Why Trump’s tariffs are failing America and the world

By Muhammad Ibrahim

Let’s delve into a critical topic that has significantly affected global trade and continues to shape economic landscapes – the Trump tariffs, their implications and consequences.

We’ll explore this from a broad perspective, beginning with a comprehensive analysis of tariffs as economic policy tools and the impact on the Malaysian economy. 

A tariff is essentially a tax imposed by a government on goods and services imported from other countries.

When foreign products enter a domestic market, customs authorities – in the case of Malaysia, the Royal Malaysian Customs – collect these duties, which effectively increase the price of imported goods.

The amount payable can be in many categories. Tariffs can be ad valorem (percentage-based on product value), specific (a fixed amount per unit), or compound (a combination of both).

Beyond merely generating revenue, tariffs serve as a potent strategic instrument in international trade policy.

What tariffs are not

While it might seem straightforward, understanding what tariff are not is crucial to grasping its broader economic and political implications.

Tariffs are not simply a tax imposed on imported goods. They are not a neutral policy tool.

While it may appear to be a straightforward revenue-generating mechanism, tariffs fundamentally alter market dynamics, consumer behaviour and international relations.

Tariffs are not mere administrative rules but a strategic instrument that can reshape entire industries and trade relationships.

Furthermore, tariffs are not inherently protectionist in isolation. While tariffs often protect domestic industries from foreign competition, their effects extend far beyond this narrow purpose.

Tariffs influence currency exchange rates, inflation, supply chain configurations, and even diplomatic relationships between nations.

Tariffs are also not a cost-free policy for consumers. Although governments collect revenue from tariffs, the ultimate burden falls on consumers through higher prices for imported goods and reduced competition in domestic markets.

This hidden cost makes tariffs regressive in nature, disproportionately affecting lower-income households.

Additionally, tariffs are not a permanent solution to economic challenges. While they are a potent policy instrument over the short run, they have damaging effects over the long run.

Tariffs cleverly used and adapted to changing global conditions can be beneficial to an economy. Therefore, tariffs are not static measures but dynamic policies that require constant evaluation and adjustment.

Finally, tariffs are not a zero-sum game where one nation’s gain automatically equals another’s loss. International trade and decades of the long globalisation process have resulted in complex interdependencies among countries, and tariff policies can create ripple effects that affect multiple countries and industries in unexpected ways.

Understanding what tariffs are not, helps clarify their true role in international commerce and economic policy.

Tariffs as an economic tool

Tariffs function as versatile economic instruments serving multiple policy objectives. Primarily, they protect domestic industries from foreign competition by making imported goods more expensive, thereby encouraging consumers to purchase locally produced alternatives.

Governments also utilise tariffs to generate revenue, particularly in developing economies where import duties may constitute significant portions of national income.

Additionally, tariffs can address trade imbalances, retaliate against unfair foreign practices, and support infant industries until they become competitive globally. They can be used as a defensive mechanism to protect the domestic economy.

Pros and cons of tariffs

Let’s look at the advantages first.

Tariffs provide immediate protection for domestic industries, preserving jobs and supporting local businesses. They generate government revenue without directly taxing the people’s income.

Strategic tariff implementation can help nascent industries develop by shielding them from established foreign competitors. Tariffs can also serve as bargaining chips in international negotiations and can address damaging dumping practices where foreign companies sell products below cost.

But protectionism to the extreme can be injurious.

In Malaysia’s case, the contrasting outcomes of how the country protected its motor and banking industries present an interesting comparison.”

The banking industry at its nascent stage was strictly regulated and highly protected, as domestic banks cannot compete against their foreign counterparts, which were highly capitalised with bigger capacity and experienced.

To the credit of the central bank, they embarked on a systematic strategy and programme to mould domestic banks into more competitive, innovative and highly capitalised institutions.

When the domestic banks were ready to compete, the Malaysian banking industry was gradually liberalised to foreign competition. With higher capital and capacity, ingenious Malaysian banks were able to compete on a level playing field and successfully expand their operations regionally. 

