Tariffs are back as a contentious tool of economic policy and statecraft.

President Donald Trump views tariffs as a way to stimulate investment in US business, redress trade imbalances, and pursue broader foreign policy goals. But his trade spats with Canada, Mexico, and China, and threats to use tariffs on the EU and other countries, have already made clear that domestic and foreign consumers and businesses will pay a steep price for Trump’s protectionism.

Tariffs increase costs for everyone

Tariffs are a tax on trade.

Tariffs increase the price of imported goods relative to domestic ones, making them more expensive for both consumers and companies that use them. If trading partners hit back with retaliatory tariffs of their own, the costs will increase even more, impacting businesses and supply chains globally with inflation.

Economies reliant on trade for essential goods - such as oil and agricultural products, and industrial supplies, like microchips or machinery - face higher costs and slowdowns in critical sectors. It is not just foreign businesses that will be affected; US consumers will also feel the impact.

As countries struggle with higher costs in shipping, production, and technology, imports like electronics, car parts, and raw materials will become more expensive, leading to higher prices on everyday items in the US, from smartphones to vehicles, and potentially causing shortages of key products.

Negative impact on investment

Markets perform better when things are predictable, but shifting tariff policies create uncertainty in the global economy. The threat of changing tariffs prompts businesses to scale back investments, delay growth plans, and reevaluate their supply chain strategies. This unpredictability hampers economic growth not just in the US but worldwide.

As tariff disputes make trade more unpredictable, global economies could face reduced investment and diminished investor confidence. Businesses dependent on foreign supply chains may struggle to plan for the future, hindering their ability to diversify product offerings, markets, or sourcing strategies.

Are tariffs really the solution?

Supporters of tariffs argue they generate government revenue, but this view overlooks their broader economic impact. While tariffs can raise funds, they can also hurt businesses that depend on global markets. During Trump's first term in office, the US had to compensate farmers for losses caused by retaliatory tariffs, offsetting financial benefits.

As China, Mexico, or other important trade partners impose retaliatory tariffs, US businesses reliant on these markets will likely see a drop in demand and shrinking export opportunities. As the cost of doing business rises, countries that depend on trade become less competitive globally.

Cost of economic nationalism

Tariffs could not only harm economies but also strain international relationships. Protectionist policies can damage ties with partners, complicating efforts to improve global supply chains and economic stability. In an increasingly interconnected, globalized world, escalating trade conflicts risk undermining trust and pushing countries away from collaborative solutions.

Trump’s tariffs are targeting allies, not just adversaries.

Nations that engage with both Western economies and emerging markets could face challenges in upholding existing trade agreements and partnerships due to tariff-related conflicts. They may even lose faith in the rules-based global economy.

Trade stability

The global economy stands at a pivotal moment, facing challenges such as pandemic recovery and rising political tensions. Countries must prioritize policies that promote economic collaboration over division. Instead of relying on tariffs, governments should focus on trade agreements that promote stability, attract investment, and strengthen supply chains.

We have learned historically that stable and predictable trade yields far greater benefits than restrictive policies. In a world where economies are closely linked, policymakers must recognize the profound consequences of trade wars before they undermine the very growth they aim to foster.

Prof. Marc Busch, Special to Gulf News

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