Geopolitics Review Extra - 8th May 2025

The Donald Diaries: The Effects of Tariffs

Contents

1. Introduction

2. The Effects of Tariffs

3. Will History Repeat Itself This Time?

4. Concluding Remarks

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Bitesize Edition

• With many tariff events throughout history to study, we have to dive deeper to explore their effects. Do tariffs always lead to inflation? Does the trade deficit actually get reduced by tariff policies, and do manufacturing sectors experience a boom? These questions have different answers depending on the historical tariff being focused on, but each example helps us frame these questions when considering the Trump tariffs today.

• Also, to introduce a relevant concept, economic complexity is a measure that tracks industries and sectors where a nation possesses an advantage, often through producing particularly advanced products. The United States possesses a relatively high comparative advantage, which gives it room to adapt to tariffs. However, when it comes to globally interconnected supply chains from the age of booming globalisation, the United States needs the rest of the world. In light of this, will Trump’s Liberation Day tariffs remain paused, or will Trump drive into the unknown with broken headlights?

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Introduction

Inflation, the trade deficit, the manufacturing sector, and the labour market have been brought into focus by Trump’s second tariff storm, and so in this post, I’ll dive into how these characteristics were affected by tariffs throughout history, and how they will be affected by Trump’s tariffs today. Let’s dive in.

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The Effects Of Tariffs

On Monday, I delved into the background of many tariff events of the past, including the Tariff of Abominations, McKinley’s tariffs, Smoot-Hawley, and Nixon’s tariff. For background, I’d recommend reading that first.

Geopolitics Review - 5th May 2025

But if you’re all caught up, let’s explore the effects tariffs can have:

• Inflation - When it comes to tariffs, inflation isn’t always guaranteed. It often depends on the overall economic environment and the areas targeted by tariffs. McKinley’s tariff from 1890 was the earliest of our examples that saw consumer prices rise. Reagan’s tariffs and Trump’s tariffs also led to price rises in specific sectors, especially steel, but sweeping inflation is rarely seen.

• Trade Deficit - Of every tariff example in history, none have worked particularly well in addressing the U.S. trade deficit. When tariffs are implemented, other nations retaliate, or tariffs affect other sectors and hurt exports. Only Nixon’s tariffs had a short-term improvement, but as we know today, the trade deficit problem hasn’t been addressed successfully.

• Manufacturing - One of Trump’s aims is to reindustrialise and reignite American industry. Tariffs often do help to achieve this. The Tariff of Abominations ensured the North was protected, and the Morrill Tariff led to a wartime boom. Both McKinley’s and Nixon’s tariffs also led to short-term booms. However, the Smoot-Hawley tariff hurt manufacturing, but the Great Depression saw little economic activity anyway. When nations retaliated, this worsened the economic downturn. Hence, the overall macro environment is an important consideration when implementing tariffs. Tariffs in an environment with the ability to pivot can lead to positive effects, whereas imposing tariffs into weakness can suffocate a weakened economy further.

• Protecting and Increasing Jobs - With manufacturing increasing, jobs would also increase. Specific sectors would see boosts, such as Northern industries from the Tariff of Abominations, and urban jobs during McKinley’s tariffs. Nixon’s tariffs had a stimulus effect, and Reagan’s tariffs boosted jobs in some sectors. However, Smoot-Hawley led to massive job losses in agriculture, as did Trump’s first-term tariffs. Again, the direction and macroeconomic environment in which tariffs are implemented are important.

Photo by Simon Hurry on Unsplash

So, have these examples of historical tariffs ever worked? In exploring this history, keep in mind that eventually we could see these trends and patterns emerge today.

We will see what happens in July when the deadline for the tariff pause is reached. Over the last few weeks, many have reported on the pursuit of hopeful de-escalation, but even if this is reached, this story doesn’t end there. This tariff storm will have consequences for the global order, namely of the psychological kind, since trust in the U.S. has plummeted in Trump’s first few months. The tariffs will also have economic consequences. Let’s now zoom in and explore the potential effects of Trump’s latest tariffs.

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Will History Repeat Itself This Time?

Keep in mind, these tariffs likely won’t return, especially in their current form, from Liberation Day. But if they were to, let’s specifically explore the impact they would have: