Trump and tariffs have become so synonymous that you cannot talk about one without naming the other. Once considered bad and economically devastating, tariffs have once again become part of our lives, directly or indirectly. Are tariffs inherently bad, or are they misjudged through the free-trade lens? The answer, as economic theory and historical evidence suggest, is more nuanced than either side admits.
How Tariffs Impact the Economy?
Assume a country imposes tariffs on all imported products. It used to produce some wheat and even import some to feed its population. Now imported wheat gets costlier. But traders see that they could increase the prices of domestic wheat to some extent, too. That's how inflation slowly creeps in. If the country doesn't produce wheat at all, then people must buy it at a higher price.
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After such a shock, people postpone non-essential spending, firms delay investment as supply chains become uncertain, and employment weakens before inflation even appears in the rest of the economy. Slowly, economies adjust structurally by rerouting supply chains, often toward third countries rather than domestic producers, unless producing within the country is cheaper and feasible. Although the economy may stabilise over time, productivity and inflation-adjusted incomes tend to drop.
History Is Repeating
The Smoot-Hawley Tariff Act of 1930 is a classic case of tariffs backfiring. It is often blamed for starting the Great Depression. US imports did fall sharply, but most of the economic pain came from other factors such as falling incomes, global financial chaos and retaliatory tariffs from other countries, not just the Smoot-Hawley tariffs. Still, it made things worse by sparking trade wars and breaking down global cooperation when the world needed stability. Well, the current situation looks familiar.
When Are Tariffs Justified?
One of the most common and defensible reasons for imposing tariffs is price arbitrage: when identical or similar goods are sold at vastly different prices across markets due to subsidies, dumping, exchange-rate distortions, or regulatory gaps. Customs duties act as a price-adjustment mechanism. That way, imports compete on more comparable terms with the domestic industry. When customs duty is lower than such a competitive price, the domestic industry loses and rushes to the government to impose additional duties.
Developing countries often use tariffs to help new industries grow. Many East Asian countries followed it but kept it strategic rather than imposing it permanently. They succeeded. In Latin America and pre-1991 India, the scenario has been different. There, the protection was the state's default policy, leading to inefficiency, inflation, and chronic balance-of-payments crises. Recently, tariffs have also been used for national security and environmental protection, such as the Carbon Border Adjustment Mechanism (CBAM) in Europe. Therefore, tariffs can work if they are temporary and targeted to achieve a purpose.
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Myth of Free Trade
For many decades, economists and policymakers - especially in advanced economies - touted free trade as an almost universal good. They have even pressured or compelled other countries to follow it by portraying that this was the obvious way towards economic progress.
However, the reality was complicated. Many developing economies indeed grew. But it also brought premature deindustrialisation, a low domestic manufacturing base, persistent trade deficits, and greater vulnerability to external shocks, especially in countries with weak institutions, safety nets, and industrial policy frameworks.
Then, studies about the "China shock" proved that free trade even backfired in advanced economies. Industrial production moved to China, causing factory closures in rich nations. Those industrial regions not only saw job losses but also faced lasting social problems. The 2008 financial crisis worsened inequality, leading to political backlash.
In fact, those struggling regions in the US became the main vote bank for Donald Trump in 2016. Experts argue that the problem was not trade itself, but the failure of states to manage its distributional consequences.
Reviewing Trump's Tariffs
Let's talk about Trump's tariffs. Although his narrative of bringing those factories and jobs, which once formed the backbone of the US industry, back to the US may seem right, his style is vivid and messy. Instead of targeted tariffs, they're broad-based, taxing everything from raw materials to finished goods. Plus, they're unpredictable; changing according to his whims, legal issues and diplomatic drama. Moreover, Trump uses tariffs to fix everything: raising revenue, reshoring jobs, reindustrialising America, and pressuring other countries. But tariffs aren't built to solve all these problems.
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Final Take
So, let's be clear. Tariffs can help countries build domestic industry and negotiate better trade deals. But what matters most is that they must be low, predictable, targeted, and conditional - not high, permanent, universal, or politically impulsive. They are powerful, like guns. Having them does not make anyone a villain, but if they go in wrong hands, they can be dangerous.
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