LETHABO SITHOLE: Trump brandishes tariffs again, despite their double-edged nature

Since returning to office US President Donald Trump has doubled down on his “America First” agenda, with tariffs once again serving as the cornerstone of his economic strategy. While these protectionist measures aim to shield domestic industries from foreign competition, they raise questions about their long-term viability in an increasingly interconnected global economy. Tariffs may appeal to certain political constituencies, but their economic effect reveals a far more precarious reality.  

In his first week back in office Trump issued an America First Trade Policy memorandum, directing federal agencies to reduce reliance on foreign suppliers and prioritise domestic production. Central to this policy is a new wave of tariffs targeting imports from China, Mexico, Canada and the EU, with some rates as high as 25%. The administration argues that these measures are essential to revitalising US manufacturing, discouraging outsourcing and encouraging consumers to “Buy American”. 

When it comes to tariffs, though, the numbers tell a different story. A 2022 study by the Peterson Institute for International Economics found that Trump’s tariffs during his first term cost US consumers and businesses about $51bn a year. This figure includes both direct tariff costs and indirect effects such as higher consumer prices and reduced spending power. Far from protecting/growing the economy, tariffs often function as hidden taxes on the people they aim to help — everyday Americans. 

Historical parallels

The parallels between Trump’s tariffs and the Smoot-Hawley Tariff Act of 1930 are striking. Enacted during the Great Depression, Smoot-Hawley imposed tariffs on more than 20,000 imported goods in an effort to protect US farmers and manufacturers from foreign competition. Instead, it triggered a cascade of retaliatory tariffs from trading partners. By 1933 US exports had plummeted 61%, worsening unemployment and the depressing effects of the economic crisis.

Nearly a century later, Trump’s tariffs risk repeating these mistakes. A World Trade Organisation (WTO) study found that global trade growth slowed to 1% in 2019 — its weakest level since the 2008 financial crisis — largely due to the US-China trade war. This slowdown cost the global economy about $850bn, highlighting the outsize effect of unilateral tariff measures in today’s interconnected world. 

Flawed logic

The logic behind tariffs hinges on the assumption that making foreign goods more expensive will spur domestic production. However, this rationale overlooks the complexities of modern supply chains. For example, the average car assembled in the US contains parts sourced from more than a dozen countries. Tariffs on imported components raise production costs for US manufacturers, undermining their competitiveness in both domestic and international markets.

A prime example is the steel and aluminium tariffs imposed by Trump in 2018. According to a report by Trade Partnership, these tariffs led to a net loss of 75,000 US jobs as industries reliant on these materials — such as construction, automotive and aerospace — faced higher input costs. Meanwhile, US steelmakers, ostensibly the primary beneficiaries, experienced only marginal gains as global demand shifted to lower-cost producers in countries like India and South Korea. 

Hidden costs

Consumers often bear the brunt of tariffs, as higher costs for imported goods translate into increased prices for everyday products. In 2020 the Congressional Budget Office released a report analysing the economic effect of tariffs imposed during Trump’s first term, including those on steel, aluminium and Chinese goods. The office estimated that these tariffs raised the cost of imports, leading to higher prices for both consumers and businesses, calculating that the average US household paid an additional $1,277 a year due to the combined effects of tariffs and retaliatory measures by trading partners. This figure accounted for both direct costs, such as higher prices on imported goods, and indirect costs, including reduced economic efficiency and productivity. 

Tariffs also invite retaliation. During Trump’s first term China retaliated against US tariffs by imposing its own tariffs on US exports, particularly agricultural products. As a result, US soya bean exports to China fell by about 50% by 2019, leading US farmers to rely on $28bn in federal subsidies to offset their losses. This cycle of retaliation not only undermines the intended benefits of tariffs but also destabilises global trade relationships. In 2018 and 2019 the US department of agriculture implemented the Market Facilitation Programme to provide financial assistance to farmers affected by retaliatory tariffs.

The programme allocated $28bn to support agricultural producers, with a significant portion directed towards soya bean farmers who suffered from reduced exports to China. The retaliatory tariffs imposed by China had a substantial effect on US agricultural exports. A US department of agriculture study found that retaliatory tariffs reduced US agricultural exports by $27bn from mid-2018 to the end of 2019, with soya beans accounting for 71% of the decline.

The imposition of tariffs by one country often leads to retaliatory measures by trading partners, resulting in a tit-for-tat escalation that can disrupt established trade patterns and harm industries on both sides. 

Resilience of global trade

Despite the global shift towards protectionism and nationalism in recent years, global trade has demonstrated remarkable resilience. According to the WTO, global merchandise trade volumes in 2022 were about 3% higher than pre-pandemic levels, reaching $25.3-trillion. This growth underscores the enduring importance of trade in driving economic recovery and expansion, even in the face of geopolitical tension and policy headwinds. The resilience of global trade suggests that the world will continue to trade, with or without protectionist measures — or Trump’s tariffs.

In a recent interview with CNN’s Fareed Zakaria, WTO director-general Ngozi Okonjo-Iweala emphasised this resilience, noting that global trade had surpassed its pre-pandemic peak, reaching a staggering $30.4-trillion, with 80% still conducted under WTO most favoured nation terms. While trade fragmentation is increasing, businesses and economies have adapted, navigating barriers and maintaining supply chains. This adaptability highlights the futility of protectionism as a long-term strategy. Nevertheless, protectionism and fragmentation remain a threat to the global economy in the long term.

Forward-looking strategies

From a domestic perspective, tariffs may offer short-term political gains, particularly among blue-collar workers in manufacturing-heavy states. However, they fail to address the structural challenges facing US industries, such as ageing infrastructure, supply chain distortions, limited investment in technological advancement, a widening skills gap and declining labour force participation. According to the National Association of Manufacturers, US manufacturing productivity grew by just 0.4% a year between 2010 and 2020, compared to 3.4% in the 1990s.

Tariffs alone cannot reverse this decline; comprehensive policy solutions are needed to enhance competitiveness. A proactive investment promotion agenda, rather than a “gun to the head” approach, can help the US remain a leader in global trade without resorting to protectionism. Equally important is a trade policy that does not weaponise tariffs to settle political scores or coerce developing nations, as seen in the case of Colombia last week.

The US threatened to impose 25% tariffs on all Colombian goods after Colombia refused to accept two US military deportation flights. However, Colombia later agreed to accept deported migrants without restrictions, and as a result the US suspended the tariffs. 

• Sithole, a legal practitioner and consultant in international business, trade and investment law, is managing partner at Amila Africa.