Additionally, historical evidence suggests that strategic tariff policies played a role in the U.S. industrial boom of the late 19th and early 20th centuries, helping transform the country into an economic powerhouse.
Under the Biden administration, tariffs remain a critical tool in trade policy, but the approach has shifted towards diplomacy and alliance-building. While Biden has retained many Trump-era tariffs, his administration has worked to ease tensions with allies while maintaining a firm stance against China. The challenge now is to balance protectionism with stable trade relationships. A more nuanced approach involves selectively targeting industries where unfair competition exists while ensuring that consumers and businesses are not disproportionately affected. Additionally, tariffs should be complemented by robust trade negotiations to maintain U.S. competitiveness and avoid unnecessary trade conflicts. Investment in domestic industries, worker training, and infrastructure development can help mitigate some of the adverse effects of tariffs and strengthen economic resilience.
The story of tariffs is one of economic strategy and unintended consequences. While they offer protection and promise industrial revival, they also risk inflation and trade wars. However, with a careful and calculated approach, tariffs can serve as a strategic tool not only for economic protection but also for foreign policy leverage. If managed wisely, tariffs can strengthen U.S. businesses, encourage fair global trade, and contribute to long-term economic stability. The key lies in balance—ensuring that protectionist policies serve as a bridge to economic resilience rather than a roadblock to global cooperation. With a forward-thinking approach, the U.S. can navigate the complexities of global trade, turning short-term challenges into long-term opportunities for growth and stability.
