Tariff Wars Between the USA and the Rest of the World
President Trump has made it abundantly clear that import tariffs will be one of his primary tools in pursuing his vision of “Making America Great Again.” Recently, his administration announced that [import] tariffs on goods originating from Canada, Mexico, and China will be implemented starting February 1, 2025, with little to no notice.
What exactly is the new U.S. president trying to achieve? His official statements remain vague—“President Trump will announce the America First Trade Policy” and “All agencies will take emergency measures to reduce the cost of living.” However, we can assume his key objectives include reducing national debt, fostering economic growth, lowering unemployment, and managing interest rates.
First, let’s set aside interest rates, as they are tools to achieve economic targets rather than objectives themselves. The national debt issue is also largely unrelated to the trade deficit. Additionally, with historically low unemployment, that is not a major concern. However, economic growth could indeed benefit from bringing businesses back to the U.S.
Breaking It Down: How Will Tariffs Work?
The tariff levels for Canada and Mexico (25%) are severe, while the announced tariff rate on Chinese goods (10%) is relatively mild and unlikely to compel businesses to relocate production to the U.S. But what if the tariffs on Chinese imports were raised to 25% or more? Let’s explore the possible consequences:
Price Hikes on Chinese-Made Goods
- A tariff increase would, at least temporarily, push up prices for Chinese-made goods in U.S. markets. Even at 10%, price increases are inevitable.
- Relocating a factory is not an overnight process—it takes time to redesign supply chains, transfer technology, and manage workforce transitions.
- The result? Inflation rises, forcing the Federal Reserve to increase interest rates, making U.S.-made goods less competitive on the global market. This acts as an indirect tax on consumers and businesses alike.
Relocation of Manufacturing—But Not to the U.S.
- A tariff war will likely shift manufacturing from China to lower-cost countries, but not necessarily to the U.S.
- Why move to the U.S. when India, Vietnam, or Indonesia offer cheaper labor and lower operational costs? These nations have established industrial capabilities, logistical advantages, and workforce readiness that make them attractive alternatives.
Workarounds: Hiding the Country of Origin
- Companies may attempt to circumvent tariffs by re-routing products through third-party countries. For example, an Indonesian firm could purchase Chinese goods, rebrand them, and export them to the U.S. under a different label.
- This raises enforcement challenges: Would these goods still be considered “Chinese-made”? It’s worth remembering that iPhones are designed in California but produced in China (and increasingly in India) using components from multiple Asian countries.
Chinese Retaliation
- Expect countermeasures such as stricter capital controls, targeted regulatory actions (sanctions, visa restrictions, higher taxes), and policies that could hurt U.S. firms operating in China.
- These could lead to financial losses for U.S. companies reliant on Chinese markets.
Shortages of Critical Goods
- In the short term, the U.S. could face supply shortages for essential goods, especially in industries where domestic production capacity is inadequate.
Who Will Work in These Factories?
- Even if companies relocate production to the U.S., who will staff these factories?
- High-tech and critical industries are already in the U.S. or allied countries. What’s needed is cheap labor—yet Trump is simultaneously pushing mass deportations and tightening immigration.
- With work visa wait times exceeding a year1 and near-zero unemployment, where will the necessary workforce come from?
Political Resistance & WTO Compliance
- Trump’s tariff plans, while expected, have not been universally welcomed by policymakers. Will these tariffs even survive beyond a second Trump term?
- As a WTO member, the U.S. is bound by certain trade rules. It will be interesting to see how the WTO responds to this stance. For example, China recently took official action against Türkiye’s treatment of Chinese electric vehicles.
Lessons from the Past: The U.S. Auto Industry’s Mistakes
History offers a textbook case: When oil prices soared in the 1980s, inefficient American cars lost market share to Japanese vehicles. According to a Yale-published study, U.S. automakers stagnated while Japan’s global car production share rose from 3.6% in 1969 to 25.5% by 1985. Instead of investing in competitiveness, U.S. firms relied on protectionist policies, which ultimately failed2.
Conclusion: Will Tariffs Boost the U.S. Economy?
We remain skeptical. While tariffs may, in the very long run, encourage industrialization, they are unlikely to deliver immediate economic gains. Instead, they could lead to higher inflation, supply shortages, and global trade disruptions. If Trump follows through with these protectionist measures, we foresee declines in the value of U.S. companies heavily reliant on China.
Ultimately, the real question is: Will these tariffs actually bring jobs back to the U.S., or will they simply push production elsewhere? Based on history, we suspect the latter.
- https://egov.uscis.gov/processing-times/ for visa H1B and form I-129 currently shows waiting time of 3.5-5.5 months depending on the Service center, for the sake of example. ↩︎
- “American demand for Japanese cars was so high in the early 1980’s, that, in 1985, MITI announced the continuation of a Voluntary Restraint Agreement to limit the amount of auto exports Japan shipped to the United States. The 1985 VRA had been in place several years prior and responded to the concerns of the US automakers, who believed Japan was becoming a hegemonic force in the automotive industry: between 1969 and 1985 Japan increased its share of global car production from 3.6% to 25.5%. But instead of catching up to the Japanese industry, the Americans stagnated. Economics reporter Hobart Rowen wrote in The Washington Post that, “the American industry did almost nothing to make itself competitive with producers of small Japanese cars. The VRA never was linked to specific investment decisions or wage concessions.” In other words, the American automakers did little to recalibrate their investments in relation to Japanese market expansion” – https://elischolar.library.yale.edu/cgi/viewcontent.cgi?params=/context/yurj/article/1032/&path_info=the_keiretsu_advantage_how_japanese_automakers_thwarted_american_competition.pdf page 6 ↩︎