Tariffs, Trade & Geoeconomics

President Trump’s return to the White House has recentered American foreign policy around economics. While he has not neglected traditional geopolitical challenges—e.g. the Iranian nuclear program, wars in Ukraine and Gaza, freedom of navigation in the Red Sea, or averting a broader war on the Indian subcontinent—the consistent throughline of Trump 47 has been the imposition of tariffs as a means of disrupting the established economic order. The ultimate goal of this disruption, however, has remained elusive. This paper will review the various goals that have been discussed and offer some tentative conclusions about the medium-term implications of this tariff campaign for American foreign policy. 

The Trade War of 2025, So Far 

The President has imposed (and suspended) several waves of tariff increases since the beginning of his second term in office. The net effect of these rounds of tariff increases has been an approximately tenfold increase in the average effective tariff on imports into the United States from approximately 2.5 percent.¹ As one would expect, these rate increases have sparked retaliation of varying degrees from our major trading partners including Canada, Mexico, China, and the European Union. In addition, the President has ordered national security threat trade investigations on the import of copper, timber and lumber, pharmaceuticals, critical minerals, trucks, and semiconductors implying a wave of tariff increases to come. 

While a complete recounting of these actions is beyond the scope of this paper, a brief summary of U.S. actions is instructive.² Beginning on Inauguration Day, the President issued the America First Trade Policy Memorandum announcing a 71-day, comprehensive review of U.S. trade policy,³ which was followed 12 days later by the imposition of 25 percent tariffs on Canada and Mexico and 10 percent on China ostensibly in order to reduce the flow of illegal aliens and fentanyl from those countries. These tariffs against Canada and Mexico were temporarily suspended two days later and finally imposed on a subset of those countries’ exports a month later. 

Twenty-one days following the start of the comprehensive review, the President imposed 25 percent tariffs on imports of steel and aluminum imports. And 65 days following the start of the comprehensive review, the President imposed 25 percent tariffs on automobiles and automobile parts, which were partially suspended several days later. 

Presumably in response to the comprehensive review that was due on April 1, on April 3 (a.k.a. Liberation Day), the President imposed a 10 percent across-the-board increase in U.S. tariffs (the universal tariff) and additional country-specific “reciprocal” tariffs of up to 74 percent. In response to retaliation from China, he further raised the effective rate on imports from China to 145 percent. Following a cumulative decline of 7 percent in the S&P 500 over four days and a precipitous spike in Treasury borrowing rates, the President suspended the reciprocal tariffs for 90 days (later extended to August 1) leaving in place the universal tariff. With respect to China, the rapidly escalation was followed by a deescalatory agreement that has at least temporarily lowered tariff rates to levels that have allowed for the resumption of bilateral trade.

The President has reached permanent agreements with the UK, Indonesia, and Japan that leave in place significantly higher US tariffs on those countries’ exports, but at levels below those initially threatened. In return, those countries have made various concessions to increase market access for US exports.   

Given the pace and variability of the tariff campaign, any conclusions about the effects are necessarily speculative. 

Revenue 

“There is a chance that the money from tariffs could be so great that it would replace” the income tax – Donald J. Trump (Fox & Friends, April 15, 2025) ⁴ 

Since 1940, customs duties have averaged just over 1 percent of total federal revenues. In the most recently completed fiscal year (FY2024), Treasury collected $77 billion in customs duties, which was enough to pay for just over 8 percent of the interest on the debt that year. 

Preliminary analysis shows that customs revenues have spiked in 2025 coming in over 84 percent above the recent peak year (2022) driven first by a pre-Liberation Day surge in imports and more recently by the higher rates.⁵ The first wave of negotiated agreements suggest that permanently higher rates (at a minimum the 10% universal tariff seems likely to endure). This will increase tariff revenues significantly. Generously assuming a tripling of tariff revenues, they might amount to enough to cover one-quarter of the interest cost on the federal debt. 

Revitalizing American Manufacturing 

“America will be a manufacturing nation once again.” – Donald J. Trump (Inaugural Address, January 20, 2025) ⁶ 

The rationale for the universal tariff, in particular, is to incentivize a broad-based renaissance in American manufacturing. The causal mechanism for this rebirth being the higher domestic prices prevailing under a higher-tariff regime. Thus far, there is little evidence of higher prices resulting from the trade war. Non-fuel import prices are up about 1.2 year-over-year while the overall price level is close to the Federal Reserve’s 2% target. Without this price effect, it is difficult to see how the tariffs could strengthen U.S. manufacturing. 

But in evaluating the potential value of the tariffs for this purpose, some clarity about the state of U.S. manufacturing is needed. U.S. manufacturing output peaked just prior to the global financial crisis and fell about 20 percent in the depth of the downturn. It has since recovered to about 5 percent below that peak output level. But while gross output is down somewhat, the value added by U.S. manufacturing has steadily increased and is at an all-time high. 

