Tariffs

1. Markets react to tariffs: three examples show the historical madness of tariffs
2. Key points
3. Can we find a conclusion that allows us to establish something today?

We have entered a downward phase, the effects of Trump's reciprocal tariffs will extend beyond trade, also affecting global political and geopolitical relations in a phenomenon that would be ‘the fragmentation of multilateralism’. 

‘What makes sense would be to maintain deficits with certain goods and services (those we value especially) and surpluses with those who value ours’ ... (Jesús Fernández-Villaverde, Professor of Economics at the University of Pennsylvania). 

‘In the United States we can't grow much coffee. We import about 8.5 billion dollars a year. The tariffs announced yesterday will amount to at least 1.25 billion dollars. That's a 15% tax increase on your morning coffee.’ Neil Bradley, Chief Policy Officer of the US Chamber of Commerce, 7 April 2025 

A tariff is a tax applied at the border on imported goods. Technically they are called ‘customs duties’ (let's be clear, that's nothing more than a trick of the State). 

Tariffs are usually a percentage of the value of a product. So, for example, a tariff of 20% on Chinese products means that a product worth 10 US dollars has an additional surcharge of 2 dollars. Companies can choose to pass on some or all of the cost of tariffs to customers. 

Governments can impose tariffs for various reasons: 

1. To generate income. Governments impose tariffs in the same way that they collect sales tax or income tax. The amounts collected are added to the government's coffers and form part of its budget. 
2. To protect the country's industries. Governments can impose tariffs on certain goods from abroad if they consider that their free movement poses a threat to regional and national producers of that good. In this case, the government's objective is to help national companies compete by making imported goods more expensive. Tariffs also serve to dissuade foreign countries from selling their surplus goods here at very low prices, which can negatively affect the price of local products and lead to the bankruptcy of national companies. 
3. Using it as a diplomatic tool. Governments sometimes restrict or prohibit the import or export of goods and services from another country to influence behaviour in non-economic areas such as human rights, treaty violations or war. One example would be the set of economic sanctions that Canada imposed on Russia as a result of its destructive war against Ukraine. Instead of simply banning trade with these countries, governments can choose to impose high tariffs as an indirect sanction. Tariffs limit the competitiveness of the country in question by making the cost of its export products prohibitive, which ultimately harms its economy. 

Historically, these taxes on foreign imports have appealed to political leaders seeking to protect national markets from competition from cheaper products, while promoting domestic industry and the domestic labour force. 

However, these measures tend to provoke a war of attrition. 

Excessive tariffs pose a risk of fragmentation, which equates to less trade, which translates into fewer tangible benefits for all. Although the tariff undoubtedly causes damage to the affected country, the first to pay that tax is the importer at customs when he enters the foreign products. 

USA: If a tariff of 25% is applied, for example, the US importer who imports avocados, tomatoes, car parts, beer, steel, or any other Mexican or Canadian product, has to pay that extra amount. As it is more expensive for the importer to bring in the product, part of the surcharge or all of the extra cost is usually passed on to the end consumer, in this case the American, generating an increase in inflation.

LESOTHO (4) which does not appear on this list is a case of tariffs without a sense of balance. Lesotho, a landlocked kingdom at high altitude surrounded by South Africa, with a population of 2.311 million. No other territory has been hit as hard as Lesotho, with tariffs of up to 50%. Lesotho's purchases in Washington are a minority compared to all the products it sells, such as diamonds or woven and non-woven suits for men and women. Meanwhile, the US exports delivery lorries, vaccines, blood and crops, among other things, to Lesotho. What perhaps goes unnoticed by Trump is the economic power of both countries. While the United States is one of the richest countries in the world, Lesotho is one of the poorest in Africa. In other words, the US can buy from any country in the world with almost no limits, but this very limited South African territory can barely afford large purchases. And these tariffs not only do not help the international trade of this African country, but could have catastrophic consequences for an extremely tiny economy that depends on its sales. 

Markets react to tariffs: three examples show the historical madness of tariffs

In 1928, Herbert Hoover (1) campaigned on a protectionist platform to support American agriculture. As the tariff movement grew after his election, many industries supported the tax, which was extended to cover a tax on 25,000 imported products. In October 1929 rumours spread that the tariff bill might fail, which Senator Reed Smoot of Utah quickly dismissed. The stock market crash began on 28 October 1929, when news spread that the Smoot Hawley tariff bill would become law. The front page article in the New York Times read: ‘Leaders insist tariff will be passed’. Although the tariff bill did not become law until June 1930, its effects were felt eight months earlier. Markets reacted immediately, as they discount future profits. Most economists blame the gold standard for the crash, but this analysis overlooks the forward-looking nature of the human mind, which is the market itself. Markets do not need to wait for profits to decline due to impending policies that will result in future losses. Hence the rapid nature of the crash. The use of leverage in the 1920s exacerbated the crash. 

