An article on the eve of August 12, the day when Trump tariffs come into force against dozens of countries, including China.
Introduction
When Trump announced – the so-called “Liberation Day” tariffs – on April 2, 2025, during a White House Rose Garden address, he framed it as an act of economic nationalism. The accompanying messages were simple, punchy, and politically potent: tariffs were portrayed as a weapon to punish unfair foreign competitors, restore lost manufacturing jobs, and strengthen national security by restoring America’s economic sovereignty. Through relentless flow of tweets, press conferences, and speeches, Trump continues to attempt to falsely perpetuate the claim that “other countries will pay for the tariffs.”
Beneath these grandiose rhetorics, however, lies the economic reality that the tariffs have functioned primarily as an indirect tax on Americans – especially hurting the lower-income households – who live from pay-check to pay-check. The immediate economic effects have been predictable and well-documented: higher prices for consumer goods, supply chain disruptions, retaliatory tariffs that hurt American exporters, and erosion of U.S. competitiveness in global markets.
As the U.S. economy accounts for over one-fourth of global GDP, in the immediate, the global economy too has been thrown into turmoil by the frequent whimsical changes in the applicable tariff rates, and the dates when they will come into effect. If the tariffs continue in the longer-term then they are likely to undermine the U.S. dollar’s role as the world’s reserve currency and create strategic openings for China to expand its financial and geopolitical influence.
This article examines the issues associated with Trump’s tariff policy – why it was thought of, how it is sought to be justified politically, the economic implications for Americans and the world, and the strategic geopolitical impact it will have in the long term.
Domestically Focused Revenue Extraction
The Fiscal Hole Created by Tax Cuts
In December 2017, Trump had signed the Tax Cuts and Jobs Act (TCJA) into law. The Act was marketed as a middle-class tax cut, but analyses by the nonpartisan Congressional Budget Office (CBO) showed that the largest benefits accrued to the wealthiest Americans and to corporations. The net effect, according to the CBO, was to increase the federal deficit by roughly $1.9 trillion over ten years, even after accounting for potential growth effects. The tax proposals in Trump’s “Big and Beautiful Budget Bill” of 2025 make the 2017 tax cuts permanent, and provide additional tax benefits, essentially to the wealthy – increasing the projected federal deficit to about $3.4 trillion over the next decade.
Who Will Pay the Tariffs?
In economic terms, the “incidence” of a tax refers to who ultimately bears its burden. A study published in 2020 by NBER found that the U.S. tariffs imposed in 2018 & 2019 on China were passed on almost entirely to U.S. importers and consumers and were not borne by exporters. This outcome is consistent with basic price theory: if foreign producers face inelastic demand for their exports to the U.S., they will not absorb large portions of the tariffs by reducing prices; instead, the U.S. side will absorb it in the form of price increases.
Why Tariffs Look Politically Attractive?
Tariffs are Trump’s attempt to fill the fiscal hole that will be created by the tax cuts for the rich in 2017 & 2025. Trump has repeatedly framed tariffs as a penalty on foreign nations rather than as a domestic tax. But tariffs are taxes – just not the kind paid directly to the IRS by households. Instead, they are collected at ports of entry from importers, who then pass them on through the supply chain to the final consumers. This indirect structure makes the tax less visible, but no less real for consumers.
Tariffs are a Regressive Tax in Disguise
The burden of tariffs falls disproportionately on lower-income households because they spend a greater share of their income on goods – many of which are imported – than on services. Essentials like clothing, household appliances, and electronics become more expensive. While wealthier households can absorb price increases more easily, poorer households feel them immediately as the expenditure on essentials accounts for a much larger percentage of their income. Trump’s tariffs are thus regressive taxes – quietly taking more, proportionally, from those with lower incomes. As the collection of tariffs from consumers is in dribble through across the board price increases of even small ticket items, what is proposed is essentially robbing the poor to pay the rich (Robin Hood principle in reverse!).
The Smokescreen of Slogans
The Power of Rhetoric in Economic Policy
Economic policy is rarely sold to the public in the language of economists. Politicians rely on simple, emotionally resonant slogans to mobilize support. Trump’s trade policy came wrapped in phrases like America First, Bring Jobs Back to America, Produce in America, and perhaps most famously, Other nations will pay for the tariffs. These slogans are marketing tools that paint tariffs not as taxes on Americans, but as punitive measures that will force foreign countries to stop exploitation of America. The problem is that while the slogans may resonate (at least for some time) with lay public, the economic mechanics tell a different story.
