“A tariff is the price which we pay for the maintenance of our independence.” ~ Alexander Hamilton, one of the Founding Father of the United States, advocated for protective tariffs in his 1791 Report on Manufactures.

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A new year brings new ideas, fresh visions, and renewed promises. This is particularly true in 2025, as governments around the world strive to fulfil the commitments they made to their electorates over the past year.

In the United States, a new Trump administration is poised to take office in a few days. With a platform centred on tariffs, deportations, deregulation, and “government efficiency,” optimism about broadening U.S. corporate profit growth and sustained “U.S. exceptionalism” might be premature. Especially given the risks posed by the broad introduction of tariffs.

The prevailing narrative suggests tariffs are inflationary. At their core, however, tariffs are taxes on imports. While they cause an initial price hike on affected goods, their broader inflationary impact depends on whether demand can grow in tandem. From 2018 to 2020, U.S. import prices actually declined, despite tariffs imposed on goods from China and other trading partners during the first Trump administration.

The United States has a long tradition of using import duties to protect domestic industries. Indeed, tariffs have been a cornerstone of American trade policy for over 250 years, from Alexander Hamilton’s 1791 advocacy for protective duties to the Smoot-Hawley Tariff Act of 1930.

However, the economic landscape has shifted dramatically over the past 70 years. Globalisation, international institutions like the World Trade Organization, and the dominance of free-market capitalism have driven down prices and boosted corporate profit margins by leveraging comparative advantages across the world. The U.S. has offshored nearly all its manufacturing, evolving into a service-oriented economy where consumption accounts for approximately two-thirds of GDP.

By increasing the cost of imported goods, tariffs function as a tax on consumers, reducing their purchasing power. Additionally, industries reliant on foreign inputs face higher production costs, which are inevitably passed down the supply chain.

A critical structural challenge lies in the lack of immediate domestic alternatives to many imported goods. Unlike previous eras of protectionism, today’s global supply chains are deeply integrated, making it difficult for businesses and consumers to quickly pivot to domestic producers. As a result, tariffs could lead to demand contraction, with businesses delaying investments and consumers scaling back spending. This combination of reduced purchasing power and constrained supply would only heighten economic pressures.

As history shows, tariffs are not inherently harmful, but their impact depends on the context. In a consumption-driven economy like the U.S., overly broad tariffs risk slowing growth rather than spurring it. The 1930’s Smoot-Hawley act preceded the great depressions – an era where the price of everything fell! Materially! The risk to inflation as a result of tariffs is very much to the downside.

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The Founding Fathers of the United States were a group of influential leaders who played key roles in establishing the foundations of the United States, both politically and ideologically. They were instrumental in the fight for independence from Britain, the drafting of the Declaration of Independence, the Revolutionary War, and the framing of the U.S. Constitution.

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