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Posted on Mar 18, 2025 / USA / Finance

Immediately after Donald Trump returned to the White House on January 20, 2025, the United States began threatening other countries with tariffs on imported goods.

The Trump administration has already introduced a number of new tariffs against leading trading partners. For example, on March 4, 25% tariffs came into force on some goods from Mexico and Canada, as well as an additional 10% tariff on imports from China. A 25% tariff may also be imposed on goods from the EU. And this seems to be just the beginning.

Countries whose products are now subject to Trump's tariffs are preparing retaliatory measures. But if they are adopted, Washington will likely strike again. In general, the world is rapidly being drawn into trade wars.

In the short term, such a policy could provoke an increase in prices in the United States - especially for imported electronics and cars, and also radically change global supply chains.

A tariff is a tax that a government levies on goods when they cross a border. Tariffs are more often imposed on imports than on exports.

There are three types of tariffs: ad valorem (calculated as a percentage of the customs value of the goods); specific (a fixed rate for a certain quantity or weight of goods); combined, a mix of both types.

Tariffs are primarily imposed to protect domestic production and to supplement the budget, and also as a retaliatory measure.

In essence, tariffs work as an export tax: the country has to spend resources on import substitution, and the opportunities for export become smaller.

Harvard economist Dani Rodrik (an industrial policy advocate whose views have never fit into mainstream economics) calls tariffs “a peculiar combination of two measures: a consumption tax on imported goods and a subsidy for their domestic production.” In fact, they are part of a broader industrial policy aimed at eliminating trade imbalances by redistributing income between different groups of the population within and outside the country.

Donald Trump seems to have a mercantilist approach to trade. He explains the introduction of tariffs by the need to reduce the US deficit in foreign trade: the country imports more goods and services than it exports.

However, it is important to understand that a trade deficit is not necessarily a negative phenomenon. A trade balance in itself does not have a positive or negative connotation.

Tariffs have a dual effect. On the one hand, they can support domestic production in the short term and generate fiscal revenue. On the other hand, they lead to higher prices, possible retaliatory measures, and reduced efficiency of global trade.

Whether tariffs will be a rare tool or widespread remains to be seen. The answer will largely depend on how strong and effective existing global institutions prove to be in the near future.

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