In today’s Finshots, we tell you about what’s up with tariffs and how they could affect the global economy.

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The Story

If we got a rupee for every time we heard the word tariff this past month, we’d be sitting on a small fortune by now. Because Donald Trump has made tariffs the centrepiece of his economic strategy. Again.

But the thing about tariffs is that they aren’t a new invention. In fact, they’re one of the oldest tricks you can find in economic textbooks.

Back in the day, the US didn’t run on income tax. It ran on tariffs. Foreign goods were taxed at the port, and that money helped build the country. Tariffs also protected fledgling industries from cheaper imports. And it worked. American manufacturing boomed under that protective umbrella.

But things took a turn in 1930 when the US passed the Smoot-Hawley Tariff Act. Tariffs jumped by 20%. Other countries hit back with their own tariffs. Global trade shrank. And while the tariffs didn’t single handedly cause the Great Depression, they certainly poured fuel on the fire.

So after World War II, that ended in 1945, the US flipped the script. It slashed tariffs and became the poster child for free trade. Income tax replaced tariffs as the primary source of government revenue. Global supply chains were born. Goods became cheaper. And everyone from companies to consumers benefitted.

So you could say that the US was built on tariffs. They funded the government without burdening citizens and protected local industry during its vulnerable early stages.

But that was then and we live in a different world now.

And before we dive into today’s drama, let’s quickly understand how tariffs actually work.

Let’s say you own a bakery in India. You and your fellow bakers have agreed to sell cupcakes for ₹30. Life’s good. Then someone starts importing fancier cupcakes from France and sells them for ₹25. Customers flock to the cheaper option and your business tanks. So to protect Indian businesses, the government steps in and slaps a ₹10 tariff on each French cupcake. Now they cost ₹35. And just like that, your ₹30 cupcake is back in the game. That extra ₹10? That’s a tariff — a tax on imports to protect local jobs, fund the government, or pressure trade partners.

Which brings us to the modern era of tariffs.

Now if you haven’t been tracking the recent tariff developments, here’s a TL;DR version. On April 2nd, Trump announced a 10% blanket tariff, with 34% additional tariffs on Chinese goods and 20% on some EU imports. China hit back with 84%, and Trump retaliated by hiking Chinese duties to a jaw-dropping 125%. And recently, while Trump announced a 90-day pause on new tariffs for most countries (with a baseline 10% still in place), China was left out.

But Trump’s no stranger to this game. Between 2017 and 2021, his first term saw tariffs on everything from washing machines to solar panels. And at the time, critics called it reckless and inflationary. But surprisingly, prices stabilised and some domestic industries saw a bump.

So now Trump wants to scale that experiment. And both his supporters and critics have a point.

Supporters argue tariffs bring in money. In 2019, US customs revenue from tariffs was $72 billion. A 10% blanket tariff on all imports (which totalled $3.8 trillion in 2023) could generate hundreds of billions. Trump even floated replacing income taxes with tariffs. Plus, higher import costs could push companies to manufacture locally in the US, protecting jobs.

But the free trade crowd isn’t convinced. They say tariffs are just taxes on consumers. Importers pass on the higher costs to buyers. And retaliation is real. During Trump’s first term, China hit back with tariffs on US soybeans, and American farmers bled. Also, gains in one sector can cause pain in another. Steel tariffs might help US steelmakers, but carmakers relying on cheap imported steel could cut production and jobs.

And the problems don’t end there. We live in a hyper interconnected world today. A single car uses nearly 30,000 parts, and rebuilding all that domestically? Slow, expensive, and inefficient. And it could choke economic efficiency. Not to mention, tariffs could hurt the US globally. As countries begin to look elsewhere, the dollar could weaken and trade ties may erode.

And all of that makes you ask, why is Trump pushing them strongly?

Well, a few reasons.

One, it’s political. “We’re taxing foreign goods, bringing jobs home” makes a great pitch. Two, it’s strategic. Reciprocal tariffs aim to level the playing field. Meaning, if a country charges a 20% duty on American goods, the US will match that. So it’s about leverage. And then it’s also about the big picture. Trump’s camp believes open US markets have been exploited by countries like China, who use subsidies, currency tricks and lax labour laws.

But here’s the thing. Tariffs aren’t a magic fix. Even if they work, nobody knows how they pan out in today’s increasingly globalised world. Economists have debated them for over a century.

Take right now, for instance. The US economy is sitting on a mountain of debt and it paid $583 billion just in interest so far this year. That’s a system running on borrowed money. Now imagine tariffs triggering a full blown trade war. Tensions rise, uncertainty creeps in, and suddenly markets get jittery. And in a highly leveraged system like this, even a small shock can spiral. Tariffs might look like a long term fix, but in the short run, they could easily tip a debt laden economy into a recession.

Maybe that’s why Trump’s easing up. At least for now.

After all, this trade war involves two biggest economies in the world and over $500 billion in US-China trade.

It might seem to you that the US has an upper hand because China relies more on US exports, and it’s the world’s factory. But also note that the US runs a $295 billion trade deficit with China. This leaves China with excess dollars, which it then recycles into US Treasury bonds. If it sells them in retaliation, it could rattle US markets. Things are fragile.

And where does India fit in?

Well, India hasn’t picked sides. Commerce Minister Piyush Goyal says India has no plans to retaliate, and that its own tariffs aren’t “humongous”. The focus instead is on negotiation — a bilateral deal with the US and other trade agreements with biggies like the UK and Europe.

Meanwhile, China is calling for solidarity, urging India to oppose what it calls US tariff “abuse”.

Yet, there’s silence from India and maybe that’s likely by design.

Because here’s the thing. This trade war might be an opportunity. If US companies want to diversify out of China but still need reliable, cost effective manufacturing partners, India might stand to gain. It doesn’t have to pick a side to benefit just yet. It just has to be ready. With the ability to plug into global value chains that are looking to recalibrate. But that window won’t stay open forever.

For now, global trade is realigning. And countries must choose between retreating behind tariff walls or adapting smartly.

Because when you toss a wrench into something as complex as global trade…

…you never really know what’s going to snap.

Until then…

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