Since 2017, tariffs have been a key tool in US trade policy under President Donald Trump. By 2025, research from the Yale Budget Lab (YBL) reveals that these tariffs have harmed the US economy and global trade dynamics. Contrary to the intended goal of strengthening domestic industry, the tariffs have caused economic losses at home and abroad.
About Tariffs and Their Economic Role
Tariffs are taxes imposed by a government on imported goods. They raise the cost of foreign products to protect local industries. However, economic theory warns that tariffs often backfire. The increased costs are usually borne by domestic consumers and companies. This reduces purchasing power and disrupts supply chains.
US Economy – The Biggest Loser
YBL analysis shows the US economy has suffered the most from these tariffs. Real GDP growth in 2025 and 2026 is about 0.5 percentage points lower than it would have been without tariffs. Long term, US GDP shrinks by 0.35 percentage points annually. In monetary terms, this equates to a loss of roughly $105 billion each year. This is economic setback comparable to nearly one-third of Pakistan’s GDP or India’s capital expenditure budget.
China and Other Major Economies
China’s economy also faces a persistent drag from the tariffs, losing 0.18 percentage points of GDP growth annually. Other major economies feel the impact but to a lesser degree. The ongoing trade tensions between the US and China have prompted high-level talks, including a recent meeting between Presidents Trump and Xi Jinping in South Korea, aiming to ease disputes.
Winners and Losers Among US Allies and Neighbours
Some regions have benefited despite the tariff war. The UK and European Union, while trade rivals of the US, have seen relative gains. Among North American neighbours, Mexico has turned the situation to its advantage, gaining economically. In contrast, Canada has suffered losses. Diplomatic relations appear to influence these outcomes, with Mexico-US ties remaining stable while US-Canada relations have been more contentious.
Broader Global Trade Implications
Globally, tariffs have disrupted supply chains and reduced trade volumes. While the US bears the largest burden, the ripple effects affect many economies. The mixed outcomes show the complex interplay of trade policies, diplomacy, and economic interdependence in the modern world.
Questions for UPSC:
- Taking example of US-China trade tensions, discuss the impact of protectionist policies on global economic growth and international relations.
- Examine the role of tariffs in shaping the economic development of emerging economies with reference to Mexico and Canada.
- Analyse the significance of diplomatic relations in trade negotiations and economic outcomes. Critically discuss with examples from recent US trade policies.
- Discuss in the light of globalisation how unilateral trade measures like tariffs affect multilateral trade agreements and global supply chains.
Answer Hints:
1. Taking example of US-China trade tensions, discuss the impact of protectionist policies on global economic growth and international relations.
- Protectionist tariffs raise import costs, reducing trade volumes and disrupting global supply chains.
- US-China tariffs led to lower GDP growth for both countries—0.35% annual loss for US, 0.18% for China.
- Trade tensions strain diplomatic relations, causing uncertainty and hampering cooperation on other global issues.
- Retaliatory tariffs create a cycle of economic harm, affecting businesses and consumers worldwide.
- High-level talks (e.g., Trump-Xi meeting) illustrate the need to resolve disputes to stabilize global economy.
- Overall, protectionism slows global economic growth and increases geopolitical tensions.
2. Examine the role of tariffs in shaping the economic development of emerging economies with reference to Mexico and Canada.
- Tariffs can create opportunities for some emerging economies to attract trade diverted from tariff-imposing countries.
- Mexico benefited economically from US tariffs, leveraging stable US-Mexico relations and free trade agreements.
- Canada suffered losses partly due to strained diplomatic relations and tariff impacts on integrated supply chains.
- Tariffs disrupt regional trade flows, forcing emerging economies to adapt their export strategies.
- Emerging economies with strong diplomatic ties and trade agreements can mitigate tariff impacts better.
- Tariffs show the importance of trade policy alignment for sustained economic development in emerging markets.
3. Analyse the significance of diplomatic relations in trade negotiations and economic outcomes. Critically discuss with examples from recent US trade policies.
- Stable diplomatic relations facilitate constructive trade negotiations and minimize economic disruptions.
- US-Mexico relations remained stable, allowing Mexico to benefit amid US tariff policies.
- Conversely, US-Canada diplomatic tensions led to economic losses for Canada during tariff impositions.
- Diplomatic quarrels can escalate tariff wars, harming long-term economic partnerships.
- High-level summits (e.g., US-China meetings) show diplomacy’s role in resolving trade conflicts.
- Effective diplomacy is crucial for balancing protectionist policies with global economic integration.
4. Discuss in the light of globalisation how unilateral trade measures like tariffs affect multilateral trade agreements and global supply chains.
- Unilateral tariffs undermine multilateral trade agreements by breaching agreed trade norms and creating uncertainty.
- They disrupt global supply chains, increasing costs and delays for multinational companies.
- Tariffs can trigger retaliatory measures, weakening cooperation in global trade forums like WTO.
- Globalisation depends on open, predictable trade; tariffs reduce this predictability and efficiency.
- Countries may seek alternative trade partnerships, fragmenting global trade architecture.
- Long-term, unilateral measures risk slowing global economic integration and growth.
