🎧 Don’t forget! Our podcast discussing these topics is available on Spotify and Apple Music.
About ninety-five years ago, on March 13th, 1930, the United States enacted the Smoot-Hawley Tariff Act, one of the most infamous trade policies in history. Intended to protect American farmers and manufacturers during economic hardship, it backfired spectacularly—triggering international retaliation, collapsing global trade (with some economists estimating a decline of more than half), and deepening the Great Depression.
This historical example illustrates a broader truth: tariffs often work well as short-term tactical measures but typically fail—sometimes catastrophically—as long-term strategic policy.
Put simply, tariffs are taxes on imported goods, making foreign products more expensive relative to domestic alternatives. They are one of the oldest economic tools, dating back to ancient civilizations. But in today’s interconnected global economy, the calculus of when and how to deploy them has become increasingly complex.
When implemented judiciously and for limited periods, tariffs can serve several tactical purposes with considerable effectiveness.
Short-term industry protection is perhaps the most straightforward tactical application. When a domestic industry faces sudden competitive pressure—whether from technological change abroad or foreign subsidies—tariffs can provide breathing room. The U.S. steel industry, for instance, has periodically received tariff protection to adjust to market changes without immediate collapse, preserving jobs and communities in the short term.
As negotiation leverage, tariffs excel. In 2018, when the United States imposed tariffs on South Korean steel, it quickly secured concessions in the United States–Korea Free Trade Agreement (KORUS) trade agreement. The tariffs themselves weren't the goal; they were the means to bring reluctant partners to the negotiating table. This approach works because the threat of economic pain creates an urgency that diplomatic niceties often cannot.
In response, South Korea negotiated an exemption from these tariffs by agreeing to limit its steel exports to the U.S. to 70% of the average export volume between 2015 and 2017. This agreement coincided with revisions to the United States–Korea Free Trade Agreement (KORUS FTA), where South Korea made concessions, such as increasing the number of U.S. automobiles that could be sold in the Korean market without meeting local safety standards.
Governments have also historically used tariffs for revenue generation—particularly before the advent of income taxes. Even today, developing countries with limited tax collection infrastructure can quickly implement tariffs at ports and borders where monitoring is relatively straightforward.
The political signaling value of tariffs shouldn't be underestimated either. When a government imposes tariffs to protect a specific industry, it sends a powerful message to affected workers and communities: "We see your struggles and are taking action." This perception of responsiveness can yield political benefits even when the economic benefits are questionable.
The 2020 "Phase One" trade agreement between the United States and China serves as an example of using tariffs as a tactical measure to achieve specific objectives. By imposing significant tariffs on Chinese goods, the U.S. secured commitments from China on intellectual property protection and increased agricultural purchases—areas where previous administrations had struggled to make progress. These tariffs were intended as temporary tools to facilitate negotiations and were partially rolled back upon reaching the agreement.
Key aspects of the Phase One agreement include:
Intellectual Property Commitments: China agreed to enhance its legal framework to protect intellectual property rights, addressing issues such as trade secrets, patents, trademarks, and enforcement against pirated and counterfeit goods.
Agricultural Purchases: China committed to increasing its imports of U.S. agricultural products by at least $12.5 billion in 2020 and $19.5 billion in 2021, compared to 2017 levels, aiming to reach a total of $80 billion over two years
However, it's important to note that while the agreement set ambitious targets, analyses indicate that China ultimately purchased only 58% of the U.S. exports it had committed to under the deal, falling short of the additional $200 billion target.
This underscores how tariffs can be employed tactically to bring about specific concessions in trade negotiations. Nevertheless, the partial fulfillment of commitments also highlights the challenges in enforcing and achieving all objectives within such agreements.
Despite these tactical advantages, tariffs generally fail when deployed as long-term strategic policy, for several well-documented reasons.
The most immediate problem is the retaliatory cycle that tariffs typically trigger. Trade partners rarely accept tariffs passively; they respond with counter-measures targeting politically sensitive exports. When the U.S. imposed steel tariffs in 2018, the EU quickly retaliated with tariffs on American bourbon, motorcycles, and agricultural products—specifically chosen to affect states important to U.S. electoral politics. These tit-for-tat exchanges can quickly escalate beyond the original sectors, harming exporters who had nothing to do with the initial dispute. We can see the same retaliatory cycle playing out currently with Canada.
The consumer costs of tariffs are substantial but often invisible to the public. Economists widely agree that the burden of tariffs falls primarily on domestic consumers and businesses, not foreign exporters. The 2018-2019 U.S. tariffs on washing machines, for instance, raised prices significantly according to several economic studies. Research from the University of Chicago and Federal Reserve found that consumers paid 12% more for appliances after these tariffs were imposed, with the cost per job saved in the domestic appliance industry likely measuring in the hundreds of thousands of dollars. These higher prices act as a regressive tax, disproportionately affecting lower-income households.
Long-term tariffs also create efficiency losses by insulating domestic producers from competition. Protected industries typically underinvest in innovation, knowing they can maintain market share without improving their products or processes. The American automobile industry's long decline in the late 20th century highlights this problem. Decades of protectionism left U.S. automakers ill-prepared for global competition, a challenge now mirrored in the EV sector as Chinese firms outpace Tesla in battery technology and price competitiveness.
Modern supply chain disruption represents a relatively new complication. Today's products often cross borders multiple times during production. When intermediate goods are tariffed, the costs cascade throughout manufacturing networks, often harming the very industries the tariffs aimed to protect. For example, tariffs on imported steel might help domestic steel producers but harm the much larger automobile, construction, and appliance industries that use steel as an input.
The diplomatic deterioration caused by sustained tariff policies can't be overlooked. Trade relationships don't exist in isolation—they're embedded in broader diplomatic contexts involving security cooperation, environmental agreements, and cultural exchanges. When trade relations sour, cooperation in these other domains typically suffers as well.
The Smoot-Hawley Tariff Act mentioned earlier provides a stark historical case study. What began as an attempt to protect American farmers contributed to a two-thirds collapse in world trade, deepened the Great Depression, and poisoned international relations during a critical period before World War II. The economic and geopolitical consequences were so severe that the legislation has become synonymous with misguided protectionism in economic textbooks.
The effects of tariffs depend on how they're implemented—a factor currently being disregarded in policy discussions.
Gradual versus sudden implementation creates vastly different market reactions. When tariffs are phased in over months or years, businesses can adapt their supply chains, negotiate with suppliers, or develop alternative sourcing. The Trans-Pacific Partnership, for instance, included tariff reductions scheduled over decades for sensitive industries, allowing for gradual adjustment. By contrast, sudden tariff shocks can cause immediate price spikes, inventory shortages, and even bankruptcies as businesses scramble to respond.
Whether tariffs are signaled as temporary or permanent fundamentally changes how markets respond. Businesses are more likely to absorb temporary costs rather than make expensive supply chain adjustments. When tariffs are presented as permanent strategic shifts, however, companies make long-term investments to adapt—moving production facilities, changing suppliers, or exiting markets entirely. These structural changes can persist even if the tariffs are eventually removed.
Markets can adapt to almost any rules given sufficient time and clarity. Unpredictable trade policy—where tariffs might appear or disappear with little warning—creates an environment where businesses delay investments and hold excessive cash reserves to manage uncertainty. This dampens economic growth regardless of whether tariffs are high or low at any given moment.
The contrasting approaches of the 1994 NAFTA implementation versus the 2018-2019 or even U.S.-China trade disputes illustrate these principles. NAFTA's tariff reductions were scheduled, transparent, and gradually implemented over 15 years for sensitive sectors, allowing businesses to adapt methodically. The U.S.-China disputes, by contrast, featured sudden escalations, unclear objectives, and unpredictable exemptions, creating business uncertainty that amplified the economic damage beyond the direct effects of the tariffs themselves.
The empirical record on long-term tariff strategies is remarkably consistent across different periods and regions.
Countries that have maintained persistently high tariff barriers have generally experienced slower economic growth than those with more open trade policies. Multiple World Bank and academic studies examining economic performance across decades have consistently found that countries with more open trade policies experienced significantly higher growth rates than those with closed economies.
