500% Tariffs: A Cheat-code to Growth?

In April 2025, Donald Trump announced sweeping tariffs across multiple nations, imposing duties exceeding 100% on some countries, particularly China. The narrative was familiar: foreign nations were being unfair, American industries were suffering, and tariffs would restore domestic manufacturing while keeping jobs inside the United States.

Tariffs have long been politically attractive because they appear simple: tax foreign goods, protect local firms, and save domestic jobs. But history shows that the economic reality is far more complex.

This article explores tariffs not from an ideological lens, but from a historical and economic one: Do tariffs actually create long-term employment and economic stability, or do they merely shift costs while distorting markets?

First let's look at a brief the history of tariffs

From ancient trade routes like the Silk Road to the ports of Rome, tariffs began as simple tolls and protection money paid to ensure safe passage. By the 16th century, this evolved into Mercantilism, a strategy where empires like Britain strictly limited imports to hoard gold and silver. This changed in 1846 when Britain repealed the Corn Laws; feeling confident in its industrial dominance and colonial resources, it pioneered the first era of global free trade. However, this openness collapsed during the Great Depression with the Smoot-Hawley Act of 1930. Despite warnings from over 1,000 economists, the U.S. raised duties on 20,000 items, triggering a global trade war that slashed international commerce by over 60% and turned a recession into a decade-long global depression.

In the wake of World War II, the world shifted from isolationism toward cooperation, beginning with the General Agreement on Tariffs and Trade (GATT) in 1947. This framework aimed to systematically lower trade barriers, eventually evolving into the World Trade Organization (WTO) in 1995. This era sparked a wave of regional partnerships, such as the evolution of the European Union and the formation of NAFTA in North America. These agreements moved the global economy away from individual trade wars and toward a system of interconnected supply chains, where nations negotiate collective rules to ensure stability and shared growth across borders.

Who Really Pays Tariffs?

A critical misconception must be clarified upfront: tariffs are not paid by the exporting country or foreign companies. They are paid by the importer at customs. In effect, tariffs are a tax imposed on domestic businesses.

In most cases, these costs are passed to consumers. The transmission depends on business scale:

• Small businesses typically operate on thin profit margins. Because tariffs represent a fixed increase in input costs, maintaining the same margin requires passing this cost on to consumers. 

• Large corporations may temporarily absorb costs to protect market share, but not indefinitely.

Consider the U.S. auto industry:

General Motors reported absorbing over $1.1 billion in tariff costs in a single quarter, projecting $4–5 billion annually, Ford reported an $800 million hit in one quarter, with an estimated $3 billion annual impact.

Even these giants eventually pass costs downstream through higher prices, reduced hiring, slower investment, or supplier pressure.

The Core Political Promise: Job Protection

Tariffs are primarily justified as tools to protect domestic employment from cheaper foreign labor.

But history shows this promise rarely holds at scale or in the long run.

America’s First Protective Tariff: The Tariff of 1816

The Tariff of 1816, or the Dallas Tariff, represented a fundamental shift in American philosophy. Before this, taxes on imports were primarily intended to fund the government's daily operations. However, following the War of 1812, the United States found its infant industries threatened by a flood of low-priced British goods. In response, Congress pivoted toward tariffs deliberately making foreign goods more expensive to give American-made products a competitive edge.

While this policy successfully fostered domestic growth, it fundamentally altered the economic and political landscape of the young nation.

Regional Economic Imbalances

The tariff functioned as an artificial "protective wall" that primarily shielded the North, where the nation’s manufacturing was concentrated. Because the northern states had the water power and capital to build factories, they were the immediate beneficiaries of these higher import costs.

Industrial Acceleration

Instead of relying on British imports, American investors began pouring capital into local ventures. In the decade following the tariff, the amount of raw cotton processed by American mills nearly quadrupled. 

Wealth Redistribution

This shift created a hidden tax on consumers. Since the tariff made British goods more expensive, American factory owners could raise their own prices just below the tariff level. In effect, this transferred millions of dollars from the pockets of rural farmers and western pioneers directly into the accounts of Northern industrialist families, deepening the wealth gap between the manufacturing North and the agrarian rest of the country.

