Tariff Paper: Evaluating Trump’s Recent Tariff Policy

Apr 28, 2025

Throughout history, empires have primarily fallen because of five major causes: monetary bubbles, internal conflicts, international conflicts, environmental shocks, and rapid technological changes. As the world’s current superpower, three of these five forces are readily apparent in the US: mounting levels of government debt, rising political tensions, and a shifting world order towards unilateralism. The confluence of these events is changing the world we live in. The political right has long blamed unfair trade as the source of America’s challenges, championing protectionist policies to “Make America Great Again.” By way of his election victory in November, Trump was given a strong political mandate to implement his policies. Yet, I argue a trade war will hurt US consumers, which have undoubtedly been the biggest winners of trade liberalization. This paper will analyze Trump’s view on tariffs to evaluate whether they threaten to accelerate changes that threaten the prosperity of the US economy.

Tariffs are just an excise tax on imported goods and not specific ones like tobacco or alcohol designed to reduce demand. Excise taxes are either specific (the federal tax is $1.01 per pack of cigarettes) or ad valorem (like the VAT in Europe, or the 7.5% tax on every U.S. airline ticket that funds the FAA). Tariffs fall into the ad valorem category (based on the transaction value of imported goods). In economics, this raises prices and shifts the demand curve left, reducing supply (though the degree of response varies by industry depending on price elasticity). The US consumer is not likely to reduce demand, so the key question is: what will the supply response be?

Trump believes it will be to add the lost capacity from imports in the US to meet US demand, adding back jobs to the economy. In a recent interview with PBS, Robert Lightzer, Trump’s former US Trade Representative, cited that Trump’s policies directly added 500,000 manufacturing jobs from December of 2016-2019. As Lightzer explains it, Trump’s tariffs are either being used as a bargaining tool to change economic relationships with other countries or for national security reasons. For the former, despite Trump claiming tariffs will increase government revenues, his team suggests they are really being used to rebalance trade deficits with US trading partners. In the latters case, there are certain industries that Trump believes are vital to US national security and therefore need to be produced domestically, such as aluminum and steel, which he implemented Tariffs on in 2018. Importantly, in a recent interview with Bloomberg, Treasury Secretary Scott Bessent stated that tariffs in Trump’s first term increased prices just 0.7% and stressed they were a one time price adjustment, fighting back against main-streets view that tariffs will raise inflation. Given Trump’s policy goals, it is important to first analyze the present: what are the core issues driving Trump and his team to hold this protectionist view.

Firstly, the US debt-to-GDP ratio is currently ~100%, the largest it has been in the Post War period. Debt needs to be serviced, currently at the rate of ~4.3% for 10-year bonds, adding to government expenditures which operates an annual budget deficit of ~$1.8 trillion. Historically, excessive debt issuance, whether it be from stocks, bonds, or treasuries has occurred cyclically, and eventually became too large, causing economic collapse (think Spain in the 16th and 17th century). As this budget deficit widens, US bond auctions continue to grow in size and bond yields should, in theory, continue to rise, as investors want to be rewarded for taking increased risk. Although, given its “exorbitant privilege” and being the reserve currency of the world (the US needs to run deficits in order to grow the global money supply), investors largely believe the US is still able to handle its debt load. However, the second largest line item on Congress’s spending bill is interest on its debt, and my point remains: once a country's interest payments exceed its income, that is a problem. This topic is worthy of a paper itself, so to quote Ray Dalio’s Principles for Navigating Big Debt Crises, which gives an excellent insight into this issue, given the US current fiscal path, “we will eventually have a debt problem.” To Trump, rebalancing the US trade deficit is core to reaching a sustainable fiscal position.

The second force apparent today is rising domestic fissures, driven not only by political differences between the left and the right, but differences in wealth and values. Wealth inequality in particular has skyrocketed, with the richest 400 Americans in 1983 being worth a combined $83 billion, while today that number stands at $5.4 trillion. Regardless of the cause, polarization is disrupting the political order, tearing apart the middle, as voters are increasingly voting for extremism on both sides of the political spectrum. Republicans have found their scapegoat in the trade deficit, blaming foreign nations for ripping off the US.

Finally, there is a conflicting world order between primarily the US and China. If a rising power challenges the dominant power, historically times have moved from a period of multilateralism, or in this case an American world order, to unilateralism. Studies, such as The China Shock, argue that China's integration into global trade after 2000 directly led to job losses and wage pressure in the US. China’s GDP is $17.8 trillion, rising 9% on average between 1990 to 2020, which lifted 800 million people out of poverty. The US currently imports $438.9 billion worth of Chinese goods, compared to $143.5 billion which it exports to China. Therefore, economists argue hyperglobalization with China, characterized by their entry into the World Trade Organization in 2001, has not resulted in trade liberalization that benefited both countries, making it a scapegoat for political leaders. Therefore, Trump stands at the front of this criticism against unfair trade with China and other countries, as he believes they are threatening America’s supremacy.

