If you look up the term ‘tariffs’ on Google Trends, a website which shows when and how many times a term has been searched up on Google, you will see there has been a recent spike in Google searches revolving around the term, from a popularity rating of 8 indicating a lack of interest, all the way to 69 on a scale of 100. 

For an economic tool which has been used since 1789, the recent fixation over them may be the largest in recent history. The Trump administration, which is planning on enacting reciprocal tariffs on other nations, is creating a newfound interest revolving around tariffs going into their second term.

Consumers are rushing to their nearest devices to find out what these new tariffs may entail for American consumers: the uncertainty seems to be spilling over into fear for some, while others openly embrace the concept as the protection of American interests. 

But, what are tariffs, and what purpose do they serve? 

What is the point of Tariffs after all? 

Ever since the advent of globalization, world trade has soared, leading to countries which produce goods for the lowest price tag to benefit through increased manufacturing jobs. However, some countries have often faced the costs of trade, with many losing domestic jobs or industries to countries which can produce certain goods at cheaper costs. As a result, countries turned to tariffs, hoping that by putting up barriers they can protect domestic industries from an insurgency of imported goods.

Tariffs are taxes on a country’s imported goods, increasing the cost of said imports and encouraging more demand for domestic goods over foreign goods. Additionally, tariffs are a way to decrease a country’s deficit, ensuring it exports more than it imports and adding to the value of its economy.

So, why tariffs, and why now?

Although historically serving as a good way to offset the negative externalities of trade, tariffs have created a trade imbalance. Who is on the receiving end? In this case, the United States. 

The above chart shows the balance of trade for the US over the years. There was a significant monthly deficit trend post-pandemic as the current balance rose to $918 billion in 2024. This balance was in the range of $500 billion pre-pandemic. So, either the US is importing more or is unable to export to other nations. Either way, this 3.1% of GDP deficit is high even for the US. This could have prompted the current administration to lean towards tariffs, hoping to bring down the walls restraining US exports. 

Note for self: Inflation expectation?

In fact, Trump made his motives with tariffs clear back in 2018 during his first term in office, when he stated in a Tweet, “When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so,” referencing the trade imbalance the US had fostered by that time. 

Tariffs and loss of Employment

The loss is not in terms of US dollars only. When the US imports more, it sends jobs abroad. How? Simple, more imports means less demand for domestic goods, leading to more jobs and investment abroad while domestic industries suffer. Look at the US manufacturing jobs lost post-2000, specifically after the North American Free Trade Agreement (NAFTA) agreement in the 1990s (most of them to China & Vietnam as well as fellow NAFTA member Mexico). A good section which was employed in these manufacturing industries was adversely impacted due to lessened demand for domestic goods and services. This lessened demand has contributed to the loss of ~ 30% of manufacturing jobs over 32 years as can be seen in the graphic below.

What’s worse is the US has developed a deficit, a negative imbalance in the budget, due to tariffs imposed by other countries. The US’s relatively free trade policy has allowed many nations to levy taxes without much retribution. The European Union (EU) is a case in point. The EU tariffs US goods in the range of 10–25%, while US tariffs are below 2.5% on average (CNBC). As a result, the imbalance becomes painfully clear.

Critique of tariffs: Tariff wars

Tariffs have never been clear of controversy. Globalists often argue that the world should get rid of tariffs altogether. Economists have long argued on both sides of the debate alongside consumers, although in a disproportionate manner: some argue tariffs protect domestic interests while others worry about the fallout in global trade. There is no doubt that tariffs also invite retaliations from other nations that can quickly turn into a tariff war. 

As a result, tariffs are not all too popular among all economists. In a recent editorial, The New York Times stated, “When more tariffs are in effect, they will raise prices for consumers and hurt more American manufacturers than they help.”

In response to the recent tariff threats by the current administration, the European Commission president strongly asserted that “The EU will react firmly and immediately against unjustified barriers to free and fair trade, including when tariffs are used to challenge legal and non-discriminatory policies.” 

Consumers and economists alike generally worry tariffs will provide inflationary effects: price rises as a result of taxation on imports may quickly turn into never-ending price hikes, worsening inflation which is already proving to be a tricky battle for the Federal Reserve. 

So, where do we stand now?

As it stands, the US has built some of the largest trade imbalances with China, Mexico, and Vietnam, among others. The table below indicates the key nations that the Trump administration is targeting aggressively to balance.

In fact, the Wall Street Journal editorial board said “Part of the president’s goal is to shrink that trillion-dollar gulf between imports and exports by getting other countries to buy more goods from the U.S. and by spurring domestic manufacturing. The nation’s biggest trading partners—Mexico, Canada and China—contribute a sizable share of the gap.”

This deficit is what Trump seeks to address. He feels the loss of manufacturing jobs and imbalance in trade is addressable through reciprocal tariffs. Trump had even acted on his beliefs in his first term, placing tariffs on Chinese imports which were continued under the Biden administration, with a lack of political disagreement. In fact, Biden himself levied tariffs on China, adding to the work of the Trump administration, with the New York Times headlining the “Biden Administration Ratchets Up Tariffs on Chinese Goods.” Regardless, no visible effects can be observed in the US-China trade deficit. Trump claims a tit-for-tat policy with tariffs can ensure the deficit is reduced and trade is much fairer. 

Will it balance the trade? Time will tell. But one thing is for sure: this has led the world in a thinking mode. Countries and trade organizations are pondering about the true ‘gains of trade’ if they come at the cost of domestic jobs. The US is not willing to give the free market to anyone unless they reciprocate the same.