Strong Opposition from Southern States

The South viewed the tariff not as a national benefit, but as a sectional burden. Their economy was built on an open-gate system: they produced vast amounts of cotton and tobacco for the world and wanted to buy cheap manufactured goods in return.

• The Export Penalty: The South was the world’s leading supplier of cotton, and Great Britain was their best customer. By placing high taxes on British goods, the U.S. government made it harder for the British to earn the dollars they needed to buy Southern cotton. Southerners felt they were being forced to subsidize Northern growth while simultaneously risking the health of their own international trade.

• The Escalation Cycle: Once the precedent was set in 1816, the protectionist wall only grew taller. Over the next twelve years, the average tax on imports nearly doubled, culminating in the 1828 - Tariff of Abominations. This cycle proved that once an industry was protected, it became politically impossible to remove that protection without causing an uproar in the North.

• Sectional Voting Blocks: Voting records from this period show a hardening of regional lines: the North began voting almost as a single unit in favor of higher taxes, while the South moved toward a near-unanimous rejection of them.

• The Path to Nullification: This economic frustration eventually boiled over into a constitutional crisis. By the early 1830s, the sense of being tributary to the North led the South to claim that a state had the right to nullify or ignore federal laws it deemed unfair. This was the first major legal challenge to the authority of the federal government, setting the stage for the sectional conflicts that would eventually lead to the Civil War.

The 2018 Steel Tariffs: A Modern Case Study

The 2018 Steel and Aluminum Tariffs (Section 232) - implemented by the Trump administration, these duties were designed to revitalize a domestic metals industry that had been struggling against a global surplus and declining market share.

Short-Term Gains and Production Surges

On a foundational level, the tariffs acted as a catalyst for a rapid increase in domestic output. By making foreign metals more expensive, the policy effectively cleared the lane for American mills to recapture their own market.

• A Significant Output Rebound: Before the tariffs took effect in 2017, American steel production sat at roughly 81.6 million metric tons. By 2019, this output had climbed to 87.8 million metric tons, a nearly 8% increase in total volume in just two years.

• The Aluminum Surge: The impact on primary aluminum was even more dramatic. Production jumped from 741,000 tons in 2017 to over 1.09 million tons by 2019. This represents a staggering 47% growth in domestic production, effectively reversing a decade-long trend of primary smelter closures.

• Capacity Utilization: The industry moved closer to the health threshold of 80% capacity. In the years prior, many mills were running at levels that were barely profitable; following the tariffs, the increased demand forced these existing facilities to run much more efficiently and closer to their full physical potential.

  
  

By analyzing the data from 2017 to 2019, we can see how these measures created a significant, though debated, short-term rebound effect for American producers.

Employment and Strategic Reinvestment

Beyond raw tonnage, the tariffs aimed to restore the human element of the industrial heartland. The metrics for employment and capital investment suggest that the policy provided an immediate, if concentrated, boost to local economies.

• Sector-Specific Job Growth: While the broader manufacturing sector remained relatively stable, the specific industries targeted by the tariffs saw a clear uptick. Employment in steel mills grew by approximately 6%, while aluminum-related jobs saw a 5% increase. In practical terms, this meant thousands of families in states like Ohio, Pennsylvania, and Kentucky saw a return to steady, high-wage industrial work.

• Investor Confidence: The protective wall encouraged domestic firms to commit to long-term growth. Between 2018 and 2019, the U.S. steel industry announced billions in new investments, ranging from greenfield (brand new) mini mills to significant upgrades of aging blast furnaces.

The Hidden Costs

While the immediate effects of the 2018 tariffs offered a visible boost to primary metal producers, these gains came at a significant cost to the rest of the American economy. Because steel and aluminum are the skeleton of modern manufacturing, increasing their price created a ripple effect that strained nearly every sector reliant on these materials.

The Ripple Effect Across Downstream Industries

The most immediate consequence of the tariffs was a sharp spike in the price of raw materials. Since domestic manufacturers now had to pay a premium for both imported and domestic steel, their cost of doing business rose almost overnight.