America First – A Policy or a Posture?
“America First” suggests that every policy decision will prioritize American interests. But when applied to trade, the concept is ambiguous. Does it mean maximizing consumer welfare by ensuring the cheapest possible goods? Does it mean maximizing domestic employment, even if that raises prices? Or does it mean using economic tools to project power of America globally?
In practice, Trump’s “America First” tariffs did not deliver on any of these potential definitions till now. They reduced consumer welfare through higher prices, they did not significantly raise manufacturing employment – based on announced investments, and they undermined U.S. global trade leadership by casting America as an unpredictable partner.
The Mirage of “Bringing Jobs Back”
Trump’s promise to bring back manufacturing jobs played to regions that have suffered under deindustrialization for decades. But economists from MIT, Harvard, and the Brookings Institution have shown that most U.S. manufacturing job losses since the 1980s have been due to automation, not trade.
Even in cases where tariffs might encourage reshoring of production, the new facilities would typically be automated to remain competitive. This means that while some investment may return to U.S. soil, it will not recreate the labor-intensive jobs of the past. In short, tariffs are a blunt and inefficient tool for job creation in a modern economy.
“Other Nations Will Pay” – The Core Deception
Of all the slogans, “Other nations will pay” is the most directly misleading. Tariffs are collected at the U.S. border from U.S. importers. While foreign producers may sometimes lower their export prices to remain competitive, empirical evidence shows this effect has been small under Trump’s tariffs. As mentioned earlier, an NBER study found that most of the cost, arising from tariffs imposed on imports from China in 2018 and 2019, stayed within the U.S.
This is why economists across the political spectrum – from conservative think tanks like the American Enterprise Institute to progressive institutions like the Economic Policy Institute – agree that tariffs are primarily paid by domestic consumers and businesses.
Why the Narrative Persists
There are three main reasons Trump’s tariff narrative has found political traction despite economic evidence to the contrary:
1. Low Visibility of Costs – Tariffs are embedded in the prices of thousands of products. Unlike a sales tax, they are not itemized on receipts. Consumers may notice prices creeping upward but may not connect them to trade policy.
2. Nationalist Framing – By tying tariffs to national pride and sovereignty, Trump made opposition to them seem like disloyalty to America. This discouraged nuanced debate in a politically polarized environment.
3. Short-Term Political Payoff – In the early stages, before full price effects are felt, tariffs could be presented as tough bargaining tactics. When the costs become obvious, the political narrative may be altered through newer distractions to mislead people.
The Historical Parallel
History offers a cautionary tale. The Smoot-Hawley Tariff Act of 1930, designed to protect American farmers and manufacturers, sparked retaliatory tariffs from dozens of countries. Global trade collapsed by two-thirds – deepening thereby the economic crisis and contributing significantly to the Great Depression of 1929-39. While the context is different today, with an array of tools to deal with global economic crisis, the underlying mechanism – using tariffs for political gains at the cost of economic stability – is strikingly similar.
Inflation, Shortages, and Decline in Competitiveness
The Price Tag of Protectionism
The most immediate and measurable effect of tariffs is higher prices for imported goods and for domestic products that use imported inputs. A study published the Peterson Institute for International Economics immediately after imposition of tariffs on Mexico, Canada and China estimated that Trump’s tariffs would cost the average U.S. household around $1,200 per year.
On an earlier occasion, when Trump imposed tariffs of 20% – 50% on imported washing machines in 2018, the prices of both imported and domestically made washers rose by around 25% – because domestic producers raised prices as they no longer faced as much foreign competition. This was a classic example of how tariffs can reduce consumer choice while raising prices across the board.
Ripple Effects on Supply Chains
Modern manufacturing relies on global supply chains, with components sourced from multiple countries for the final assembly. Tariffs disrupt these networks by raising costs unpredictably.
An illustrative example would be of tariffs on imported steel and aluminum which will increase the input costs for U.S. auto manufacturers, as they cannot instantly source the required material domestically. The higher costs would make American cars less competitive abroad and more expensive at home.
This uncertainty on the quantum of tariffs as well as how long they will stay in place will also discourage investment in new capacity.
Retaliatory Damage
Foreign governments did not passively accept U.S. tariffs. China, the European Union, Canada, and Mexico imposed retaliatory tariffs on U.S. exports, targeting politically sensitive industries such as agriculture.
