The Weaponization of Tariffs

Economic nationalism and its ripple effects

An analysis by Morgan Treadwell and Taylor Veritatis

In traditional economic theory, tariffs serve as policy instruments to protect domestic industries or address trade imbalances. Under the current administration, however, tariffs have evolved into something far more consequential: diplomatic weapons deployed suddenly and often unpredictably to extract concessions on issues unrelated to trade. This transformation of tariffs from economic tools to policy cudgels carries significant implications for market stability, diplomatic relationships, and America’s economic future.

The economic cannon: tariffs as surprise attacks

The sudden confirmation of 25% tariffs on imports from Mexico and Canada, effective Tuesday, sent stock markets tumbling as investors grappled with the implications. This announcement marks not just a shift in trade policy but exemplifies a governance approach where economic levers are pulled for maximum impact rather than deliberate economic outcomes.

The market reaction was swift and telling. Major indices fell sharply as investors processed the potential ripple effects through supply chains, consumer prices, and international relations. What makes these particular tariffs especially significant is their targeting of America’s closest trading partners and the integration of North American supply chains following decades of economic cooperation under NAFTA and its successor agreement, the USMCA.

This approach to tariffs—announced suddenly, implemented quickly, and wielded as leverage in unrelated policy disputes—creates economic disruption that extends far beyond the targeted sectors. As one Wall Street analyst noted, “Markets can adapt to almost any policy environment given enough time and predictability. What they cannot price efficiently is constant uncertainty and policy by surprise.”

Market impacts: measuring the immediate consequences

The timing of these tariff announcements has proven particularly problematic for markets already navigating economic uncertainty. Recent economic indicators paint a concerning picture:

• The ISM Manufacturing Index fell below expectations in February, signaling contraction in a sector particularly vulnerable to trade disruptions
• The Atlanta Federal Reserve’s GDP forecast for Q1 2025 has been revised downward significantly
• Consumer sentiment indices have weakened, with University of Michigan data showing increasing concerns about price stability
• Weekly jobless claims have trended upward, suggesting potential softening in the labor market

These indicators, combined with the sudden implementation of significant tariffs, have rapidly shifted market sentiment. Investors who began the year optimistic about economic prospects have quickly recalibrated their outlook. The volatility index (VIX), often called the “fear gauge” of Wall Street, spiked following the tariff confirmation.

Perhaps most telling is the sectoral impact. Companies with significant supply chain exposure to Canada and Mexico saw their stocks decline disproportionately. Auto manufacturers, which rely heavily on cross-border component sourcing under the integrated North American manufacturing model, experienced sharp selloffs. Agricultural exporters, often the first targets of retaliatory tariffs, similarly saw market valuations decline as investors priced in the likelihood of escalating trade tensions.

Historical lessons: what previous tariff episodes reveal

This is not the first time tariffs have been deployed as policy weapons, and historical precedents offer instructive lessons. During the first Trump administration, tariffs on Chinese goods were implemented in stages throughout 2018-2019. A Federal Reserve study subsequently found these tariffs cost American companies approximately $1.4 trillion in stock market value and reduced business investment by nearly 2%.

The Smoot-Hawley tariffs of 1930 provide an even starker historical warning. Intended to protect American farmers during the early Great Depression, they instead triggered retaliatory measures from trading partners that deepened and prolonged the economic crisis. Economic historians widely consider them among the most counterproductive economic policies of the 20th century.

These historical examples highlight a consistent pattern: while tariffs may benefit specific protected industries in the short term, their broader economic costs—particularly when implemented suddenly or triggering retaliation—typically outweigh those narrow benefits substantially.

Global ripple effects: beyond American markets

The impact of weaponized tariffs extends well beyond American shores. The integrated global economy means disruptions in North American trade relationships create cascading effects through international supply chains.

European markets responded negatively to the Canada-Mexico tariff announcement, with particular weakness in export-dependent sectors. Asian markets similarly registered concerns, especially in economies with significant exposure to North American trade flows. The prospect of a potential “tariff war” has raised risk premiums across global markets.