Lighthizer put the administration's view on free trade well, saying “free trade has not failed because it doesn’t work, it has failed because it doesn’t exist.” In his view, other countries use aggressive industrial policy, whether it be tariffs, currency manipulation, favorable banking systems, tax laws, or labor and environmental regulation to their advantage, while the U.S. over-consumes and under-produces. In his book No Trade Is Free, he writes that producing more and consuming less is how a nation gets rich. For Trump, reordering global trade is not only fair, but essential for American prosperity.

Therefore, on April 2nd, Trump instituted a 10% baseline tariff on all countries (ironically even those in which we hold a trade surplus with), and others with much higher rates targeting China (84%), Cambodia (49%), and Vietnam (46%) to name a few. However, after these tariffs were instituted, the dollar weakened substantially, falling 5% against the pound, 6% against the Euro and Japanese Yen. Furthermore, the risk-free rate of U.S. treasury bills skyrocketed past 4.7%. The market also cratered, with the key indices such as the NASDAQ declining more than 20% and the S&P 500 declining more than 18%. As the US faces the confluence of the three conflicts I mentioned earlier, the markets, as well as many economists, seem to believe tariffs will increase long-term inflation and thwart economic growth, directly contrasting Trump. However, I am curious about the history of tariffs? Is there anything we can learn from the historical use of tariffs that could educate us on how Trump’s policies of today will impact the future?

The German economist Friedrich List (1789-1846) was one of the first advocates of liberal trading policies, pushing the German state to implement Zollverein (free trading bloc). However, as a dissenter of the father of economics, Adam Smith, List also believed the protective tariff was essential for nations in the middle stage of development with the requisite natural and human resources to industrialize. This became known as the “infant industry” protection argument. As he saw it, tariffs were not useful for a country in the early stages of development, and not necessary for countries in a fully developed stage. The US, early on, precisely fit this model. Beginning with Alexander Hamilton’s Report on Manufactures and Henry Clay’s “American System,” which became a euphemism for industrial development under the shelter of tariffs, the U.S. adopted a protectionist posture.

Tariffs became the main source of government revenue, but created an ironic dilemma: embarrassing surpluses. (To be clear, a large deficit is dangerous, especially when interest payments outpace government income, but a surplus also hurts the economy by taking money out of circulation, slowing down growth.) In the 21 years from 1815 to 1836, 18 were surplus years. By 1836, the federal debt had been extinguished completely! This fiscal problem persisted, even though the depression of 1837 and the Civil War (1861-1865). Interestingly, the Civil War was an inflection point for trade policy, as the South supported trade liberalization. European trading partners were their core export market, as well as their core import market, given their insatiable desire for luxury European goods. However, following the North’s victory, protectionism came to dominate the next 70 years of US trade policy.

Culminated in the Smoot-Hawley Tariff Act of 1929, raising duties to 40–50%, tariffs became a manifestation of short-term policy thinking and industrial greed. John Maynard Keynes (1883-1946), the preeminent 20th century economist, saw many problems with trade liberalization and persistent trade imbalances. Therefore, he supported the use of broad tariffs to boost employment, government revenue, and national prosperity. However, this abandoned the original strategic logic of the “infant industry” protection argument. Rather than benefiting the US, the Smoot-Hayley tariffs exacerbated economic disparities, increased political turmoil within America, failed to raise substantial government revenues, and triggered international retaliation, severely restricting global trade flows. Canada imposed tariffs of up to 30% on US farm goods and over two dozen other countries also raised duties on American industrial products. Between 1929 and 1933, US exports fell by 66%, from $5.24 billion to $1.76 billion, as global trade contracted sharply. At the time, unemployment was already rising and stood at 8.7% in 1930 before the Smoot-Hawley Tariff was signed in June, but after its implementation, it soared to nearly 25% by 1933. Therefore, tariffs undoubtedly deepened the Great Depression causing policy makers to change their stance on free trade.

Post-World War II trade policy marked a significant shift, as the US moved towards trade liberalization. Franklin Roosevelt, led by his Secretary of State Cordell Hull, reversed the protectionist thrust with a series of reciprocal trade agreements. These included the General Agreement on Tariffs and Trade (GATT) and later the North American Free Trade Agreement (NAFTA), which reduced trade barriers and increased global economic integration. As a result, the long-run economic logic of trade liberalization reasserted itself: remove tariffs, and labor eventually reallocates into industries in which that country holds a competitive advantage. For the US, this was namely services. The US economy has in effect upgraded from lower paying manufacturing to high paying services, which now account for roughly 80% of GDP and 85% of private sector jobs.

The US is undoubtedly the biggest winner of trade liberalization: since 1945, US GDP has grown from under $250 billion to over $25 trillion, and its share of global GDP in nominal terms remains around 25%. Trade liberalization led to the US enjoying the highest GDP per capita amongst large, developed nations and undoubtedly strengthened America’s position as the world’s superpower.

Yet despite the US being the largest overall beneficiary of trade liberalization, the internal fractures I mentioned earlier have fueled resentment and a search for scapegoats. Much of the outsourcing and industrial decline was not driven by foreign manipulation, but by American firms looking to increase their profit margins via outsourcing. Still, the political right, embodied by Trump, seized on China and global trade as the culprits. But what have we learned?