American soybean farmers, who had built decades-long relationships with Chinese buyers, saw their exports plummet. Following the trade war in 2018, the U.S. Department of Agriculture estimated that farm exports to China fell by more than $10 billion. To cushion the blow, the Trump administration authorized more than $28 billion in aid to farmers – effectively transferring taxpayer funds to offset the self-inflicted harm of the trade war.
Erosion of Competitiveness
By raising input costs for American manufacturers, tariffs make U.S. goods less competitive in both domestic and global markets. This is a double blow: U.S. exporters lose market share abroad, and U.S. consumers face fewer affordable choices at home.
Competitiveness is not just about cost – it is about reliability. Businesses around the world prefer to trade with partners who can provide stable pricing and predictable policies. Erratic tariff decisions weaken the perception of the U.S. as a dependable trade partner.
Long-Term Harm to U.S.A.
The Global Role of Dollar
The U.S. dollar has occupied a unique position in the world economy for nearly eight decades. It is the dominant currency for settling international trade, the primary asset held by foreign central bank as reserves, and the main currency used in global finance.
As of 2024, roughly 58% of all global foreign exchange reserves were held in dollars – down from over 70% two decades ago, but still far ahead of the euro (20%), Japanese yen (6%), and Chinese yuan (3%). The dollar is also involved in nearly 88% of foreign exchange transactions worldwide, according to the Bank for International Settlements.
This dominance creates several major advantages for the United States:
1. Lower borrowing costs – U.S. Treasury securities are considered the world’s safest and most liquid assets, allowing the federal government to borrow at lower interest rates.
2. Seigniorage – When other countries hold U.S. dollars as reserves, they are essentially giving the U.S. an interest-free loan.
3. Financial leverage – The U.S. can use the dollar’s centrality to enforce sanctions, as seen in cases involving Iran, Russia, and North Korea.
4. Crisis resilience – In times of global instability, investors flock to dollar-denominated assets, strengthening U.S. financial stability.
The Trust Factor Behind the Dollar
The dollar’s dominance is built on trust. Other nations use the dollar because they believe the U.S. will maintain stable political institutions, respect the rule of law, and pursue predictable, market-friendly economic policies.
The Trump-era tariffs, while not directly undermining the technical mechanisms of the dollar system, signal that the U.S. is willing to use economic policy as a blunt political instrument, even at the cost of global disruption. Combined with Trump’s threats to withdraw from longstanding trade agreements and his open criticism of institutions like the World Trade Organization (WTO), this unpredictability introduced doubt into the minds of foreign governments and investors.
How Tariffs Undermine Dollar Dominance
The connection between tariffs and the dollar’s status may seem indirect, but it is real:
1. Reduced trust in policy stability – If the U.S. can abruptly impose tariffs on close allies (as happened with Canada and the EU over steel and aluminum), trading partners may worry that the same unpredictability could extend to financial markets.
2. Encouraging diversification – Countries seeking to reduce exposure to U.S. political risk have a direct incentive to settle trade in other currencies or to hold reserves in alternatives currencies to the dollar.
3. Empowering competitors – By alienating trade partners, the U.S. indirectly drives them toward emerging financial systems – many of which are being developed by China.
The Global Diversification Trend
There were signs of a slow shift toward currency diversification, even before Trump’s presidency. Russia, for example, has been actively reducing its dollar holdings since 2014, partly in response to U.S. sanctions. The European Union has pushed for greater use of the euro in global trade, especially in energy markets.
Trump’s aggressive tariff policies have added momentum to this trend. Countries such as India, Iran, and several in Africa have begun conducting more trade in local currencies or in yuan. While the dollar remains dominant, the share of global reserves held in dollars has fallen steadily, according to IMF data.
This erosion may not cause an immediate collapse, but it represents a long-term strategic risk: once trust in the predictability of U.S. policies is damaged, rebuilding trust in dollar could take decades – if it can be rebuilt at all.
The Seigniorage Threat
Losing reserve currency share would also reduce seigniorage revenues. A smaller global role for the dollar means less demand for physical and digital dollars abroad, weakening the “free loan” effect the U.S. currently enjoys. The cost of U.S. government borrowing would rise, putting more pressure on domestic budgets already strained by deficits – deficits made worse, ironically, by the combination of Trump’s tax cuts and tariff-related economic distortions.