More concerning is the potential undermining of the rules-based trading system established over decades of international cooperation. When the world’s largest economy uses tariffs as diplomatic weapons rather than economic tools, it weakens the World Trade Organization and related institutions designed to make trade predictable and fair. As former WTO Director-General Pascal Lamy observed, “The system of global trade rules was built precisely to prevent the unpredictable use of tariffs as political weapons.”

The resulting uncertainty creates a risk premium for international investment and encourages other countries to develop economic relationships less dependent on American market access—a long-term strategic loss for U.S. influence.

The domestic price: American consumers and businesses

While market volatility captures headlines, the most significant impacts of weaponized tariffs often fall on American consumers and businesses. Economic research consistently shows that import tariffs are primarily paid by domestic importers and ultimately consumers, not foreign governments.

A Congressional Budget Office analysis of the 2018-2019 tariffs found they reduced real household income by an average of $831 annually. The current Canada-Mexico tariffs would likely have even greater consumer impacts given the integration of North American supply chains and the importance of these countries for U.S. food imports.

American businesses face multiple challenges from unpredictable tariff policies:

• Supply chain disruption and the need to quickly source alternative suppliers
• Higher input costs that must either be absorbed (reducing profits) or passed to consumers (reducing competitiveness)
• Uncertainty that complicates long-term investment decisions
• Potential loss of export markets due to retaliatory measures

Small and medium enterprises often bear disproportionate impacts, lacking the resources of larger corporations to quickly adapt supply chains or absorb compliance costs associated with sudden tariff changes.

The governance implications: what weaponized tariffs reveal

Beyond economic consequences, the use of tariffs as policy weapons reveals significant governance patterns with implications for democratic institutions. Three patterns are particularly concerning:

First, the implementation of tariffs without typical interagency review processes bypasses established governance mechanisms designed to assess both economic and diplomatic consequences before major policy changes. This concentration of trade policy authority represents a shift from institutional decision-making to personalized governance.

Second, using tariffs as leverage in unrelated policy disputes (such as immigration enforcement or security cooperation) blurs traditionally separate policy domains. This approach makes coherent policy development difficult and undermines the expertise of domain specialists within government.

Third, the economic uncertainty created by unpredictable tariff announcements affects markets’ ability to efficiently allocate capital. When investment decisions must account for the possibility of sudden policy shifts, resources flow toward shorter-term, lower-risk allocations rather than productive long-term investments that drive economic growth.

The path forward: economic nationalism’s costs and alternatives

Proponents of the current approach argue that aggressive tariff policies demonstrate American willingness to defend its economic interests and can extract concessions otherwise unobtainable. They point to specific industries protected by tariff barriers and the leverage created in diplomatic negotiations.

However, evidence increasingly suggests the costs of economic nationalism substantially outweigh its benefits. The market instability, consumer impacts, business uncertainty, and international relationship damage create aggregate economic harm that exceeds narrow sectoral gains.

Alternative approaches to legitimate trade concerns exist. Targeted enforcement of existing trade agreements, collaborative development of new rules for emerging economic sectors, and multilateral pressure on genuine bad actors in the international system can address trade concerns without the collateral damage of broad, unpredictable tariffs.

As investors recalibrate expectations amid shifting trade policies, the fundamental question remains whether economic tools designed for carefully calibrated policy adjustments can function effectively when deployed as diplomatic weapons. The market’s answer, reflected in volatility and downward revisions to growth expectations, appears increasingly clear: economic nationalism’s costs are being borne not by foreign competitors, but by American investors, businesses, and consumers.

Markets can adapt to almost any consistent policy environment. What they cannot efficiently navigate is governance by surprise. When tariffs become cannons rather than carefully deployed policy instruments, the economic collateral damage falls primarily on those the policy purportedly aims to protect.

---

Morgan Treadwell and Taylor Veritatis are the founding editors of Beyond the Spectacle, an independent platform examining governance patterns and their implications for democratic institutions.