“President Trump loves tariffs. He said, It's one of the most beautiful words in the English language,” said American historian, trade expert and John French Professor of Economics at Dartmouth University, Douglas Irwin. “When a boy has a hammer, everything to him looks like a nail, and he just wants to pound away. And so, he aims to achieve diplomatic, strategic, military, and economic objectives – and everything can be accomplished through tariffs. He really likes them as an instrument.”
From his very first days in office, President Trump did not conceal his sympathy for tariffs. In his inauguration speech at the start of the year, he promised “to tariff and tax foreign countries to enrich our citizens.”
And although the US president had made use of tariffs during his previous term, economists interviewed by LRT.lt emphasise that this time tariffs may have even greater consequences for business and the global economy. So, what does Trump want to achieve with tariffs, and why does he adore this instrument?
What does the White House expect from tariffs?
“The broad theme that they've always mentioned is that other countries are ripping off the US. The US has a trade deficit, which means that we buy more from other countries than they buy from the US, and that's unfair in some way,” explained Professor Irwin.
One of the reasons why Trump began threatening the world’s states with tariffs so quickly is the revenue they generate for the government. A tariff is an import duty – an obligation on imported goods, set by and accruing to, in this case, the US government.
“We just had a big budget bill that cut taxes, and so we're going to be losing revenue from that. This is a way of making up some of that lost revenue,” said the Dartmouth professor.
Like any other trade policy, tariffs create both winners and losers. “I think US producers are the biggest winners, and perhaps the only winners from this tariff policy,” said Varan Kitayaporn, Visiting Assistant Professor at Beloit College, Wisconsin, who researches international trade and its impact on developing economies. “Domestic producers used to have to compete with, you know, imported goods which are much cheaper. Now they don't have to do that anymore”.
Yet Professor Irwin noted that many US manufacturers that previously relied on cheap imports as a source of supply are now facing higher costs: “So, Ford and General Motors require a lot of steel, but we're putting very stiff tariffs on imported steel, and that's raising the costs for domestic automakers now. Foreign automakers don't have to pay higher steel costs because they don't have that sort of tariff. So, it's actually hurting us, manufacturing and other industries, where cheaper inputs as a source of supply are required.”
Companies unwilling to pay tariffs are encouraged to shift production to the US. This is one of President Trump’s objectives – to use tariffs as a bargaining tool to open foreign markets, allowing the US to manufacture and sell more goods abroad and thereby reduce the trade deficit.
The consequences
The impact of such a policy abroad is already visible. For example, in Lesotho, whose economy is heavily dependent on access to the US market, the mere threat of tariffs last month triggered a crisis in the textile industry.
But Professor Irwin stressed that disrupting cheap foreign production does not necessarily mean immediate economic growth or new jobs in the US:
“Textiles are a very labour-intensive process, and so even if you have 20-, 30- or 40 percent tariffs, that may not be enough to compensate for the higher costs of producing in the US.”
As Professor Kitayaporn pointed out, “We don't buy Chinese t-shirts because we love Chinese producers. We buy that because the Chinese can produce more cheaply than our neighbours here, in Wisconsin.”
In his view, it is unrealistic to expect companies to invest in sectors where Americans are not efficient. The strength of the US industry lies in high-skill sectors:
Even if companies start a new manufacturing project in the US, that “doesn't mean that they are going to create a lot more jobs, more likely they will start with a lot of automation and just hire a few high-skilled engineers, instead of a great amount of low-skilled production line workers,” he predicted.
Moreover, he raised the question of sustainability: “What happens after 2028, when Trump is gone from this office – will the tariffs remain? Is it worth the trouble moving here for the next four years [...] only to have to relocate again later?”
Professor Irwin added that the constantly shifting tariff landscape has created a highly unpredictable environment: “It seems like it's ever-changing, and you can't count on a given rate today to be in place tomorrow or a year from now. That makes it very difficult for businesses to plan where exactly they want to do their operations. I think we've sort of seen the US business investment slow down quite a bit, partly because of this.”
This uncertainty, he noted, is also problematic for America's central bank. “This is a bad situation for the Federal Reserve, because when you have higher prices, usually the Fed responds by tightening interest rates, but when you have slower growth, they usually respond by lowering interest rates. So now they're stuck in what's known as stagflation, where they don't really know what to do, because they're worried about inflation, but they're also worried about slower growth. It's ambiguous what they should be doing with monetary policy.”
