The new age of tariffs: economic tool or political weapon?

In recent months, it has to be acknowledged that tariffs have taken center stage in economic and political discourse: it is not only reshaping global markets but also influencing strategic decisions across industries. For students of economics and finance, understanding the ripple effects of these trade barriers is not just relevant, it is essential to consider how they reshape economies interaction both domestically and internationally and alter the course of investment decisions. Therefore, this blog aims to help individuals understand tariffs as they represent fundamental instruments of international trade policy, their positive and negative effects, and what are their impact on today’s economy.

Firstly, it is important to define what tariffs are. Academically, tariffs are described as government-imposed taxes on imported goods, intended to regulate trade, protect local industries, increase government revenue, and manage international economic relations (Krugman, Obstfeld, & Melitz, 2018; Irwin, 2020). It is important to note that they can generally be classified into two major types: on the one hand, specific tariffs, which impose a fixed monetary charge per unit of imported goods, and on the other hand, ad valorem tariffs, calculated as a percentage of the imported goods’ value (Carbaugh, 2019; Feenstra & Taylor, 2020). Finally, in history, tariffs have acted as strategic instruments with the aim of promoting domestic industries, balancing trade, and providing leverage during international negotiations (Rodrik, 2018).

Moreover, the economic impacts of tariffs are complex and dual-faceted. On one side, tariffs effectively protect domestic industries by raising the costs of imported goods, thus promoting domestic market competitiveness (Irwin, 2020; Autor et al., 2016). This scenario can lead to increased domestic production and employment within protected industries. Moreover, the Generation of government revenue, particularly significant for developing nations reliant on tariff income (Feenstra & Taylor, 2020). Finally, enhanced leverage in international trade negotiations, securing beneficial economic terms (Rodrik, 2018; Irwin, 2020).

Conversely, tariffs frequently trigger retaliatory measures from trade partners, risking trade wars that can significantly disrupt international economic stability and diplomatic relationships (Bown, 2021; Evenett & Fritz, 2019).

Additionally, tariffs typically result in increased prices for consumers, who ultimately bear the costs. This reduces their purchasing power and may contribute to inflationary pressures, negatively impacting economic growth and living standards (Amiti, Redding, & Weinstein, 2019; Fajgelbaum et al., 2020). Ultimately, Potential sheltering of inefficient domestic industries undermines innovation, competitiveness, and productivity in the long term (Krugman et al., 2018; Autor et al., 2016).

Having examined the concept of tariffs and their underlying mechanisms, it is now important to consider their contemporary impact on the global economy. Recently, tariffs have re-emerged prominently in global trade discussions. Notably, in July 2025, the United States entered into significant trade agreements with Japan and the European Union, reducing tariff rates substantially, thereby influencing international trade relations (Reuters, 2025; Barron’s, 2025). The deal with Japan, for instance, reduced auto tariffs from 27.5% to 15%, reflecting a strategic shift toward more moderate tariff rates aimed at stabilizing economic relations and avoiding severe disruptions in international trade (Reuters, 2025).

Despite these seemingly positive developments, economic experts warn of potential underlying risks associated with sustained high tariffs. Specifically, increased tariffs have led to short-term market stability but are likely to impose long-term economic challenges, such as disruptions in global supply chains, inflationary pressures on consumers, and reduced productivity and innovation in domestic industries (Financial Times, 2025; Amiti et al., 2019). Moreover, recent court rulings challenging the legality of certain executive-imposed tariffs highlight the evolving regulatory and political context that may constrain future unilateral tariff actions, necessitating greater legislative oversight (Financial Times, 2025).

Even Switzerland, a country known for its open trade policies, was not spared from the recent tariff turmoil. In August 2025, the United States stunned Swiss officials by threatening a steep 39% import tariff on Swiss goods, even though Switzerland had already eliminated tariffs on industrial imports (meaning 99% of U.S. products enter Switzerland tariff-free). Swiss authorities scrambled to negotiate a solution, even considering concessions like increased purchases of U.S. liquefied natural gas to appease Washington. This episode highlighted how even a highly open economy like Switzerland can be caught in the crossfire of trade disputes, leaving key Swiss sectors bracing for potential disruption (Reuters, 2025).

Thus, while recent tariff adjustments demonstrate an attempt at diplomatic economic engagement, the broader implications emphasize the importance of sustainable and balanced tariff policies to mitigate potential negative economic consequences. In conclusion, tariffs remain critical yet controversial elements of international trade policy. While they provide considerable benefits, including industry protection and government revenue, their adverse effects on consumers, global economic stability, and overall economic efficiency must be critically evaluated. Policymakers should employ comprehensive economic research and foster international cooperation to manage tariffs effectively, aiming for balanced trade policy outcomes.

References:

Amiti, M., Redding, S. J., & Weinstein, D. E. (2019). The Impact of the 2018 Tariffs on Prices and Welfare. Journal of Economic Perspectives, 33(4), 187–210.

Autor, D. H., Dorn, D., & Hanson, G. H. (2016). The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade. Annual Review of Economics, 8, 205–240.

Bown, C. P. (2021). Trade Wars: Past, Present, and Future. Economics & Politics, 33(2), 222–250.

Carbaugh, R. J. (2019). International Economics (17th ed.). Cengage Learning.

Evenett, S. J., & Fritz, J. (2019). Going It Alone? Trade Policy after Three Years of Populism. Global Trade Alert Report.

Fajgelbaum, P. D., Goldberg, P. K., Kennedy, P. J., & Khandelwal, A. K. (2020). The Return to Protectionism. Quarterly Journal of Economics, 135(1), 1–55.

Feenstra, R. C., & Taylor, A. M. (2020). International Economics (5th ed.). Worth Publishers.

Irwin, D. A. (2020). Trade Policy in American Economic History. Annual Review of Economics, 12, 23–44.

Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International Economics: Theory and Policy (11th ed.). Pearson Education.

Rodrik, D. (2018). Straight Talk on Trade: Ideas for a Sane World Economy. Princeton University Press.

Reuters. (2025, July 23). US-Japan trade deal averts worst for global economy. Reuters.

Barron’s. (2025, July 23). US-EU tariff negotiations yield new agreements. Barron’s.

Financial Times. (2025, July 28). Donald Trump’s tariff blitz brings US levies to highest levels since 1930s. Financial Times.

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Written by Mélanie Gillo