The interesting case of Proton

Malaysia’s national car project, Proton, launched in 1983, was initially a symbol of national pride and industrial ambition. The project aimed to transform Malaysia into an industrialised economy and foster domestic engineering capabilities by producing affordable national cars.

Proton’s first model, the Saga, launched in 1985, was based on Mitsubishi technology and benefited heavily from government support, including high tariffs (up to 300%) on imported cars, and favourable financing for buyers.

Despite early success, it eventually failed. With heavy protection, Proton managed to capture up to 74% of the Malaysian market by the early 1990s. Unfortunately, the company eventually struggled due to several key factors.

Small domestic market and failure to penetrate foreign markets: After some time, Proton developed a reputation among Malaysians for producing lower-quality vehicles compared to foreign competitors. The company’s dependence on foreign technology had delayed the development of fully indigenous models until the late 1990s, and the heavy reliance led to limited innovation and competitiveness.

Unstructured protectionism and eventual market liberalisation: Proton enjoyed heavy protection through tariffs and import restrictions. However, industry liberalisation and tariff reductions under regional free trade agreements exposed Proton to competition it was ill-prepared for. This eroded its domestic market share from 74% to around 12.5% by 2016.

Immense financial struggles: Over the years, Proton required substantial government subsidies, reportedly over $3bn, and faced ongoing financial losses and declining market share, prompting the sale of nearly half its stake to China’s Geely in 2017 in an attempt to revive the company.

An expensive missed opportunity: While Proton enjoyed heavy protection, there were huge downsides to the economy, including:

• missing out on becoming a regional automotive hub as foreign manufacturers chose a more open markets like Thailand
• reduced foreign investment due to high entry barriers
• stagnation in technology and innovation from lack of competition
• limited export success
• failure to meet global standards
• higher costs
• fewer choices for consumers in Malaysia
• weak development of a competitive local supply chain
• dependence on government bailouts had burdened taxpayers and public finances

The declining brand value and market share eventually resulted in a foreign takeover.

Overall, prolonged protectionism hindered Malaysia’s automobile industry growth, technological progress and global competitiveness. It cost the country’s finances dearly.

The two industries were shielded with the well-meaning goal of helping domestic companies grow strong enough to compete with foreign firms.

However, their contrasting strategies led to very different results. This demonstrates that tariffs can have both positive and negative effects simultaneously, depending on how they are implemented.

Inflection point of tariff policy

The inflection point of tariff policy occurs when the marginal costs of protection equal the marginal benefits.

Initially, modest tariffs may effectively protect domestic industries while generating revenue with minimal economic distortion.

However, as tariff rates increase beyond optimal levels, the costs begin to outweigh benefits dramatically. This point varies by industry, economic structure and international relationships.

Beyond this inflection point, excessive tariffs create significant deadweight losses, severe retaliation and substantial reductions in overall economic welfare.

The effect is similar to the ‘sin tax’ imposed on liquor and tobacco. After a certain point, the negative impact will start to show: smuggling, tax evasion, counterfeits, and a black economy.

Useful long-term economic tool?

While tariffs can serve important short-term policy objectives, their long-term effectiveness remains questionable. Historical evidence suggests that sustained high tariff policies often lead to economic inefficiency, reduced innovation and slower growth rates. This is proven by the case that I mentioned above.

On the other hand, countries that have embraced free trade generally experience higher living standards and greater economic prosperity over time.

The key in using tariffs as an economic policy tool lies in careful implementation, clear objectives and timely removal once the stated goals are achieved.

Ultimately, tariffs are most effective as temporary instruments rather than permanent features of economic policy.

Why Trump uses tariffs

US President Donald Trump’s reliance on tariffs as a trade weapon stems from several interconnected motivations.

First, economic nationalism: Trump views trade deficits as evidence of unfair deals, believing that tariffs can reduce the US trade deficit by making imports more expensive and encouraging domestic production.

Second, manufacturing revival: Trump naively expects tariffs to bring back manufacturing jobs to the US by making foreign goods more expensive, thereby incentivising companies to produce domestically.