Protectionism, isolationism and nativism go together as they did in the 20s and 30s, where the industrial revolution displacing farming was not unlike the tech revolution of today displacing manufacturing and enabling a service economy. Starting a trade war is misdiagnosing the root cause of America’s “stagnation.” As Michael Pettis and Matthew Klein argue in Trade Wars Are Class Wars, trade imbalances don’t arise from nations competing, but reflect class conflicts within nations themselves. Countries like China and Germany run trade surpluses because they suppress wages and depress domestic demand, forcing them to rely on foreign consumers to absorb their over production. In turn, deficit countries like the US don’t see rising household debt and weakened domestic industries because they import too much, but because the lower and middle class, who have yet to upgrade to services, lack the income to compete.

Tariffs, in this view, are a policy mistake. Rather than increasing domestic investment and raising incomes, tariffs treat the symptoms: raising prices for consumers and distracting them from internal class conflict and inequality. Overall, the net effect will lead to less growth, making consumers worse off.

If Trump’s reasoning follows that of Ross Perot, who fought against Bush on the hollowing out of America in the 80s when we had a trade war with Japan, that we must right a wrong and bring back jobs to the middle class, another adequate example is Europe. Ask yourself if Europe, which has high tariffs to protect certain industries, has really done so? Have 46.6% EU Commission imposed tariffs protected Germany's auto industry from Chinese EV competition? Germany and Europe certainly took away all other EU auto capacity as Italy, France and UK couldn't compete with their subsidized manufacturing, but did it save these manufacturing jobs in the end? Yes, up to a point, they did, but it arguably delayed the inevitable: when the cost of production gets too high and innovation gets stifled. As Mario Draghi recently pointed out, Europe and especially Germany has much to make up after artificially protecting industrial jobs which it doesn’t hold a comparative advantage in, especially in leading edge technologies.

Applying my analysis, leads me to hold this view: tariffs thwart growth and are negative. Yet one critical point still remains. Although the largest US companies dominate global innovation, do supply chain bottlenecks under the China-sphere make reallocating these industries into the US vital to US sovereignty? To some extent, I agree. Certain industries are critical to the US and given current US-China relations, such as semiconductor manufacturing (of which nearly all the leading edge GPU chips are made in Taiwan), should be produced in the US. But I have three key points here.

Firstly, I believe it is fair to argue that current protectionist policies are simply causing further international divisions, especially with US allies. However you may view China, the method Trump used to reach his tariff numbers was unclear and I believe will lead to further isolationism. History has taught us this is bad. Rebalancing the US trade deficit and protecting core industries are the right issues, but the way Trump has gone about it has done more harm than good. Secondly, this does not take away from the argument that tariffs will thwart growth. As you may argue these industries are critical, moving these industries into a country that does not hold a competitive advantage in their production will still lead to increased prices! (The new supply curve will likely have a cost structure which clears the market at a higher price than before). Finally, protecting lower paying manufacturing jobs is still the wrong policy (remember Europe). Yes, the US should protect crucial, high paying manufacturing jobs such as semiconductor manufacturing, but history has taught us that US prosperity (measured by GDP per capita) has improved the most from trade liberalization, where the US transformed its economy to be service oriented. Reallocating resources to retrain our workforce into higher paying services jobs will raise wages and the US standard of living.

But what about services, especially those deeply embedded in intellectual property, like movies or pharmaceuticals, or tax-optimized countries, such as Ireland and Luxembourg, which have historically been difficult to tax? These nations produce little in tangible output, but serve as offshore vehicles to reallocate profits generated in the US, this siphons US tax revenues to their own coffers under the guise of globalization. Imposing targeted tariffs on IP-heavy imports or profit-shifting multinationals would be less about trade in goods and more about correcting structural imbalances. Rather than penalizing US firms with high domestic tax rates, a smarter approach might be to impose steep tariffs on countries exploiting tax loopholes and lower tax rates for profits earned and retained within the US economy.

In economics, the follow-up question is always: and then what? As a modern famed economist, Milton Friedman (1912-2006) famously said, “we call a tariff a protective measure. It does protect; it protects the consumer very well against one thing. It protects the consumer against low prices.” History has taught us tariffs will undoubtedly raise prices and lower economic growth, while trade liberalization has brought the opposite (once again, by how much depends on the new cost curve). As I mentioned, addressing the budget deficit and protecting core industries is important to national security, but the benefits of upgrading to a service based economy, as a result of trade liberalization, can not be overlooked. If history is any guide, protectionism may feel patriotic, but it is irrefutably harmful.

Bibliography:

Books:

Trade Wars are Class Wars by Michael Pettis

No Trade is Free by Lighthizer

History of Economics by John Kenneth Galbraith

Principles of Debt Crises by Ray Dalio

The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade by David H. Autor, David Dorn & Gordon H. Hanson

Websites:

https://www.statista.com/statistics/269960/national-debt-in-the-us-in-relation-to-gross-domestic-product-gdp/

https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en

https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/

https://www.cnbc.com/