China as the Strategic Winner
China’s Grand Strategy
China’s economic rise is no accident. Since the early 2000s, Beijing has pursued a dual-track approach:
1. Integrating deeply into the global trading system (including joining the WTO in 2001) to benefit from existing rules.
2. Building parallel institutions and infrastructure to reduce dependence on U.S.-controlled systems.
Trump’s tariffs have accelerated China’s motivation to pursue the second track. If the U.S. could suddenly disrupt trade flows with a key partners like Canada, Mexico, and China, Beijing reasoned, it needed alternative systems immune to U.S. pressure.
The Belt and Road Initiative (BRI)
The BRI, launched in 2013, is China’s sprawling global infrastructure and investment program, covering more than 140 countries. While its primary focus is on roads, ports, railways, and energy projects, it also has a strong financial component: many BRI contracts are denominated in yuan, encouraging participating countries to hold and use the Chinese currency.
By deepening economic ties and creating dependency through infrastructure financing, China is building the foundations for a yuan-based trade network.
CIPS – China’s Alternative to SWIFT
The Cross-Border Interbank Payment System (CIPS), launched in 2015, is Beijing’s answer to the Belgium-based SWIFT network that underpins most global bank transactions. SWIFT is not owned by the U.S., but it operates within a Western-led financial framework that Washington can influence, especially when imposing sanctions.
CIPS allows banks to clear and settle cross-border yuan transactions directly. While still far smaller than SWIFT, its growth has been steady: by 2023, CIPS was processing more than $12 trillion in transactions annually, up from just $6 trillion in 2020.
For Beijing, CIPS is more than a payment system – it is a strategic hedge. If geopolitical tensions escalate, China wants a viable alternative to dollar-based systems for itself and its partners.
How Trump’s Tariffs Helped China
Ironically, the U.S.-China trade war gave Beijing a strong talking point to persuade other countries to consider alternatives to U.S.-linked systems. Chinese diplomats could point to Washington’s willingness to weaponize tariffs and argue that while today it’s tariffs, tomorrow it could be financial sanctions or blocked access to payment networks.
Several countries facing U.S. political pressure – including Russia, Iran, and Venezuela – have already embraced yuan settlements. Others, like Brazil and Saudi Arabia, have shown interest in conducting portions of their trade with China in yuan, particularly for commodities like oil.
The Reserve Currency Ambition
China’s long-term goal may not be necessarily to replace the dollar outright – it is to create a multipolar currency system where the yuan plays a much larger role. Even modest gains in reserve currency status would give China more economic resilience and global influence.
The share of global payments in yuan has risen steadily since 2015 to about 6% currently. While still small compared to the dollar, the increases is significant in a short time frame.
The Strategic Cost to the U.S.
Every step China takes toward financial self-sufficiency and international yuan use reduces U.S. leverage. The ability to enforce sanctions, to shape global trade norms, and to borrow cheaply are all tied to the dollar’s dominance. Erosion of that dominance will shrink America’s influence on global financial system.
Trump’s tariffs, far from weakening China’s long-term position, have arguably strengthened it by pushing more countries to consider alternatives to U.S.-centric trade and finance systems.
Conclusion
Donald Trump’s tariffs were sold to the American people as bold acts of economic nationalism – punishing unfair trade partners, reviving manufacturing jobs, and making “other nations” foot the bill. They are, in fact, regressive taxes on Americans, disproportionately burdening the poorest households while delivering only symbolic victories on trade balances and job creation.
While the short-term effects – higher consumer prices, supply chain disruptions, and retaliatory tariffs – are damaging enough, the long-term consequences could be far more serious: undermining trust in U.S. economic policy, weakening the dollar’s role as the world’s reserve currency, and accelerating the rise of China as a financial and geopolitical power.
The history of global trade is clear: countries that embrace open markets, leverage comparative advantage, and maintain predictable policies tend to prosper and lead. Those that retreat into protectionism may score short-term political points, but they risk strategic decline.
Trump’s tariff policy is a case study in how politically appealing narratives can mask economically damaging realities – and how, in a deeply interconnected world, such policies can have ripple effects far beyond domestic borders. In this case, the biggest beneficiary of America’s protectionist turn may be its primary strategic rival – China.
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Recently, the International Monetary Fund (IMF) sharply lowered its forecasts for world growth for 2025 and 2026, warning that the outlook could deteriorate further as US President Donald Trump’s tariffs spark a global trade war.
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