Tariffs Are Rising in Number: What That Means for Globalization and the Global Economy's Future

Tariffs are rising in number as geopolitical conflict intensifies and have “reached an all-time high,” according to a recent analysis from the Hinrich Foundation, a Singapore-based non-profit focused on sustainable global trade. The organization notes that tariffs “are often useful to nurture fledging industries, influence social behavior, and as an important source of state revenue,” which was “particularly so as rapid globalization saw an increasing gravitation toward cheaper products from abroad.” Retaliatory tariffs are more common than ever as tensions rise between nations, used less for trade protectionism than as bludgeoning tools to hamper foreign commercial interests.

Nick Marro

According to Nick Marro, the lead global trade analyst at the Economist Intelligence Unit (EIU), which provides forecasting and advisory services through research and analysis, tariffs “function as a barrier to economic integration and liberalisation.” When one factors in heightened global tension as a result of U.S.-China competition, Russia’s war with Ukraine, the impact of the COVID-19 pandemic, and inflation, it should come as no surprise that “these days,” as Marro puts it, tariffs are “in many cases harbingers of future trade restrictive policies to come.”

Marro notes that retaliatory tariffs have become more common as a result of trade policy becoming more intertwined “with wider political (and geopolitical) disputes” and that the future of global trade is being questioned amidst a wider blowback against globalization. He also provides insight into the U.S.-China relationship and how tariffs have impacted American consumers. Along the way, he explains how tariffs have been used to hurt smaller economies and how countries have used them as a tactic to respond to the climate crisis and even take on more progressive policy initiatives (though whether those initiatives are truly progressive is largely dependent on who one is speaking to).

Marro’s interview with foreignpress.org is within the scope of AFPC-USA’s partnership with the Hinrich Foundation. The AFPC-USA is solely responsible for the content of this interview. 

The following conversation has been condensed and edited for clarity.

How can tariffs make the global trade system less sustainable?

Tariffs, at their core, are a tool of protectionism. Sometimes, governments may see them as necessary to protect their own domestic socio-economic interests, including in terms of shielding their domestic industries from competition. Other times, governments may implement them to achieve specific policy goals, ranging from economic development to national security. In terms of pure economic logic, however, tariffs raise costs for businesses and households, while enhancing inefficiencies around global production and value networks. Tariffs function as a barrier to economic integration and liberalisation, and these days, are in many cases harbingers of future trade restrictive policies to come. 

Why have retaliatory tariffs become more common?

Over the past five years or so, trade policy -- and trade frictions -- has increasingly become intertwined with wider political (and geopolitical) disputes. The latter part of the 2010s was marked by a reassessment of globalisation, not only by populist figures such as Donald Trump and Bernie Sanders, but also some business groups, think tanks, civil society organisations and even average consumers. We're now seeing a worrying trend whereby governments are adopting trade restrictive measures in the name of national security. This isn't new; China was actually one of the first movers on this, even before Trump's trade war. Unfortunately, that logic is now multiplying across regions, painting a worrying picture for the future of global trade. 

What are some of the most harmful tariffs imposed by the U.S. in response to strategic competition from China and how have these impacted consumers?

The tariffs imposed by Donald Trump on China have had an indirect impact on US households. These are indirect because, in most cases, these duties do not target finished consumer goods; rather, they target intermediate inputs, although these also raise the cost of production and manufacturing in ways that are ultimately passed onto US consumers. The Biden administration has maintained these tariffs -- albeit with some exclusions -- and there isn't any indication that they plan on significantly relaxing these duties anytime soon. 

Since late 2020, business groups have cited these tariffs as contributing to the high rates of inflation in the US, but we see higher prices as driven by supply chain shortages, higher global energy prices and strong retail demand tied to pandemic-era fiscal stimulus. Reducing the US tariffs on China would likely help fight some of this inflation, but is unlikely to fully resolve these pressures, given the other economic factors at play behind this inflationary phenomenon. 

How do tariffs adversely impact smaller economies?

Tariffs have the effect of worsening the competitiveness of a foreign good in a domestic market. In other words, imports will be pricier than domestically-produced items. For smaller economies facing tariffs, this means that their products may not be as competitive in a key export destination. 

www.hinrichfoundation.com

Exporting countries could fix this problem via structural solutions.This could include improving domestic productivity in ways which reduce input costs (and allow their producers to sell these same products for a cheaper price, while still maintaining their margins). Specific ways to do this could include better infrastructure, education and technology to improve production processes to cut down and streamline costs. These are long-term and often expensive policy prescriptions, however, which may be difficult for smaller economies to implement. '

Shorter-term solutions could include domestic subsidies, or monetary policy choices that allow the local currency to depreciate, both of which could preserve the cost competitiveness of exported products in the face of high market tariffs. These solutions are politically (and diplomatically) risky, however, and bring with them potential allegations of unfair trade practices, as well as currency manipulation.

How have countries used tariffs as a response to the climate crisis? Have these efforts been successful?

The EU is likely the market to watch in terms of using tariffs to achieve environmental goals, specifically in regards to its carbon border adjustment mechanism, which began on January 1st 2023. That said, implementation will take time -- the CBAM is expected to be adopted gradually over the period until 2027. As a result, it may be difficult to cite obvious success with these policies in the near-term. In addition, countries like Malaysia and Indonesia have voiced strong opposition to the EU's CBAM, specifically in regards to how this policy will affect the palm oil trade. That suggests that the EU's promotion of the CBAM could be diplomatically tricky with much of the developing world, especially as Malaysia and Indonesia rally South American exporters to join their cause. 

Tariffs are often framed in negative terms, according to the majority of news consumers. Is it possible for tariffs, and trade policy at large, to be both protectionist and progressive?

I think the EU's CBAM is a great example of how a protectionist trade policy can be framed (and promoted) as a progressive policy tool. That said, this perspective really depends on who you're talking to. European policymakers may tout the CBAM as progressive, but if you talk to Malaysian and Indonesian officials -- who are concerned about how disruptions to their palm oil exports might affect employment in their own countries -- then the viewpoint is probably more negative.