The same trend of increasing manufacturing productivity is apparent in the employment data as well. Post-war employment in manufacturing peaked in 1979 when one in every four private sector workers was in the sector. Manufacturing employment has been on a secular decline since then. Today about one in 11 private sector workers is in manufacturing and real average hourly earnings in the sector are up 12 percent, which is reflective of the fact that the United States is the world leader in manufacturing value-added per worker. The result is that while U.S. manufacturing contributed about 13 percent of U.S. GDP at that 2007 peak, it is now about 10 percent of a 40 percent larger economy. Put simply, the United States has moved up the manufacturing value chain and American workers are reaping the benefits. 

The health of American manufacturing should also be considered on a competitive basis, where the rise of Chinese manufacturing is in some sectors cause for alarm. Overall, the United States produces about 17 percent of global value-added in manufacturing down from the post-Cold War levels of around 30 percent. Meanwhile, China’s share of global manufacturing value added has steadily increased and today hovers around 30 percent. China and the United States are by far the largest manufacturing powers. The data does not support the thesis that American manufacturing writ large is fundamentally weak, inefficient, or in need of protection. 

Unfortunately, were the universal tariff to raise import prices, as intended, would actually undermine the competitiveness of U.S. manufacturing by raising the costs of inputs to production. In a normal year, more than half of U.S. imports are inputs to domestic manufacturing. Moreover, the retaliation that the trade war has invited has weakened the price competitiveness of U.S. manufactures in foreign markets. This lowers expected returns to investment in the sector and thus actual investment. It is telling that the policy agenda for the principal trade association for the U.S. manufacturing sector calls for zero-for-zero tariffs, not increased protection of the sector.⁷ 

Protecting Strategic Industries 

“The tariffs have given U.S. Steel a new lease on life.” – Donald J. Trump (The White House, February 13, 2025) ⁸ 

Despite the generally deleterious impact of higher tariffs on the manufacturing sector, there could still be benefits to particular sectors that face subsidized competitors or that are vital to our national security. As noted above, the President has announced targeted tariffs to protect domestic steel, aluminum, and automobile manufacturing and a series of trade remedy reviews on a range of other “strategic” industries ranging from film to pharmaceuticals.   

The efficacy of these trade measures is still to be proven and ought to be evaluated on at least two criteria. First, is the industry in some way economically or strategically vital to Americans’ wellbeing? Second, is a tariff the right tool to promote the success of that industry? 

The absolute need for a domestic source of supply for any given good or service is affected by a range of considerations. Is it available from a friendly and reliable trade partner? What alternatives exist for the use case? Do the costs of policy intervention outweigh the costs of going without? What is the time horizon over which the need exists? A certain skepticism should inform policymakers in answering these questions given that in the span of just a few years successive administrations have swung from identifying an absolute necessity of robust federal support for the adoption of low-carbon energy production to concluding that such production is anathema to American energy dominance. 

But provided the answers to these questions lean toward a policy intervention, the question remains whether tariffs should be the preferred tool. Given that tariffs impose broad costs and invite retaliation, a direct intervention (a grant, loan, loan guarantee, advance purchase commitment, R&D investment, antitrust exemption, tax credit, regulatory relief, etc.) could be a better option for creating or protecting the capacity that is needed. 

The history of tariffs as an effective policy instrument is not encouraging.⁹ Far from providing an opportunity for a battered industry to recover, history shows that the protected domestic sectors tend to become less efficient while consumers face higher prices. Too often tariffs are a lose-lose proposition. 

Reducing Fentanyl Imports or Compelling Immigration Policy Changes 

“To me the most beautiful word in the dictionary is ‘tariff’” – Donald J. Trump (Economic Club of Chicago, October 15, 2024) ¹⁰ 

President Trump’s affinity for tariffs has led to the unconventional employment of tariffs in disputes not usually associated with international trade relations. His first use of tariffs during his second term leveraged access to the U.S. import market to advance immigration and illicit drug control policy goals with Mexico, Canada, China, Colombia, and Venezuela.  

Economic and financial sanctions have become an oft used—some have argued overused—tool of American foreign policy.  The innovative use of the blunt tool of tariffs and market access could prove an enduring advancement if husbanded to an appropriately limited set of ends and used against those countries where the balance of economic interests makes access to the U.S. market particularly valuable. For example, the narrow policy changes sought with respect to Canada, Colombia, Mexico, and Venezuela were swiftly achieved, while the dispute with China remains unresolved. And the long U.S. history of severe restrictions on trade with Cuba suggest that even when access to the U.S. market would be of incredible value, there are limits to the effectiveness of the tool. As with the rise of financial sanctions during the Global War on Terror, further study is warranted on when and how more regularized use should be made of this policy tool. 

And To What End? 

The gyrations of the 2025 tariff campaign makes evaluation of the effectiveness of these tools nearly impossible. Historical experience, economic theory, and initial market reactions argue for a high degree of skepticism that any of the economic goals will be realized. 

What we do know is that this experiment in policy making has eroded the regard in which America is held in foreign countries. When faced with a larger, more powerful challenger, states can choose to bandwagon or to balance. That is, to subordinate their interests to those of the more powerful state or to gather allies to pursue their interests contra the wishes of the more powerful state. In the present instance, many states are choosing to balance. The revisions to the international economic order that are underway—new trade blocs, reduced dependencies on U.S. economic chokepoints, etc.—are likely to leave us less well positioned in the future both economically and politically.