MORE THAN 90 years ago Franklin Delano Roosevelt surveyed the wreckage of the Great Depression. He pointed to one of its causes: sky-high tariffs had put America on the “road to ruin” by inviting retaliation and suffocating investment. It was a painful lesson, and it took decades of sustained global effort, led by America, to bring tariffs down and let commerce flourish. From our vantage in 2025 the perils of protectionism should still be abundantly clear. Tragically, if Donald Trump gets his way, America risks repeating the errors of the past.
There is uncertainty about how far Mr Trump will actually go in his second term. Investors and diplomats alike were relieved that he refrained from slapping universal tariffs on all imports on his first day back in office. But make no mistake: the man who declared tariff to be the most beautiful word in the dictionary is determined to ratchet up protection. He sees tariffs as a simple tool to achieve multiple objectives: shrink America’s trade deficit, rebuild its manufacturing might and generate a gusher of revenue for the government. On every count he is wrong.
Mr Trump’s dalliance with tariffs in his first term already shows that they did nothing to narrow America’s trade deficit. One reason is that the dollar tends to strengthen when tariffs are applied. The first-order effect of tariffs is to reduce American demand for imported goods, leading to less demand for foreign currencies. But when fewer dollars are sold, the greenback’s value increases which in turn depresses global demand for American exports. The result is that even as Americans buy less from the rest of the world they also sell less to it.
To truly shrink its trade deficit America would have to undergo fundamental economic changes, with its savings rate increasing or its investment decreasing. It is not obvious that either change would be desirable: high investment, in particular, is vital if America is to hold its own in new technologies, including artificial intelligence. A monomaniacal focus on the trade balance has no bearing on the economy’s real strengths. Just look at Germany and China today, both running giant trade surpluses and both mired in lacklustre growth.