• Widespread Cost Inflation: Industries that consume the most steel such as automotive manufacturing, heavy machinery, construction, and household appliances faced an immediate financial squeeze. Unlike the steel mills, these downstream companies could not easily pass all these costs onto consumers without losing sales, leading to narrowed profit margins and reduced budgets for expansion.

• The Net Job Disparity: While the tariffs were championed as a jobs program, the actual numbers told a more complicated story. By late 2019, the entire U.S. steel industry had only added a net total of roughly 1,000 jobs. When compared to the massive scale of the American labor market, this gain was remarkably small relative to the economic friction the policy created.

Broader Economic Friction and Opportunity Costs

The core problem identified by economists was that for every one job saved or created in a steel mill, several more were put at risk in the industries that use steel. This created an environment of long-term inefficiency for the sake of a short-term industry lifeline.

• The Manufacturing Ecosystem Drain: Because the price of steel in the U.S. became higher than the price in Europe or Asia, American manufacturers of finished goods (like tractors or washing machines) found it harder to compete globally. A study by the Federal Reserve Board estimated that the higher costs and retaliatory tariffs actually hindered the labor market, suggesting that 75,000 more jobs would have existed across the broader economy had the tariffs never been implemented.

• Output Stagnation: The logic of protectionism hit a wall when faced with global supply chains. As costs rose, many steel-consuming firms were forced to scale back production or freeze hiring. In simple terms, the policy focused on protecting the producers of raw materials while unintentionally penalizing the innovators who turn those materials into finished products.

By late 2019, the data suggested that the protective wall meant to save jobs in one sector was inadvertently dismantling them in others.

Why Manufacturing Jobs Are So Hard to Bring Back

Complex Global Supply Chains

Modern manufacturing is not a single factory producing everything. A car contains thousands of components sourced from specialized regions worldwide.

In cities like Shenzhen or Suzhou, a factory can obtain a custom screw, coating, or circuit component within minutes, the result of 30 years of industrial clustering and specialization.

Semiconductors represent the most extreme expression of modern industrial clustering. Taiwan’s dominance is not simply about where chips are made, but about the depth and density of the ecosystem that supports their production. Taiwan’s tightly concentrated network of specialized suppliers and skilled talent clustered around hubs like Hsinchu Science Park. Thousands of firms providing ultra-pure chemicals, advanced packaging, tooling, testing, and maintenance operate within close proximity, enabling rapid iteration and problem-solving that cannot be replicated through isolated factory investments.

The timeline to build a semiconductor fab is measured in years, but the precision required is measured in atoms. Unlike a standard factory, a fab is essentially a massive, vibration-proof cleanroom that must be shielded from even the slightest environmental interference.

Taiwan’s dominance in semiconductors stems from a forty-year head start and structural barriers that go far beyond factory capacity. Leading-edge fabs require over $20 billion upfront, driven by ultra-specialized tools like ASML’s High-NA EUV machines that cost roughly $400 million each. In the U.S., higher construction and regulatory costs often 40–100% above Taiwan push capital intensity even further. While automation limits labor costs, heavier upfront investment makes American-made wafers structurally more expensive due to higher depreciation.

While modern trade policy seeks to onshore this capacity through tariffs and subsidies, semiconductor manufacturing remains one of the hardest industrial systems in the world to replicate. Recreating this ecosystem in the United States would require relocating entire supply chains while simultaneously closing a large skills gap. More importantly, the accumulated, tacit manufacturing knowhow behind Taiwan’s so-called “Silicon Shield” has been built over decades. It cannot be rebuilt quickly through tariffs or subsidies; it demands sustained investment in education, talent development, supplier ecosystems, and industrial culture.

Automation and Structural Change

Since the early 2000s, U.S. manufacturing output has remained near record highs. Yet employment has fallen by about 5 million jobs.

This is not primarily due to trade. It is due to:

• Automation

• Productivity gains

• Capital-intensive production

Even if factories return, they no longer employ workers at historical scale.

