Trump’s Tariff Policy Explained: Winners, Losers & its Global Impact

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On Monday, January 20th, Donald Trump was sworn back into office.

And love him or hate him, he’s wasting no time shaking things up¹.

Exiting Global Agreements – Pulled the U.S. from the Paris Climate Agreement and WHO, reshaping climate and public health policy.
Declaring a Border Emergency – Deployed military resources to tighten security at the southern border.
Creating a New Government Efficiency Dept. – Founded the Department of Government Efficiency (DOGE), led by Elon Musk, to cut bureaucracy and streamline operations.

But one move has the world holding its breath – and that’s tariffs (aka import taxes).

Since taking office, Trump has threatened 25% tariffs on Mexico and Canada and floated a 10% punitive duty on Chinese imports to start. He’s also planning on what levies to put on Europe².

Now, the mainstream media and foreign leaders call this reckless and inflationary.

But is it?

Well, history shows us it’s more complicated than that. So, let’s break down Trump’s plan, the historical context, and why tariffs may not be as bad as everyone believes.

What is a Tariff?

Put simply, a tariff is a tax on imported goods, making foreign products more expensive.

And governments use these tariffs for a variety of reasons – like:

Protect local businesses – Higher prices on imports make domestic products more appealing to consumers.

Generate revenue – Governments collect money on foreign goods.

Apply pressure in trade disputes – Tariffs can be used as economic leverage (this is a big one).

For example, if the U.S. imposes a 25% tariff on Japanese cars (let’s say a Nissan), a $40,000 car would now cost $50,000 in the U.S. Thus, this price hike encourages consumers to buy American-made vehicles instead (like a Ford).

And like anything in economics, tariffs are just another tool that shifts wealth around – it’s just a matter of finding who benefits and who pays.

Using the same scenario above:

Losers: Consumers, who now pay 25% more for imported cars.
Winners: Auto firms, which face less competition, boosting profits and hiring.

See? That’s tariffs in a nutshell.

Do Tariffs Cause Inflation? It’s Complicated

One common concern is that tariffs drive up inflation - but history shows it’s not that simple.

For example, the U.S. lowered tariffs between 1960 and 1980, yet inflation surged.

Meanwhile, in the 1930s, tariffs were raised dramatically, yet the economy fell into deflation (more below).

This tells us that tariffs alone don’t determine inflation - many other variables, like monetary policy, supply chain disruptions, and consumer demand all play key roles.

Trump’s Trade War: Strategy or Risk?

So why is Trump pushing for tariffs on imported goods?

I see two main reasons:

1. Stop Foreign Countries from Using the U.S. as a Dumping Ground

For decades, the U.S. has been the "buyer of last resort" for foreign nations.

I’ve written about this more before in, “The U.S. Dollar’s Global Dominance: Perks, Pitfalls, and the Peril of Losing It,” but in short, countries like China, Japan, and Europe have weak consumer spending. Their people save more and spend less, meaning they import less and export more to keep their industries afloat and avoid the unpopular job losses that should happen.

So, where do they all export to? The U.S.

And when these countries flood the U.S. with exports, they reinvest the dollars they earn back into U.S. assets (aka dollar recycling) – thereby keeping the dollar stronger than it should be and making it cheaper for Americans to import even more foreign goods.

A look at the current account balance shows this unbalance in action:

The U.S. runs a chronic trade deficit, importing far more than it exports.
Meanwhile, countries like China run chronic surpluses, selling more to the U.S. than they buy in return.

Figure 1: CIA.gov, The World Factbook, Dunham 2025

Of course, some argue that trade deficits aren’t necessarily bad, as they allow the U.S. to benefit from lower-cost imports and cheaper debt while focusing on innovation and services.

But this brings us to the second main point. . .

2. Restart The Dormant U.S. Manufacturing Sector

A major consequence of these chronic trade deficits and an artificially strong dollar is the crowding out of U.S. manufacturing and exports.

See, when the dollar is strong, American exports struggle - U.S.-made goods become more expensive abroad, making them less competitive.

Meanwhile, foreign manufacturers gain an edge - their weaker currencies make their products cheaper for U.S. consumers, further reducing demand for American-made goods.

The result? U.S. manufacturing gets squeezed, production shifts overseas, and more jobs are offshored.

To put this in perspective, manufacturing’s share of the U.S. economy has plunged - from 23% of GDP in 1970 to over 16% in 1998, and now barely 10% as of 2021 (the latest data available).

Figure 2: BLS, Dunham 2025

There’s a lot more to it, but tariffs, in Trump’s view, could help break this vicious cycle - forcing foreign nations to buy more American goods instead of just using the U.S. to subsidize their own growth, thus reinvigorating the U.S. export and manufacturing economy.

