The Rising Costs of Trade Barriers

March 27, 2025

Because of President Trump’s America First policy and slogan politics (e.g., “Liberation Day”), the world will shift away from globalization as tariffs and trade barriers surge. While the Trump administration argues that these measures protect domestic industries and generate revenue, the reality is not that simple and much more costly to Americans and the rest of the world.

The Promise and Pitfalls of Tariffs

The Trump Administration claims tariffs offer three key benefits:

1. New Tax Revenue: Tariffs could fund tax cuts, spurring economic growth.
2. Domestic Investment: Higher import costs might encourage local production.
3. Foreign Burden: Exporters, not US consumers, would absorb tariff costs.

However, these assumptions are dubious:

• Retaliation Risk: Trading partners like China, Canada, Mexico, and the EU will impose their own tariffs, negating revenue gains, not to hurt America but to protect their own people from the losses suffered by Trump’s unilateral decisions.
• Currency Volatility: A stronger dollar could offset import declines, leaving US consumers to pay more.
• Conflicting Outcomes: If imports fall, US buyers—not foreign exporters—bear the cost because domestic production is costlier, and prices will increase.

The Weakening Dollar and Inflation Fears

The dollar has weakened amid erratic tariff policies, raising uncertainty and lowering growth expectations. A falling dollar relative to other currencies means:

• Higher Prices: All imported goods cost more, not just where tariffs apply.
• Trade War Fallout: Retaliatory tariffs, especially selective foreign tariffs, which are certain to come, will further inflate import prices, squeezing US households.

The Domino Effect: Recession and Fiscal Dominance

A prolonged trade war will trigger a recession, possibly a depression if there are repeated retaliatory tariffs as President Trump had promised, forcing the Fed to cut rates and widening the fiscal deficit. While recessions temporarily ease inflation, stimulus measures and deficits reignite it. Meanwhile, the dollar’s role as the global reserve currency is eroding, evidenced by soaring gold prices and declining foreign demand for US Treasuries. Without foreign buyers of US Treasuries, domestic interest rates rise as the Treasury has more difficulty raising the capital it needs to run the country.

The Fed could relax banking rules to stabilize yields, encouraging unlimited Treasury purchases. But this risks fiscal dominance, where monetary policy prioritizes government solvency over inflation control.

The Debt Dilemma: Inflation as the Only Escape

With $36 trillion in federal debt, repayment is increasingly unlikely. As bonds mature, the rollover will be in less valuable dollars. That’s the effect of inflation.

With $36 trillion in federal debt, repayment is nearly impossible. The growing debt must be refinanced. As debt matures, it’ll be rolled over into less valuable dollars—thanks to inflation.

Historical Loss of Purchasing Power (BLS Data):

Average Annual Inflation Rates:

• 1940–2025: 3.8%
• 1960–2025: 4.1% (peaked at 14.8% in 1980)
• 1980–2025: 3.1%
• 2000–2025: 2.1%

While the average rate of inflation over recent years has been relatively low – it’s presently close to 2.75% in the US (and Canada) — should inflation rise to 4%-5% or more on average, the forced austerity would cause a decades-long recession, possibly depression, leaving inflation as the only viable path to reduce the debt-to-GDP ratio.

Conclusion: Red Skies in the Morning – Investors Take Warning

There is no question that there is a storm on the horizon. Retaliation from trade partners, rising inflation, and fiscal dominance paint a grim picture. Investors should brace for increasing chaos:

• Seek Safety: defensive stocks and Gold may hedge against inflation.
• Avoid Risk: Avoid overvalued growth stocks and long-term Treasuries.

As globalization unravels, the economic fallout will test policymakers—and wallets—worldwide.