The Hidden Long-Term Costs of Tariffs
Tariffs don't just raise prices—they reshape economies in ways that are hard to reverse. The 2018 steel and aluminum tariffs were meant to protect U.S. manufacturers, but by 2021, they had cost the economy over $3 billion in lost output. This pattern is common: while tariffs promise short-term protection, their long-term consequences ripple across industries, stunting economic growth in ways few anticipate.
Lost Market Share Is Rarely Recovered
When tariffs are imposed, affected countries typically respond by sourcing products from alternative markets.
Once these new supply chains are established, they tend to become permanent. Even if tariffs are eventually removed, the original exporters rarely regain their full market position.
For instance, after China retaliated against U.S. tariffs, American soybean farmers lost billions in exports. Even after trade tensions eased, China had already built relationships with alternative suppliers like Brazil, making full recovery impossible. This represents a permanent loss of business opportunity and revenue that compounds over time.
Companies that lose international customers must either scale down operations or absorb higher costs, neither of which contributes positively to economic growth.
Persistent Inflation Without Corresponding Deflation
Tariffs reliably increase prices, but history shows these price increases rarely reverse fully when tariffs are removed. This "ratchet effect" on prices occurs because:
Businesses that raised prices to cover tariff costs rarely lower them completely when tariffs end
Supply chain disruptions and reorganizations create permanent inefficiencies
Domestic producers who raised prices under tariff protection maintain higher prices afterward
This inflationary impact isn't just theoretical—it played out in real-time during the Trump administration's 2018 tariff policy.
The Trump Administration Example
That's what happened in Trump's first term: Although Trump's 2018 metals tariffs modestly expanded US production, they raised costs for cars, tools, and machines and shrank those industries' output by more than $3 billion in 2021, the International Trade Commission found in a 2023 analysis.
This real-world example demonstrates how tariffs designed to help one sector often create larger downstream costs in related industries. The modest gains in metals production were significantly outweighed by losses in industries that use those metals as inputs, resulting in a net negative impact on the economy.
Beyond these measurable economic losses, tariffs also create a different kind of inefficiency rooted in politics, corruption, and regulatory manipulation. Instead of a level playing field, tariffs encourage backroom deals, lobbying, and government favoritism that distort markets even further.
Corruption and Abuse: How Tariffs Enable Cronyism
Tariffs are often presented as tools for national economic security, but in practice, they frequently become mechanisms for political favoritism, backroom deals, and outright corruption. By granting government officials and industry insiders the power to decide who benefits from trade barriers, tariffs open the door to significant abuse.
Lobbying for Protectionist Policies
When tariffs are implemented, industries that stand to benefit quickly mobilize lobbying efforts to maintain and expand them—often at the expense of broader economic interests. This leads to:
Regulatory Capture: Large corporations influence policymakers to maintain tariffs that benefit them while harming smaller competitors and consumers.
Unequal Tariff Exemptions: Companies with strong political connections often secure exemptions, giving them an unfair advantage.
In 2018, U.S. steel and aluminum tariffs prompted over 168,000 requests for exemptions from businesses that relied on imports. Reports showed that larger, politically connected firms were more likely to get exemptions, while smaller competitors suffered higher costs.
Political Favoritism in Tariff Implementation
Tariffs distort markets and create opportunities for political actors to use them as leverage. Politicians often impose or remove tariffs based on electoral or lobbying interests rather than sound economic reasoning.
Under Trump's 2018 tariffs, companies that made campaign donations or had direct access to policymakers were more likely to receive exemptions. In contrast, businesses without political ties faced steep costs, creating an uneven playing field that rewarded influence over efficiency.
Encouraging Smuggling and Black Markets
When tariffs make certain goods prohibitively expensive, it often leads to illicit trade. Rather than protecting domestic industries, this fosters corruption and criminal enterprises.
When Argentina imposed high tariffs on electronics, a thriving black market emerged, with smuggled goods from Paraguay and Chile flooding the country. Instead of boosting domestic production, the tariffs enriched smugglers and corrupt customs officials.
Tariffs as Tools for Political Retaliation
Governments sometimes use tariffs not for economic protection but as weapons to punish political adversaries or favor domestic allies.
Import tariffs and restrictions in China are sometimes adjusted based on geopolitical disputes. After Australia called for an independent investigation into COVID-19's origins, China retaliated with steep tariffs on Australian barley and wine—costing Australian exporters billions in lost trade.
Investment Decline and Uncertainty
Tariffs significantly reduce investment due to increased uncertainty in several ways:
Policy Uncertainty deters businesses from making long-term capital commitments when tariff regimes might change with political winds.
Supply Chain Disruptions force companies to reconsider their global manufacturing and sourcing strategies, often leading to investments in countries with more stable trade environments.
Retaliatory Measures from other countries make U.S. exports less competitive globally, discouraging investment in export-oriented industries.
Compressed Profit Margins from higher input costs make the U.S. less attractive for investment compared to markets without such barriers.
Reduced Foreign Direct Investment occurs as global companies reconsider U.S. operations when faced with unpredictable trade barriers.
Capital Reallocation away from U.S. markets as investors seek environments with clearer, more stable trade policies.
While protected industries might see some short-term investment boost, the broader economy experiences investment drought that stunts growth potential.
Negative Growth: The Cumulative Impact
Perhaps the most significant long-term cost is the cumulative impact on economic growth. Tariffs create a cascade of negative effects:
Reduced productivity through inefficient resource allocation
Diminished investment as businesses face uncertain trade environments
Innovation slowdowns as competition decreases
Higher input costs that make downstream industries less competitive globally
These factors combine to produce lower growth trajectories that can persist for decades. The difference between even a small percentage of foregone annual GDP growth compounds dramatically over time, representing trillions in lost economic output that can never be recovered.
Conclusion
Ultimately, tariffs don't just tax imports—they tax economic opportunity itself. The cost isn't measured only in dollars but in lost innovation, stagnating industries, and a weaker economy for future generations.
Tariffs consistently create inflation that persists long after implementation and generate negative GDP growth through distortionary effects. The evidence is clear: if we want to build a strong commercial foundation for lasting prosperity, we need to eliminate tariffs, not expand them. Free and open trade has consistently proven to be the path to greater economic growth, lower prices, and more opportunities for businesses and consumers alike.
Tariffs make imports more expensive and economies less competitive. The greatest cost isn't just what we pay at the checkout counter but the opportunities lost: investments not made, businesses that never grow, and industries left behind. If the goal is long-term prosperity, the answer isn't more protectionism—it's more competition.
Written by David Cerf | March 2025If you found this analysis valuable, consider subscribing to for more insights on economic policy and its real-world impacts.