Labor Cost Gaps

Average manufacturing wages:

• China: $6–8/hour

• U.S.: $25–30/hour

A 25% tariff cannot bridge a 400% wage gap, let alone decades of specialization and infrastructure advantage.

Jaws of the snake

As stated earlier that the American economy was at record high output levels since 2000, but still had lost 5 million jobs, this can be visualized like “jaws of a snake”- where one line representing the Manufacturing Value Added (MVA) goes up, but the Manufacturing Employment Added (MEA) stays flat or reduces.

The primary reason for this phenomenon apart from offshoring of jobs is automation. For example - a 100% tariff might force a company to move a factory from China to Ohio, that company will not hire 5,000 workers at $30/hour. To remain profitable, they will build a highly automated "dark factory" (run by robots) that only requires 50 high-tech technicians.

Geopolitical rivalry and tensions

Political rivalry does not incentivize China to help the US build factories and increase manufacturing instead it acts by rerouting trade. In 2025, while US-bound shipments from China dropped, China’s overall trade surplus hit a record $1.2 trillion. They achieved this by routing goods through Mexico, Vietnam, and Thailand. 

A "Made in China" product becomes "Made in Vietnam" with only a 10% value-add in assembly, effectively bypassing the 100% tariff. This means the US still consumes Chinese origin goods but now pays a middleman tax to a third country, further increasing costs for US consumers without actually bringing the manufacturing home.

Also include retaliatory tariffs, tighter control on rare - earth minerals, and other things, which doesn’t seem beneficial in any case.

So, Who Really Benefits from Tariffs?

Tariffs tend to benefit:

• Specific protected firms

• Certain political constituencies

• Marginal domestic producers

They tend to hurt:

• Consumers

• Downstream manufacturers

• Exporters facing retaliation

• Long-term economic efficiency

The gains are concentrated. The costs are distributed.

Conclusion: The Illusion of Economic Control

Tariffs are emotionally powerful because they suggest the idea that a nation can simply tax its way back into industrial dominance. But economic systems are not mechanical switches. They are adaptive networks.

History consistently shows that tariffs:

• Create short-term industry relief

• Generate long-term inefficiencies

• Fail to deliver net employment gains

• And often deepen political and regional divisions

Manufacturing jobs will not return through taxation alone. They return if at all through education, technology leadership, infrastructure, supply-chain rebuilding, and innovation ecosystems.

Tariffs may slow the tide, but they do not change the direction of the river. For investors, tariffs are not moral questions. They are cost structures, margin compressions, and capital misallocations.

Watch out for our next blogs coming out as a part of the "Decoding Tariffs" series, where we will delve deeper into this topic, analyzing it from various economical, historical, and financial perspectives.

References

Historical Analysis

• Atack, J., et al. (2004). The Evolution of the American Economy. National Bureau of Economic Research (NBER). Link

• Taussig, F. W. (1892). The Tariff History of the United States. Putnam's Sons. Archive

  
  

The 2018 Steel/Aluminum Impact

• Economic Policy Institute (2018). Why Global Steel Surpluses Warrant Section 232 Measures. EPI Report

• Flaaen, A., & Pierce, J. (2019). Disentangling the Effects of the 2018-2019 Tariffs on a Beam of Manufacturing. Federal Reserve Board. Working Paper

• EconoFact (2020). Steel Tariffs and U.S. Jobs Revisited. Analysis

  
  

Industry Specifics & Semiconductors

• Center for Strategic and International Studies (CSIS). Silicon Island: Assessing Taiwan's Importance. CSIS Analysis

• U.S. Department of Commerce. The State of the Semiconductor Industry. Commerce.gov

  
  

Corporate Impact Data

• Center for Automotive Research. U.S. Consumer & Economic Impacts of Trade Policies. CAR Group

• Mexico Business News (2019). GM Tops Estimates Despite $1.1 Billion Tariff Hit. News Report

Disclaimer-This article is for educational and informational purposes only and should not be considered as investment advice or a recommendation to buy or sell any securities or adopt any investment strategy