Once the bill became law, other nations retaliated. The agricultural sector was one of the hardest hit, as farmers could not export their crops competitively. Hoover followed up with the Revenue Act of 1932, raising taxes in the midst of the economic collapse. By 1934, world trade had fallen by 66%, returning to 1905 levels. The Great Depression continued, increasing economic nationalism, which allowed radicals to come to power, resulting in the Second World War. The adage proved to be true: when goods cannot cross borders, armies will. 

Long after, as we entered a new century, protectionist hawks still believed that tariffs protected American jobs. Recent history proves otherwise. President George W. Bush imposed steel tariffs on 20 March 2002. According to the Bureau of Labour Statistics, between March 2002 and March 2003, the manufacturing industry lost 475,000 jobs, more than there were in the entire steel industry. Manufacturers were unable to pass on the higher steel prices to their customers, as there were many fixed contracts prohibiting price increases. 

The tariff affected the performance of the stock market. This fact is often overlooked due to the attention paid to the dotcom crisis during the previous two years. From March 2002 to May 2003, with the tariffs in force, the S&P 500 lost 2 trillion dollars in market capitalisation. The Dow Jones Industrial Average reached a post-11 September 2001 peak on 19 March 2002 at 10,635.25. Steel tariffs went into effect the following day. Lumber tariffs followed in May. The Dow did not fully recover until the steel tariffs were lifted on 4 December 2003. The Bush administration lifted the tariffs after learning that the European Union would retaliate. Had this been the case, the US stock market could have suffered another severe crash, like the one it suffered in 1929. 

Currently, around two thirds of international trade is tariff-free, either because countries have reduced their taxes under the Most Favoured Nation (MFN) treatment (2), or because of other trade agreements. 

However, the levels of tariffs applied to the remaining third of world trade are often high, with significant disparities between sectors. Agriculture continues to be highly protected. Manufacturing continues to face trade barriers in key sectors. Raw materials tend to benefit from low tariffs. 

Developing countries face higher tariffs, which limits their access to international markets. Their agricultural exports are subject to average import duties of around 20% on an MFN basis. Textiles and clothing face some of the highest tariff rates, averaging close to 6%, which reduces their competitiveness. 

South-South trade (between developing countries) is still subject to high tariffs. For example, trade between Latin America and South Asia faces an average tariff of 15%. World trade reached a record level of 33 trillion dollars in 2024, registering growth of 3.7% (1.2 trillion dollars). Most regions experienced positive growth, with the exception of Europe and Central Asia. 

Services were the main driver of this expansion, with an annual increase of 9%, totalling 700 billion dollars (almost 60% of total growth). Trade in goods grew more slowly (+2%), adding another 500 billion dollars. However, growth in both sectors slowed in the second half of 2024, with an increase of only 1% for services and less than 0.5% for goods in the fourth quarter. 

Developing economies grew faster: their imports and exports increased by 4% over the year and 2% in the fourth quarter, mainly thanks to East and South Asia. Developed economies, meanwhile, stagnated: trade was unchanged over the year and declined by 2% in the fourth quarter. 

Imbalances in merchandise trade have increased. The US trade deficit with China reached - 355 billion dollars, widening by 14 billion in the fourth quarter. The US trade deficit with the European Union (EU) increased by 12 billion dollars to -241 billion. At the same time, China's trade surplus reached its highest level since 2022, and the EU reversed its previous deficits to record a trade surplus for the year. 

World trade remains stable in 2025, but uncertainty persists. Increased geo-economic tensions, protectionist policies and trade conflicts point to future disruptions. Recent trends in shipping also point to a slowdown, with falling freight rates signalling a weakening of industrial activity, particularly in supply chain-dependent sectors. 

During the Trump Administration, the stock market peaked in January 2018, when President Trump announced tariffs on China. China responded in kind. It also imposed tariffs on steel and aluminium imports from around the world, including Mexico, Canada and the European Union. Canadian lumber was also hit with a tariff, resulting in higher domestic prices. The market retreated and did not reach its January high until August 2018. A minor setback, but a setback nonetheless. 

Domestic consumers pay most of the tariffs, even on raw material imports, as they are imposed by the US government at the port of entry. No one doubts that there are many bad actors on the global stage. We need to address the behaviour of China and other nations, especially when it comes to devaluing their currency and subsidising their own industries to compete unfairly with American companies. Free trade must be fair trade. 

The free market and trade require a system of honour that is rigorously applied through existing bodies, developed to resolve disputes in front of panels rather than on battlefields. If a nation violates the established rules for fairness and integrity, the matter must be addressed. Denial of market access, import quotas, loss of most-favoured-nation trade status, expulsion from the World Trade Organisation and revocation of foreign aid are just some of the many options. 