Can The Trump Tariffs Actually Work? Lessons From The Great Depression

Now, no matter how you feel about tariffs, once you see the bigger picture, it’s hard to ignore their strategic value.

But still, that doesn’t mean there aren’t risks. . .

For starters, countries like China or Canada won’t just idly sit back while they’re getting tariffed. No. They’ll likely hit back with tariffs of their own - fueling a tit-for-tat trade war.

And the last time we saw such a spiraling trade war was – you guessed it – the 1930s Great Depression.

I covered this in detail last April in “Trading Shots: Escalating Trade Wars and Echoes from the Great Depression.” If you haven’t read it yet, I highly recommend it.

But here’s the gist: In 1930, the Smoot-Hawley Act imposed steep import taxes to protect U.S. businesses - especially farmers - as demand collapsed and unemployment soared. The goal was to essentially aid domestic producers by keeping out cheap foreign goods that could drive prices even lower and crush corporate profits, leading to more bankruptcies and layoffs.

But it backfired.

Over two dozen countries retaliated with their own tariffs – and global trade plunged.

For example, overall U.S. trade collapsed for nearly a decade from pre-1929 levels, while trade with Europe plunged by two-thirds (66%) between 1929 and 1932 - taking many years to recover.

Just take a look at U.S. imports (red line) and exports (blue line) during this period.

Figure 3: U.S. Census Bureau, Historical Statistics of the United States, Dunham 2025

This “beggar-thy-neighbor” strategy only worsened the crisis, proving that trade wars can backfire with devastating consequences for everyone.

This is a real issue if the world engages in a trade war like this again – where import tariffs spiral higher and global trade just freezes up.

So, would the same thing happen today?

Well, it could. But things are much, much different now. And it gives Trump some serious bargaining power.

Would Tariffs Crash the Economy Again? Not So Fast.

Unlike 1930, when the U.S. had excess savings, weak consumption, and a booming manufacturing sector (much like China today), the economy is now completely opposite.

The U.S. now has:

Very high consumption
Low savings
A shrinking manufacturing sector

This means tariffs might actually help.

Why?

Well, there’re a few reasons – like. . .

Encouraging Domestic Growth – While tariffs tax consumers, they also subsidize U.S. producers, allowing them to hire more workers and raise wages. This can fuel higher consumption and economic expansion as it ripples throughout the economy (remember, one worker’s increased spending is another’s income).

Shifting Demand to Production – Unlike in 1930, the U.S. now relies heavily on imports. Tariffs could redirect demand toward domestic goods, helping balance trade. To put it in perspective, the U.S. imports about $1 trillion more than it exports each year.

Rebalancing the Economy – Tariffs could help counter the U.S. economy’s "pro-consumption, anti-production" imbalance, supporting a manufacturing revival and reducing the U.S. deficit which is in desperate need of narrowing.

But tariffs do come with risks…

Higher Costs Without Growth – If domestic demand is weak (or weakening), tariffs could raise prices without boosting production, thus hurting consumers. This is something to monitor especially as lower-income households grow increasingly fragile. Put simply, if tariffs increase costs without boosting domestic production (supply), they hurt consumers without helping the economy - especially those already struggling.

Worsening Trade Imbalances – If global markets can’t absorb more U.S. exports, tariffs could shrink output instead of strengthening it. For instance, as I pointed out in "Trade Wars Redux? China’s Manufacturing Glut and Its Global Implications," China is already exporting aggressively to counter its own slowdown. Thus, if both the U.S. (the world’s largest economy) and China (the second largest) are pushing exports at the same time, the big question is: Where will all this excess production go? This is the biggest risk - one that echoes the trade disruptions of the 1930s where prices collapsed, triggering waves of bankruptcies and layoffs.

Final Thoughts: Are Trump’s Tariffs the Right Move?

The mainstream media calls Trump’s tariff plan reckless. Critics warn of inflation, retaliation, and economic fallout.

But here’s the thing - Trump’s diagnosis of the U.S. economy isn’t exactly wrong. The U.S. consumes too much, saves too little, and manufactures far less than it used to (just look at the chronic deficit and mounting debt burdens).

But the real question is whether tariffs are the right cure - or just a harsh prescription with serious side effects.

Think of it like going to the doctor. You agree something is wrong, but is the treatment too extreme? Is the dosage too high?

History proves that protectionism carries risks. But history also proves that ignoring economic imbalances only makes them worse. For instance, the U.S. runs massive trade deficits and has seen its manufacturing base shrink for decades. That has left some deep wounds on the economy - ones that can’t be ignored forever (which I’ll dive into more in a future Morning Pour).

Maybe Trump’s approach is too aggressive. Or maybe it’s the wake-up call the U.S. economy needs.

Either way, the world is watching.

Sources:

Disclosures:

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