It is worth noting that Donald Trump also used tariff policy during his previous term in office. At that time, however, it was directed at specific countries, such as China.
“Right now, the current administration collected tariffs from pretty much everything under the sun, from all the countries on earth, and from all kinds of products, with very few exceptions,” said V. Kitayaporn. “Back then, American consumers, if they couldn't import from China, they still had other countries to import from [...] Now. Well, if they cannot import from one country, they cannot import from any other country as well, so they have no choice, either buying from domestic producers, which is more expensive, or buying from other countries, which are also heavily taxed. This means that most of the tariff is going to fall on American consumers.”
Nevertheless, the case of Lesotho clearly illustrates how crucial access to the US market is for foreign states. Knowing this, some experts argue, Trump uses tariffs more as a strategic bargaining tool rather than as an economic instrument.
“The White House’s tariffs won’t reduce the US’ trade deficit or enhance US manufacturing. Their main objective seems to be their use as a cudgel to extract other policy concessions from foreign governments,” summed up Brett House, Professor of Professional Practice in the Economics Division at Columbia Business School.
A tool of strategic bargaining and geopolitical influence
According to Irwin, Trump likes tariffs because by threatening them, the US forces foreign countries to consider the potential harm of losing access to its huge market. By wielding the threat of tariffs, the US president is even attempting to influence foreign countries’ policies towards China and Russia, as in the case of India. Earlier this year, Canada was threatened with tariffs over “uncontrolled fentanyl smuggling across the border”, while Brazil faced similar threats due to plans to prosecute former president – and Trump ally – Jair Bolsonaro.
In some cases, the tariff tactic has already proved effective, for instance, in resolving the border conflict between Thailand and Cambodia. Trump presented himself as the chief mediator by threatening to call off tariff negotiations with both countries unless they ceased hostilities.
Nevertheless, economists remain sceptical about deals based on tariffs.
“Many of the promises the Trump administration is touting as deals and wins are neither legally enforceable or likely to be enacted. Many are laughably unrealistic in terms of their scale and timing,” said Professor House.
Professor Irwin agreed: “The EU and other countries have promised more investment in the US, but these are market economies where the public sector just can't direct the private sector to invest more in a particular country. So there's a big question about how those investment objectives can be achieved. It could be that they relabel existing investments or investments that were ongoing, saying, 'Oh, they count.'”
The economist also pointed out that trade deals concluded on the basis of tariffs are equally flexible, since they are not legally binding.
“They are not approved by the US Congress, so it's not clear how binding they are on the US or on other countries. And so we're in this sort of uncertain land where there are these 'deals', but it's not clear the economic substance of them in terms of how they'll actually change things on the ground.”
And then there are the consequences for international relations. “We see that with the US and Canada. I mean, Canada is our closest trading partner, one of our largest trading partners. Canada is not just concerned, but angry at the US for treating it worse than Russia or China,” continued Dartmouth University professor.
According to him, one of the greatest surprises of the tariff policy is that some countries have pushed back: “China is retaliating. It looks like India is going to retaliate, but Canada, Mexico and the EU – which were removed from the retaliation lists – did not.”
He noted that some states are resisting tariffs in less obvious ways. Aware that the United States is not only a vast importer but also a major exporter, several countries are seeking alternatives for their imports. Spain, for example, recently announced it would no longer purchase US-manufactured F-35 fighter jets, opting instead for European models. China and several other nations have declared they will cease buying Boeing aircraft, replacing them with European Airbus planes.
Why did some countries retaliate, while others did not?
“Lots of reasons behind that. Some of that is about economics, like how dependent you [a country – LRT] are on the United States. If the US stops trading with you, what are your options? Also, it's all about politics, how you want to be viewed by your domestic workers – like whether you want to be perceived as a strongman,” said Kitayaporn. The economist added that in exchange for lower tariffs, some states may offer concessions “that sound like big headlines but don't really mean anything.”
Professor Irwin agreed: “China had a big impact. So, China retaliated. The US raised tariffs, and when they quickly realised they're at very high levels, they need to bring them down. So, they cut a deal. I don't know whether the European Union could have done the same thing, because, I think, it would have been scary for European businesses if the tariffs had gone up over 100% given how much trade there was.”
“The United States a pretty big importer in the global economy. So, if American consumers stop importing, it's going to hurt economies in the world. But economics and international trade are not a zero-sum game. If you're hurting one economy, that's doesn't necessarily mean that you are winning,” summarised Professor Kitayaporn.
Newsletter
Every Friday morning.