Tariffs will be counterproductive for investors, consumers and companies in the US and in other countries. Repeating the failed trade policies of the past will only result in worse stock market performance and massive economic distortions. The changing landscape of international trade and the rapid changes in applicable customs regulations can have significant repercussions for companies, which must be vigilant and react. 

But let's not forget the web of barriers that the European Union has been putting up over the last 30 years to protect its industry and agriculture. Europeans have taken them for granted and this is open to review. The great defender of free trade should also look in the mirror before giving free trade lessons.

Key points

On 2 April in Washington, Donald Trump announced his reciprocal tariffs, a new tariff regime that he describes as ‘the big one’ and which should mark a turning point in the new Administration's trade policy. The president wants to revive and rebuild the US manufacturing industry, which over the last 40 years has lost many jobs to countries offering lower wages, such as Mexico and China. But Trump also believes that the United States has a huge trade deficit and that other countries are benefiting from selling their products to US consumers. 

To explain his approach, Trump often cites the example of the 10% tariffs that the European Union applies to car imports from the United States, while this tariff is 2.5% on the US side. More recently, White House spokeswoman Karoline Leavitt highlighted the 50% tariffs that the EU applies to US dairy products. 

According to the World Trade Organisation, the levels of tariffs between the two blocs are, on average, relatively similar: weighted by the volume of trade, the duties applied by the EU to US products amount to 4.2% for agricultural products and 0.9% for non-agricultural products. 

But the Administration could also take into account elements that it considers to be non-tariff trade barriers, such as value added tax (VAT). 

On 26 February, Trump declared that he would impose tariffs of 25% on the European Union. According to the latest statements from the various economic leaders of Trump's team, the tariffs should be in double figures and be applied to all imports entering the country or only to those countries with the largest trade surpluses with the United States. 

Several points remain unresolved: will tariffs be applied to all imported products or only to certain sectors such as semiconductors, pharmaceuticals, wood and copper? Will they be charged immediately or with a period of application that would allow for possible negotiations with the affected countries? Will they be cumulative, for example, for cars, in addition to the 25% already announced? Or will only the highest level be taken into account? 

For companies that depend on a global supply chain, the only certainty is uncertainty. And that uncertainty doesn't just affect long-term strategic planning. It is already changing the way companies procure raw materials and other inventory. 

That means that the disruptions created by tariffs don't begin when those tariffs go into effect. They begin as soon as companies start to fear the impact of that disruption. 

Tariffs could increase the cost for the automotive industry. It is therefore urgent that companies examine their supply and sales chains to anticipate the possible impact of these measures and of the upcoming changes planned on both sides of the Atlantic, prioritising the search for alternative scenarios to mitigate the impact of the new duties.

Can we find a conclusion that allows us to establish something today?

Let's not forget that even if the tariffs last four or five months until a hypothetical future agreement is reached between Trump and his counterparts, the damaging effects will begin to be felt and will last for many years because it takes much longer to reverse the negative effects of a tariff war and non-tariff barriers than it does to feel their effects. 

In conclusion, tariffs can have a significant impact on global trade. They can increase the prices of goods and services, affect the competitiveness of companies and limit business opportunities. They can also affect the efficiency of global supply chains and cause retaliation and volatility in markets. It is therefore important for countries to work together to reduce trade barriers and promote free trade, which can benefit all nations and improve the global economy. 

Notes. 

(1) Herbert Clark Hoover (West Branch, Iowa; 10 August 1874-New York; 20 October 1964) was an American engineer, businessman and politician who served as the thirty-first president of the United States from 1929 to 1933. His presidency was marked by the Great Depression, and his policies and methods for combating it were considered mediocre. The Great Depression caused the collapse of a large part of the US economy, with the consequent impoverishment of the population; however, President Hoover's general reaction was to try to avoid financial panic and to consider the Great Depression as a temporary crisis. He attempted to combat it by promoting volunteer work, developing major public works such as the Hoover Dam, promoting protectionist measures such as the Smoot-Hawley Tariff Act, increasing the top income tax rate from 25% to 63% and increasing the corporate income tax. 

(2) The most favoured nation (MFN) regime is a fundamental principle of international trade that establishes that countries should treat all their commercial partners equally. The MFN is a fundamental principle of the multilateral trading system established after the Second World War. Its objective is to replace the frictions and distortions of bilateral policies based on force. 

(3) Read The 2024 National Trade Estimate Report on Foreign Trade Barriers (NTE) 

(4) Lesotho is a country that ‘benefits’ from the AGOA (African Growth and Opportunity Act) agreement with the United States, due to its economic vulnerability. This is not the first time that Trump has lashed out at Lesotho, as some time ago, he called it ‘the country that nobody has heard of’ in one of his speeches in the US Congress. This naturally led to criticism from Lesotho diplomats, who considered it ‘surprising and disappointing that he claims that nobody knows Lesotho, especially given that the United States has an embassy here,’ as Minister Lejone Mpotjoane stated. (La Razón Internacional)