Third, as bargaining leverage: Tariffs serve as negotiating tools to pressure trading partners into making concessions on trade agreements and practices.

Fourth, political base support: Tariffs appeal to his core constituency in manufacturing, the heavy Rust Belt states, providing tangible evidence of his “America First” agenda, something that resonates with the Maga (Make America Great Again) crowd.

Finally, while not the primary goal, revenue generation from tariffs: This is an added benefit, which Trump presents as a great positive for American taxpayers.

Are the tariffs effective?

The effectiveness of Trump’s tariff policy is, at best, mixed.

For example, China’s exports to the US dropped by 34.5% in May 2025 – their lowest since 2020 – while imports from the US slipped by 18%, narrowing China’s trade surplus with the US.

However, China’s exports to Southeast Asia, the EU and Africa grew by 14.8%, 12%, and 33% respectively in May 2025.

This reflects a significant shift in China’s market repositioning under US tariff pressure, demonstrating the policy flexibility of some countries to react to external pressure. In fact, China’s year-on-year net exports in May 2025 increased by 4.8%, bringing its year-to-date trade surplus to an impressive +25% or $103.2bn.

Regarding job creation, success has been limited. While some manufacturing jobs returned, the numbers were modest compared to campaign promises. Many job losses were due to automation rather than trade. The US trade deficit persisted and even increased, reaching historically high levels in dollar terms.

The impact on consumers was negative. Tariffs raised costs for American consumers and businesses that rely on imported goods, effectively acting as a tax on these groups. Preliminary estimates in July 2025 suggest a tariff impact of -0.7% on US GDP and +1.2% on the Consumer Price Index – far from what was expected.

While some sectors like steel and aluminum saw partial industry benefits, downstream industries faced higher input costs.

Finally, mixed business confidence due to trade tensions negatively affected business investment in some sectors.

Will Trump persist with tariffs?

Based on Trump’s stated positions and political incentives, there’s a strong likelihood that he’ll continue his tariff policy. He’s even threatened higher tariffs (10-20% across all imports). Since Trump cannot run for a third term, it would not be a wild guess if the next president decides to unravel Trump’s tariff policies.

However, experience also suggests that the imposition of tariff rates by the US on other countries seems to keep on changing, depending on which side of the bed Trump wakes up on in the morning!

From a political calculus perspective, tariffs remain popular with Trump’s base and provide visible, immediate actions that align with his campaign messaging. This approach also aligns with his broader worldview on trade and international relations, suggesting policy consistency rather than change.

Furthermore, given the importance of key states to his electoral strategy, maintaining tariff policies serves his political interests, even though some of the retaliatory tariffs imposed by certain countries will hit his supporters’ base hard.

It makes one wonder whether American voters truly understood what they were voting for when they elected Trump.

Impact on US economy

In the short term, we saw several impacts.

There was a direct pass-through of tariff costs to consumers for many goods, leading to higher consumer prices.

Industries dependent on imported inputs faced higher production costs, leading to business cost increases. These make US companies less competitive. These companies might even relocate to other lower-cost jurisdictions.

In the interim, companies scrambled to find alternative suppliers, creating temporary inefficiencies and leading to supply chain disruption.

Finally, trade uncertainty contributed to stock market volatility as investors try to divert from emerging risks or stand on the sidelines until the situation becomes more certain.

In the long term, global economic efficiency has declined due to suboptimal resource allocation, reduced competitive pressure, and weakened innovation incentives.

Trade relationships are restructured, resulting in lasting shifts in supply chains and trading patterns.

Retaliatory measures may entrench long-term trade barriers, while consumers face sustained price increases for certain goods, ultimately diminishing consumer welfare.

On the extreme side, the trade war can manifest itself in military conflicts, worsening an already bad geopolitical situation.

International response

Countries responded to Trump’s unilateral tariff policy through multiple strategies.

Many, including China, the EU and Canada, imposed retaliatory tariffs on US goods, often targeting politically sensitive sectors like agriculture.

