Research Review | 25 April 2025 | Tariffs

Tariffs, Tokens, and Turmoil: The Market Fallout from Trump’s Policy Uncertainty
David Krause (Marquette University)
April 2025
This paper investigates the financial consequences of economic policy shifts following President Trump’s second inauguration in January 2025. Using empirical data from April 2024 through April 7, 2025, this study assesses asset performance across U.S. equities, cryptocurrencies, gold, and bonds. The administration’s aggressive trade protectionism, ambiguous digital asset directives, and deregulatory approach to artificial intelligence have triggered heightened market volatility, diminished investor confidence, and a rotation toward defensive assets. Indexed returns reveal that traditional safe havens like gold outperformed riskier assets, while the Magnificent Seven equities and cryptocurrencies have experienced sharp post-inauguration drawdowns. The findings highlight the destabilizing role of policy uncertainty in capital markets, raising critical concerns for investors and policymakers regarding the repricing of political risk. This paper concludes that inconsistent economic governance is contributing to systemic fragility and recommends a more coherent regulatory approach to restore investor trust and improve market efficiency.

The Paradox: Who Will Ultimately Pay for the Tariffs?
Wenwei Huang (George Mason University)
March 2025
In the global economic landscape, tariffs have long served as a tool for governments to protect domestic industries, balance trade deficits, and sometimes to retaliate in trade disputes. However, the imposition of tariffs introduces a complex paradox: while ostensibly designed to benefit local economies, the financial burden and economic responses extend far beyond the initial target. President Trump’s second term has begun, and within a month of taking office, he has reaffirmed the importance of tariffs with NAFTA allies Canada and Mexico, as well as raising import tariffs on major trading counter partners such as China and the European Union, even extending to most of the trading counterparties. This has pushed the issue of tariffs to the forefront again. This essay explores the multifaceted implications of tariffs, questioning who truly bears the cost. By examining the real case studies, economic theories, and real-world impacts, the discussion will delve into how tariffs affect consumers, producers, governments, and the international community. It will argue that while tariffs might offer short-term protections or advantages to some sectors, they often lead to increased prices, retaliatory measures from trade partners, and potential economic inefficiencies. The essay assumes that the ultimate payers of tariffs are not only the direct importers but a broader spectrum including consumers through higher prices, taxpayers through government subsidies or bailouts, and even the global trade environment which might see a reduction in overall welfare due to disrupted trade relations. Through this analysis, the paradox of tariffs is laid bare, revealing a scenario where the cost is distributed in ways that might negate the very benefits tariffs are intended to provide.

A Better Tool to Counter China’s Unfair Trade Practices
Alex Raskolnikov (Columbia U.) and Benn Steil (Council on Foreign Relations)
February 2025
The United States runs a large and persistent current-account deficit with China—meaning, roughly, that it imports far more goods and services from that country than it exports. As a necessary mirror image of that deficit, it also runs a capital-account surplus with China—meaning that it imports more capital than it exports. Although it is widely understood that the United States would necessarily import less Chinese capital if it imported less Chinese stuff, it is generally not understood that the reverse is equally true. So if the U.S. tax subsidy for the import of foreign capital were eliminated, Chinese investors would have less motivation to outbid Americans for U.S. assets and, in consequence, less incentive to dump goods in this country in return for dollars. We propose a series of tax reforms that would significantly reduce the returns on U.S. portfolio investments by the Chinese government, its sovereign wealth fund, and China’s other major investors. If implemented, these reforms may lead to a 16 percent decrease in China’s goods-trade surplus with the United States without the drawbacks of tariffs and while raising foreign revenue, supporting U.S. production, and helping to keep American assets in American hands.

The America First Trade Policy: The Knowable and Unknowable Consequences
Dan Ciuriak (Ciuriak Consulting)
February 2025
The “America First Trade Policy” initiated under President Trump signals a fundamental reshaping of US trade relations by using tariffs to address trade deficits and alleged national security concerns. This paper examines both the knowable consequences of this policy, drawing from recent natural experiments, including Section 232 and Section 301 tariffs, and Brexit, and also delves into the unknowable consequences based on the unexpected consequences to a historical precedent for the America First Trade Policy, namely the Nixon Measures of 1971. Conventional trade theory predicted inefficiencies and economic losses from these natural experiments and conventional trade theory was vindicated by the outcomes. This does not augur well for the prospects of success of the America First Trade Policy. Moreover, historical evidence suggests that the full impact of unprepared departures from accepted arrangements will drive unpredictable systemic changes in global finance, supply chain realignments, and geopolitical shifts due to the responses of myriad private and state actors responding in their own best interests. The paper concludes that the America First trade Policy is not only likely to fail to achieve its intended first-order objectives because of fundamental internal incoherence within the populist trade economics which informs it but also risks uncontrollable unintended changes in global economic relations.

Bluff Without Purpose: Rethinking Trump’s Tariff Policy and the Misuse of Game Theory
Doron Narotzki (University of Akron)
April 2025
This paper challenges the narrative that President Trump’s tariff policies reflect a sophisticated application of game theory. While some scholars attempted to frame these policies as strategic maneuvers modeled on classic games like Chicken or the Prisoner’s Dilemma, I argue that this interpretation overstates their coherence and consistency. Drawing on foundational and behavioral game theory, the paper argues that Trump’s actions lack the rationality, credibility, and structural clarity required for meaningful strategic modeling. Even when extended to multi-player frameworks, game theory fails to capture the fragmented and improvisational nature of U.S. trade policy under Trump. The evidence points not to a calculated strategy, but to a destabilizing set of decisions that resist game-theoretic justification.

The Economic Consequences of A Three-front Trade-War
Xinxin Wei (University of Leeds), et al.
March 2025
Against the backdrop of a new round of trade frictions between the US, Canada and Mexico, we utilize a computable general equilibrium (CGE) model with Armington elasticity and the Eaton-Kortum approach. We simulate different trade friction scenarios, including the effects of tariffs imposed by the U.S. on Mexico, Canada and China and these countries’ retaliatory measures. Our findings reveal that tariff increases between Canada, Mexico, China and the US result in declining GDP for all of these countries up to 16.5%, 6.6%, 0.3% and 0.19% respectively and with positive spillover effects on their major trading partners and increasing their GDP. The retaliatory actions do not significantly improve Mexico, Canada and China’s GDP. Additionally, we highlight that the trade frictions between the US, Canada and Mexico have not universally promoted domestic production in the United States. Notably, the United States’ decision to impose tariffs on all industries in Canada, Mexico, and China might result in a reduction in U.S. import and export trade flows and shift where global trade increasingly bypasses the U.S.

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