The Economic Impact of Trump’s Tariff Policy

Author: Isaac Aberra, Lancaster Royal Grammar School, Lancaster, UK

Abstract

This paper examines the macroeconomic and market effects of tariffs imposed during Donald Trump’s second presidential term. The focus is on the intended goals of protecting U.S. manufacturing and reducing the trade deficit, as well as the unintended consequences such as reciprocal trade measures, market volatility, and shifts in global capital flows. Drawing on trade theory and market data, the analysis finds that short-term costs were significant, while longer-term benefits remain uncertain.

Introduction

In early 2025, the U.S. administration implemented a series of import tariffs on key products including steel, aluminium, and certain technology goods. These measures were presented as part of a broader push for “economic sovereignty”, with the aim of reversing decades of reliance on foreign manufacturing. The expectation from the policy side was that such protection would bring production back onshore, strengthen industrial employment, and improve GDP growth through import substitution.

Economists were divided in their assessment. Some viewed this as a modern re-run of import substitution industrialisation strategies once common in developing economies. Others argued that the U.S., as a high-income, consumption-driven economy, might not experience the same benefits, particularly given the complexity of global supply chains.

The fiscal dimension was also relevant. Tariffs were expected to provide extra government revenue which, in theory, could be channelled into infrastructure or industrial investment. Whether these revenues would materialise at any significant scale was less clear.

Global Response and Economic Tensions

The international response was immediate and largely hostile. Canada, the European Union, and China saw the measures as protectionist and in some cases as violations of World Trade Organization rules.

One prominent policy was the 25% tariff on imported steel and aluminium. Its effects were mixed. Domestic producers initially saw higher prices and increased orders, but downstream industries such as automotive and construction faced rising input costs. Quarterly U.S. GDP contracted by around 0.05% — small in absolute terms but notable given it occurred during an otherwise expansionary period. This contraction was partly linked to a surge in imports before the tariffs took effect, followed by a sharp slowdown.

By mid-2025, the administration introduced a 10% baseline tariff on most imports, describing it as a structural reset of trade policy. Other countries responded in kind, with some measures clearly aimed at politically sensitive U.S. exports such as soybeans and aerospace products. This exchange escalated into a wider trade conflict.

Market Reactions and Investor Behaviour 

Financial markets responded in a manner consistent with increased risk aversion. In June 2025, the S&P 500 fell by 1.6%, its steepest monthly drop in over a year. The Dow Jones Industrial Average declined by 542 points, or 1.23%. UK-based investors withdrew approximately £330 million from U.S. equity funds. At the same time, Europe an funds experienced inflows of £280 million, suggesting a mild “safe-haven” effect in European equities.

The FTSE 100 reached an all-time high in the same month, supported in part by this capital shift. As shown in Figure 1, the S&P 500 fell by 1.6% in June 2025 while the Dow Jones declined by 1.23%. Concurrently, UK investors withdrew roughly £330 million from U.S. equity funds, whereas European funds experienced inflows of £280 million (see Figure 2). This was a clear example of capital flight, where investors redirect funds to markets perceived as less exposed to policy shocks.

Figure 1: Market Performance Before and After Tariffs 

Figure 2: Capital Movement Following Tariff Announcements

The U.S - China Trade War

The tariffs sharply worsened relations with China. U.S. duties on Chinese goods rose to 145%, while China imposed 125% tariffs on U.S. exports. The elasticity of demand for U.S. goods in China proved to be high, with importers switching to Brazilian soybeans, European aircraft parts, and other substitutes.

This led to significant trade diversion. Chinese and multinational firms began routing goods through tariff-neutral countries such as Vietnam or the UK to avoid direct exposure to U.S.–China duties. These tariff rates are illustrated in Figure 3, highlighting the sharp escalation in trade tensions between the two nations. However, given China’s central role in global manufacturing, the disruptions were broad. Delays in component shipments, higher costs for intermediate goods, and reduced investment in cross-border projects became increasingly common.

Figure 3: Tariff Rates in the U.S - China Trade 

The Broader Economic Effects

The tariffs triggered several knock-on effects. Export-dependent sectors like automotive and aerospace saw share prices fall between 5 and 8% in the three months after the escalation. Domestic steel and aluminium prices increased by 14%, pushing up costs for construction and heavy industry. These tariff rates are illustrated in Figure 3, highlighting the sharp escalation in trade tensions between the two nations.

Central banks, including the Federal Reserve and the Bank of England, cut interest rates by 0.25 to 0.5 percentage points to support demand. Business investment fell 3% quarter-on-quarter in mid-2025, reflecting uncertainty over the future trade environment.

Not all effects were negative. Certain UK exporters benefited from trade diversion, capturing market share from U.S. producers in selected goods. Yet in net terms, both for the U.S. and globally, the effect was contractionary.

Figure 4: Price Increase in Key Commodities Post-Tariff, Steel and Aluminium

Conclusion 

Trump’s tariffs were broad in scope and politically significant, but their economic consequences were complex and, in the short term, mostly negative. GDP growth slowed, financial markets adjusted downwards, and global trade flows were disrupted.

Long-term reshoring of industry remains a possibility, but its success depends on whether the U.S. can maintain competitiveness without damaging its international partnerships. For now, this period serves as a reminder that protectionism, while capable of benefiting specific sectors, often produces wider and less predictable economic costs.