Inside an investment management firm, senior analyst Alex is mentoring junior analyst Jamie.

Jamie: Hi Alex, I’ve noticed everyone’s talking about tariff wars recently — news headlines, earnings calls, even clients are bringing it up. What’s going on? Why is this such a hot topic now?

Alex: That’s a sharp observation, Jamie — and a very timely one. You’re right, the word “tariff” has been thrown around for decades, but now it’s no longer just a policy lever, it’s being escalated into a strategic weapon.

Jamie: What do you mean by that?

Alex: Let me explain. Tariffs have always existed, as tools to protect domestic industries, collect revenue, or balance trade deficits. But today’s context is different. We’re entering an era where tariffs are no longer just about economics — they’re about power, positioning, and politics.

Why Are Tariffs Escalating into “Tariff Wars”?

Alex: There are a few important reasons why tariffs are once again in the spotlight and why they’re starting to evolve into broader tariff wars:

1. Geopolitical tensions are increasingly complex
   Whether we’re talking about U.S.-China strategic competition, carbon border adjustment debates between the U.S. and EU, or concerns around technological self-sufficiency, trade policy is becoming closely intertwined with foreign policy. In this context, tariffs are not just economic tools but also being used to reflect national positions or strategic priorities.
2. Global supply chains are under stress
   Events like the COVID, the war in Ukraine, and climate-related disruptions have shown us how delicate and interconnected supply chains really are. As countries rethink their industrial dependencies and seek greater resilience, tariffs are sometimes introduced not just for protection, but to encourage reshoring or diversification.
3. Domestic political dynamics play a role
   In many economies, especially where inequality and populist sentiment are rising, tariff policies can be used to demonstrate action. Messages like “protecting local jobs” or “standing up to unfair trade” tend to resonate with the public. While the longer-term economic effects may be more nuanced, tariffs can carry symbolic value during election cycles or periods of economic pressure.

In short, some countries are weaponizing tariffs. And when multiple countries do that at the same time, you don’t get policy. You get a trade war.

Jamie: So how do we define a “tariff war” exactly?

Alex: Great question. A tariff becomes a "war" when tariff actions become retaliatory, prolonged, and multi-layered, spreading beyond isolated industries and dragging in multiple countries. Let’s take a step back and look at some of the major tariff wars in U.S. history to understand the pattern.

Jamie: Wow, this isn’t just a one-off phenomenon —it’s more like a recurring cycle! So, what kind of real impact do these tariff wars have on the U.S. and the global economy?

How Tariff Wars Trigger Inflation and Supply Chain Chaos

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Alex: Especially in today’s tightly connected global supply chains, taxing a single category can ripple across the entire system. A few examples:

1. Tariffs push up product prices
   Tariffs are additional costs. To maintain profit margins, companies often pass these costs to consumers. During the last U.S.-China trade war, U.S. appliances, furniture, and apparel — categories highly dependent on Chinese imports — saw prices rise. This "imported inflation" hits low-income households hardest and weakens overall consumer demand.
2. Fed research confirms the inflation link
   In 2020, the Federal Reserve reported that newly imposed tariffs pushed up average import prices within a year, especially for electronics, toys, and household items. The aggregate consumer price index (CPI) is 0.3% higher than it would have been without the tariffs. This limited the Fed’s room to balance inflation control and growth support.
3. Companies turned to Vietnam and India — with mixed results
   While brands like Adidas and Apple claimed they had gradually moved production away from China, in practice, Vietnam and India yet to have the full capacity in terms of infrastructure, logistics networks and skilled labor force to do so.

In 2021, Adidas experienced significant production disruptions when Vietnamese factories were forced to shut down for weeks due to COVID restrictions. As a result, Adidas reported that the factories capacity shortage in Vietnam led to €400 million sales impact in Q3 2021 alone.

Bottom line? “Trying to save on tariffs ended up costingmore. Trying to reduce risk only created more uncertainty.”

The Deeper Economic Toll of Tariff Wars

Alex: Tariff wars might appear to protect, but over time, they draincompetitiveness and create inefficiencies that outweigh the short-term gains.

1. Consumers bear the brunt
   According to a 2019 study by the Federal Reserve Bank of New York, tariffs imposed during the U.S.-China trade war increased the annual cost per household by approximately $419, accounting for both higher prices and efficiency losses. While some other research estimates ranged higher, this figure is among the most widely cited.
2. Corporate cost pressures spike
   The U.S. Chamber of Commerce reported that tariffs on steel and aluminium increased manufacturing costs by tens of billions of dollars, placing a strain on U.S. industrial competitiveness. These tariffs raised input prices across industries from automotive to construction.
3. Costly supply chain reshuffles
   Apple began gradually moving production of some iPhones to India and Vietnam to reduce dependence on China. However, Apple has acknowledged challenges in scaling up outside China. According to a 2025 Reuters report, Apple plans to make the majority of U.S.-bound iPhones in India by 2026, but infrastructure gaps remain a bottleneck.
4. Hidden export losses
   Following China’s retaliatory tariffs in 2018–2019, U.S. agricultural exports to China dropped from $19.5 billion in 2017 to $9.1 billion in 2018. The impact was particularly severe in farming states like Iowa and Kansas.

The Market Fallout

1. VIX spikes
   After Trump’s new tariff announcement, the VIX surged from 20 to 50+ in just days — a sign of widespread fear. Tech, manufacturing, and commodities sectors sold off sharply.  
2. Historic S&P 500 drop
   On April 2 2025, after new auto and agricultural tariffs on China and Mexico were announced, the S&P 500 plummeted 4.84% and 5.97% in 2 consecutive days, totaling 10.81%.
3. Rush into safe-haven assets
   In May 2025, XAU Spot Gold reached near 3,500 $/oz, and 10-year Treasury yields hovering at the level around 4.2-3%, reflecting a sentiment shift away from risk     assets into low-volatility and fixed income.  
4. Sector divergence
   Tech (especially semiconductors and cloud infrastructure) rallied on domestic production subsidies. But traditional manufacturing, energy, consumer electronics, and agriculture lagged badly due to rising costs and declining demand.

Conclusion: No Winners, Only Costs

Jamie: Sounds like tariff wars are high-cost, low-efficiency — so why do politicians still use them?

Alex: Because political timelines are shorter than economic ones. Tariffs can rally voters and show strength in the short term. But they rarely fix structural issues. History proves this:

• 1930s tariff protections only deepened the Depression;
• The 1980s forced Japan to comply, but also accelerated offshoring;
• Post-2018, the U.S. failed to fully "decouple" from China, while China turned inward — no one benefits.

Jamie: So, tariffs are like painkillers in policy not cures?

Alex: Well, tariffs may offer short-term relief or political gain, but they don’t address the root issues of competitiveness. If tariff wars drag on, they tend to create more friction than progress and, in the end, there are no real winners, only mounting costs and negative ripple effects.