Much has been written about US President Donald Trump's disastrous "reciprocal" tariffs, which, despite having remained in effect for less than 24 hours, roiled the stock market, drove up Treasury yields, and caused the dollar to depreciate. In fact, the tariffs that have so badly undermined markets' faith in the US were never reciprocal at all: they were entirely unilateral actions betraying a fundamental misunderstanding of economics.
US businesses and consumers will face higher prices. Mr Trump himself was forced to concede this in a recent cabinet meeting, though he was dismissive of the impact: children might get "two dolls instead of 30" for Christmas, and the toys might "cost a couple of bucks more" than usual. Still, it was a startling admission, given that he was elected partly on the promise that he would lower prices.
Mr Trump's attacks on the independence of the US Federal Reserve -- which he has long held should maintain lower interest rates -- make it less likely that this policy-induced inflationary pressure will be reined in. Compounding the risks are Mr Trump's threats to reinstate "reciprocal" tariffs for any country that does not strike a new trade deal with his administration during the 90-day "pause" he announced on April 9. And some tariffs -- including a 10% "baseline" tariff on US imports and a 25% sector-specific rate -- have remained in place all along.
The costs of Mr Trump's tariffs will not be confined to the US. Some of the countries Mr Trump has targeted with high tariffs have very small economies, which are highly dependent on exports to the US. Lesotho, on which Mr Trump imposed a 50% levy, is perhaps the most extreme example.
The costs are compounded when countries respond with tariffs of their own, whether retaliatory tariffs on US imports, like those embraced by China, or tariffs on other markets to offset the export losses to the US. While this response is understandable -- why should the US be able to inflict losses on its trading partners unilaterally? -- it ends up making matters worse for everyone.
As tariffs rise, losses to the importing country -- as measured by the rise in consumer prices and reduction of consumption -- grow not proportionally, but exponentially, to the square of the tariff rate. Double the tariff rate; quadruple the losses. Small wonder that Treasury Secretary Scott Bessent doubts the sustainability of the tit-for-tat exchange that has brought Chinese tariffs on US goods to 125%, and US tariffs on Chinese goods to a rate as high as 245%.
This does not mean countries should simply tolerate Mr Trump's tariffs. Rather, they should preserve or increase free trade among themselves, lower non-tariff barriers, and reduce their dependence on the US in other realms (such as defence), thereby bolstering their own resilience. Such a response could ensure that, as reckless and irredeemable as Mr Trump's tariff campaign is, some good does come of it.
At the same time, countries should work together to persuade the US to abandon its tariff campaign. After all, tariffs prevent the price mechanism from performing its proper function of balancing supply and demand, and this mechanism is integral to the free-market ideology to which Mr Trump and his Republican Party purportedly subscribe. Even the mission of the Department of Government Efficiency, as problematic as it is in theory and practice, aligns with the party's traditional defence of the principle that markets should be allowed to function with minimal government intervention.
Republicans might counter that the tariffs align with another of their stated priorities: reducing America's current-account deficit. But a deficit arises when a country spends more than it produces. The only way to reduce it is through fiscal, monetary, and exchange-rate policies that boost savings, not through disruptive, distortionary, and antagonistic tariffs that merely boost costs. © Project Syndicate 1995–2025
Koichi Hamada was a special adviser to former Japanese prime minister Shinzo Abe.