Even if you have been living under a rock since January 2025, there’s a good possibility that news of tariffs and trade wars have reached you. For many Americans already rattled by years of inflation, impending rising prices as a result of tit-for-tat tariffs cannot come at a worse time. Wall Street, which had an euphoric reaction to President Trump’s election, is now on the verge of a bear market.
While tariff disputes aren't new to global economics, the current landscape is uniquely volatile, bringing unsettling echoes of protectionism last seen during the Smoot-Hawley Tariff Act of the 1930s. The Smoot-Hawley parallel should put all students of economics on high alert. As Thomas Sowell stated in 2018 during the first Trump administrations's threat of tariffs, "I happen to believe that the Smoot-Hawley tariffs had more to do with setting off the Great Depression of the 1930s than the stock market crash. Unemployment never reached double digits in any of the 12 months that followed the crash of October 1929, but it hit double digits within six months of passage of Smoot-Hawley, and stayed there for a decade."
Trump’s approach aims at reviving American industries and correcting persistent trade deficits with major economies such as China, Mexico, and the European Union. Yet, this aggressive stance has triggered immediate retaliations from these nations, suggesting a rapidly spiraling trade conflict. For instance, Trump's recent 25% tariffs on steel and aluminum imports have led the European Union to plan protective measures for its own industries, directly responding to redirected trade flows that threaten their domestic producers.
The real danger here lies not merely in the escalation of tariffs but in the broader implications these actions have on global economic cooperation and diplomatic stability. Unlike the post-World War II era, where international organizations like the WTO facilitated negotiations and dispute resolutions, today's geopolitical climate is increasingly fractured. With the U.S. sidelining the WTO’s authority by refusing to appoint judges and accusing the institution of overreach, the traditional mechanisms for managing trade tensions are significantly weakened.
This global shift toward protectionism isn't isolated to Trump's policies alone. Countries worldwide are already intensifying defensive economic measures in response to excess manufacturing capacities in China, particularly in steel, electric vehicles, and chemicals. Vietnam and South Korea, for instance, have imposed steep penalties on Chinese steel to protect domestic markets from an influx of cheap imports, while Mexico and Indonesia are launching similar defensive probes and tariffs.
Economists caution that while today's situation might not precisely mirror the Great Depression, the economic consequences could still be substantial. The surge in tariffs introduces uncertainty, discourages investment, disrupts supply chains, and ultimately inflates consumer prices. BMW, a global automotive giant, anticipates losing roughly $1.1 billion due to U.S. tariffs affecting its production and imports, emphasizing the collateral damage felt by companies worldwide.
More subtly but just as critically, escalating protectionism erodes trust between trading partners, fragmenting long standing alliances and encouraging nations to seek greater economic independence. The IMF has already noted the emergence of economic blocs formed around geopolitical allies, marking a stark reversal from previous decades' emphasis on global integration and open trade.
While Trump’s supporters argue tariffs will revitalize domestic industries and employment, the economic reality is more complex. History suggests protectionism rarely achieves sustained economic growth and instead often results in higher consumer costs, reduced efficiencies, and strained international relations.
Reversing this trajectory towards protectionism won't be straightforward. Tariffs, once implemented, become bargaining chips in international negotiations, making unilateral removal politically challenging. Coupled with escalating geopolitical tensions and nationalistic economic policies, the prospects of returning to a genuinely open global market seem increasingly remote.
The critical takeaway from these developments is clear: global economies and governments must tread carefully. Though protectionism can offer temporary relief for targeted industries, history warns us that the broader implications—economic isolation, diplomatic strain, and stunted global growth—far outweigh these short-term benefits. As tariffs continue to escalate, policymakers worldwide would do well to recall lessons from the past before engaging further in this risky economic gamble.
If you're interested in further reading on this topic, the WSJ has an excellent article that you can dig into.