Multiple countries have filed formal complaints with the World Trade Organization, initiating WTO challenges, though the dispute resolution process was slow.

Countries also sought to reduce dependence on US markets by strengthening other trade relationships, leading to alternative trade partnerships (for example, EU-Japan trade deals).

There was some attempt at multilateral coordination, forming coalitions to present unified opposition to US policies, though with limited effectiveness. Brics is a good example of how new coalitions can be developed into trade blocs with the capability to coordinate policies.

Finally, in the long term, we have seen diversification strategies by countries to reduce reliance on US technology and markets. This will have an impact on the US, changing the narrative that the US is the place to be for innovation and creativity.

Furthermore, the US will be starved of foreign talent, which had contributed significantly to the wellbeing of the US economy.

Empirical evidence on tariff effectiveness

Both historical and contemporary evidence provides valuable insights into tariff effectiveness. Traditional economic theory consistently shows that tariffs create deadweight losses and reduce overall economic welfare.

A stark historical precedent is the Smoot-Hawley Tariff Act of 1930, widely cited as worsening the Great Depression through trade war escalation. This act, intended to protect US industries and farmers by raising import duties on over 20,000 items, provoked retaliatory tariffs from other countries, resulting in a significant reduction in global trade. This deepened the Great Depression, leading to job losses and economic contraction worldwide.

The act is widely regarded as a classic example of the dangers of protectionist trade policies – a very good example of a ‘beggar-thy-neighbour’ policy, where countries attempted to solve their own economic problems at the expense of others, ultimately worsening the global economic situation for everyone.

Recent studies on Trump-era tariffs consistently reveal limited job creation, substantial cost burdens for US consumers and businesses, inefficient resource allocation, and negative consequences for US exporters due to foreign retaliation.

While a few industries experienced short-term, sector-specific gains, these were outweighed by broader economic costs. It’s important to distinguish between short-term adjustment effects and long-term equilibrium outcomes when evaluating the overall impact.

Are trade wars beneficial?

Let’s summarise the overall impact. From an economic perspective, trade wars are overwhelmingly negative. They lead to reduced global economic efficiency, higher consumer prices, supply chain disruptions, reduced innovation incentives and lower overall GDP growth.

Any positives are limited to temporary protection for some domestic industries and the potential for better trade deals through pressure tactics.

Politically, trade wars lead to the erosion of international cooperation, the weakening of multilateral institutions, increased geopolitical tensions, and a reduction in US soft power influence.

The potential positives are largely confined to domestic political benefits for protectionist politicians and a demonstration of willingness to challenge the status quo.

From a social standpoint, the impacts are also negative. We see reduced consumer choice and higher living costs, job losses in export-oriented industries, increased economic inequality, and reduced cultural exchange and international understanding.

The limited positives include potential job gains in protected industries and the satisfaction of nationalist sentiment.

As an example of specific retaliatory measures, Canada responded to US tariffs through several approaches. They imposed counter-tariffs on US goods, particularly in sectors like steel, aluminium and consumer products, specifically targeting sectors with significant political and economic impact in US states.

Canada pursued economic diversification, exploring other markets to reduce complete dependence on US trade relationships. It also focused on strengthening domestic industries to reduce vulnerability to external trade disputes.

Trump’s tariff policy represents a significant departure from post-World War Two trade liberalisation trends. While it has provided some short-term political benefits and limited sectoral advantages, the broader economic evidence suggests negative impacts on overall welfare, efficiency and international cooperation.

The long-term consequences are likely to include permanently higher trade barriers, reduced economic integration, and continued uncertainty in global trade relationships.

Muhammad Ibrahim is a former governor of Bank Negara, Malaysia’s central bank. These remarks were delivered at Kuala Lumpur University (UniKL) on 31 July.

The views expressed in Aliran's media statements and the NGO statements we have endorsed reflect Aliran's official stand. Views and opinions expressed in other pieces published here do not necessarily reflect Aliran's official position.

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