These growth differentials appear linked to several factors. Protected economies typically show lower productivity growth as domestic companies face less pressure to innovate. They attract less foreign direct investment, limiting technology transfer. And they develop smaller export sectors, missing opportunities to achieve economies of scale by selling to global markets.
The consumer welfare impacts of protection are significant. Studies consistently show that tariff reductions lead to increased variety, higher quality, and lower prices for consumers. The North American Free Trade Agreement, for instance, substantially reduced prices of many affected goods for U.S. consumers—a benefit that accrued disproportionately to lower-income households who spend larger percentages of their income on tradable goods like clothing and food.
The academic consensus on these issues is unusually strong for a field often characterized by theoretical disagreements. Surveys of professional economists, such as those conducted by the University of Chicago's Initiative on Global Markets, have consistently found overwhelming agreement with statements supporting the economic benefits of free trade. The vast majority of economists across the political spectrum agree that freer trade improves productive efficiency and offers consumers better choices, with long-run gains that typically outweigh short-term employment effects.
This doesn't mean that trade liberalization creates no losers—it certainly does—but rather that the overall economic effects of tariff reduction are positive in most circumstances. This allows countries to focus on their comparative advantages, leading to more efficient global resource allocation and economic growth.
Despite the general case against strategic tariff use, several limited exceptions warrant consideration.
The infant industry argument suggests that truly nascent industries with strong potential for future competitiveness might benefit from temporary protection. South Korea's successful development of world-class steel and automobile industries began with protective tariffs in the 1960s and 1970s. However, these protections were gradually removed as the industries matured, and they were accompanied by strong export promotion—forcing the protected companies to remain internationally competitive despite their sheltered domestic markets.
National security considerations sometimes justify tariff protection for strategic sectors. The U.S. maintains capacity in certain specialized steel products for defense applications, even when imports might be cheaper. However, this argument is frequently overextended to industries with limited genuine security implications.
Tariffs can sometimes address market failures like dumping (selling below cost to gain market share) or heavily subsidized foreign competition. In these cases, tariffs can level the playing field rather than distort it. However, determining when foreign pricing truly constitutes dumping rather than legitimate cost advantages can be challenging and subject to political influence.
The success of strategic tariffs often depends on whether they're part of a paired policy approach that addresses underlying competitiveness issues. Protection that merely preserves the status quo typically fails. Protection that buys time for worker retraining, technology adoption, and business model evolution can occasionally succeed.
"Those who cannot remember the past are condemned to repeat it," philosopher George Santayana famously wrote. This observation applies perfectly to the cyclical nature of tariff policies throughout economic history. The evidence is clear: tariffs excel as tactical instruments but typically fail as strategic policy. They can effectively address short-term challenges, force negotiations, and signal political responsiveness. But as long-term economic strategies, they generally reduce growth, harm consumers, and trigger counterproductive cycles of retaliation.
For policymakers, the implications are straightforward but politically challenging. Tariffs should be used sparingly, with clear objectives, defined timelines, and careful implementation. When deployed, they should be part of comprehensive approaches that address the root causes of competitive challenges rather than merely treating symptoms.
The next four years of international trade will undoubtedly include tactical tariff use. The challenge for governments is resisting the temptation to convert these tactical tools into permanent features of economic policy—a conversion that history suggests leads to reduced prosperity and increased international tension. In trade as in many domains, the best tactics serve clear strategies; they don't become strategies themselves.
Appo Agbamu, CFA is the Founder and CEO @ Ahrvo Labs Inc. Ahrvo Labs develops, markets, and sells compliance, payment, and banking solutions. Agbamu earned a B.Acc. in Accounting and a BBA in Economics, w/a minor in Financial Markets from the University of Minnesota. In addition, Agbamu is a Chartered Financial Analyst (CFA) charterholder.
Ahrvo Labs offers businesses solutions that optimize payment, banking, and compliance processes. Our Portable Identity Gateway features a single onboarding process that provides access to over 800 financial service providers worldwide. With secure global transactions and a commitment to regulatory compliance, our cutting-edge gateway is designed to simplify workflows and streamline operations for businesses. Learn more @ https://ahrvo.com
No posts
Comments
Nothing yet. Say the first thing.
Sign in to join the conversation.