Why Trump’s Tariffs Could Backfire on the US Economy

In his most far-reaching trade measures since returning to the White House, Donald Trump enforced 25% tariffs on imports from Canada and Mexico, which came into force on Tuesday, 4 March. He also imposed an additional 10% tariff on Chinese imports, on top of a 10% levy rolled out last month. And of course, he declared his intention to implement similar measures on European imports last week. But as usual with Trump, we don't know much yet. Will the tariffs target specific products, or will they be applied across the board? That remains to be seen. It is also unclear whether these EU tariffs will mirror those applied to Canada and Mexico.

By now, most people recognize that President Trump embraces unilateral tariffs not just with the traditional motivation of protecting domestic jobs but as a tool of leverage — to address issues ranging from migration to drug trafficking, technology transfers, and, a new one in the growing list of grievances, to address the EU that was created “to screw the US,” according to the President.

His approach raises deeper questions: How do unilateral tariffs or the threat of such tariffs affect business investment? What are their long-term consequences? And, crucially, what will they achieve, or will they backfire on American firms and consumers?

These are complex questions, but economists — who have spent decades analyzing trade policies and the consequences of protectionism — find levying unilateral tariffs a risky and flawed strategy. Here are three key reasons why:

Unilateral Tariffs Provide Only Short-Run Leverage

The United States, by virtue of its large market, has the power to inflict significant damage on smaller economies through unilateral tariffs. We saw this recently when Colombia scrambled to avoid a 25% tariff on its exports, fearing economic disruption and job losses. However, the short-term pressure the U.S. can exert is likely fleeting. Initially, some trading partners may concede or seek to negotiate – UK Prime Minister Starmer is the last one hoping for an exception from the cascade of tariffs. Over time, however, most will adapt by coordinating with others to retaliate. The logic is straightforward: smaller players do not engage a dominant economy alone. Instead, they form coalitions.

This is precisely the kind of escalating trade war that the rule-based global trading system was designed to prevent. A stable trade system relies on large countries showing restraint and abiding by rules. This encourages other countries to engage and trade. If the U.S. wants to curb forced technology transfers or negotiate stronger intellectual property protections, it needs allies — not antagonism — to shape trade rules that constrain China or other actors.

Unilateral Tariffs Erode Trust and Create Uncertainty

Unilateral tariffs function much like broken contracts. Even if some are never implemented, the uncertainty they create is damaging. Consider the U.S.-Mexico-Canada Agreement (USMCA), NAFTA’s successor which President Trump negotiated, and which guarantees tariff-free trade across North America. In the wake of pandemic-related supply chain disruptions and the economic fallout from the Ukraine war, USMCA could be a beacon for nearshoring and reshoring manufacturing production. With new tariffs firms may reconsider long-term investments in Mexico — or even in the U.S., given how deeply integrated some supply chains are.

If there is uncertainty about whether future tariffs will raise the cost of essential imported components, for example, a car manufacturer may decide not to nearshore or reshore. Businesses thrive on a stable policy environment. When firms fear that trade agreements can be disregarded at any moment, they delay or cancel planned expansions. This unpredictability slows economic activity and weakens confidence in the U.S. as a reliable trade partner. And this does not just harm foreign companies — it affects American businesses, workers, and consumers as well.

Tariffs Protect Companies That Are Not Globally Competitive

Tariffs allow domestic companies to produce at higher costs without fear of competition. Protected by tariff walls, firms can remain inefficient, charge higher prices, and avoid the pressure to innovate. A 100% tariff on electric vehicles (EVs), for instance, keeps China’s much cheaper EVs out of the U.S. market, but at what cost? A 25 % percent tariff on European goods, may give US companies that directly compete with imports from Europe a edge. With tariffs, however, consumers face fewer choices and higher prices, while domestic manufacturers have little incentive to improve.

Equally concerning is the risk of cronyism. Trump’s inclination to carve out exceptions for those who curry favor means that companies with the best lobbyists—not the most productive ones—stand to benefit. Competition, not protectionism or favoritism, drives innovation, strengthens industries, and delivers better products at lower prices for consumers. International competition from China’s Deepseek artificial intelligence model exposed the cost inefficiencies in U.S. tech firms’ pursuit of AI, illustrating the potential danger of limiting competition.

A Costly Spectacle

Unilateral tariffs may provide a striking display of executive power, but they are an imperfect and often counterproductive policy tool. While it may be politically tempting to blame America’s economic challenges on foreign competitors, the reality is more complex. Breaking trade agreements and ignoring established rules has long-term costs — not just for other countries but for American businesses, workers, and consumers. If the U.S. wants to address pressing issues such as intellectual property theft or illegal migration, it needs strategic partnerships, including the EU, not unilateral tariffs that alienate allies. A rules-based system is not just about fairness—it is about ensuring long-term economic prosperity. Unilateral tariffs are a blunt instrument that often inflicts more harm than good.

Peter Debaere is the Tipton Snavely Professor of Business Administration at the University of Virginia’s Darden School of Business. He is an international economist, with a focus on international trade, multinationals and trade policy.