Understanding Tariffs: How They Work and Why Trump Uses Them as a Negotiation Tactic

With President Donald Trump back in office, tariffs have once again become a hot topic in economic and political discussions. Critics, especially in the media, are quick to sound the alarm, claiming that his aggressive trade policies will raise prices, disrupt global trade, and hurt American consumers. However, what many fail to understand is that Trump doesn’t see tariffs as just an economic policy—he sees them as a strategic tool in negotiation.

Since taking office, Trump has doubled down on his America-first economic policies, using tariffs to reshape trade relationships and push for better deals. While some argue that his approach is reckless, history shows that tariffs are not about permanent restrictions on trade; they are about leverage.

So, what exactly are tariffs? How do they impact trade and prices? And most importantly, what is Trump really trying to accomplish? Let’s break it down.

What Are Tariffs?

Tariffs are taxes imposed by a government on imported goods. These taxes make foreign products more expensive, encouraging consumers and businesses to buy domestically produced goods instead. Tariffs can serve multiple purposes, including:

• Protecting Domestic Industries – By making foreign goods more expensive, tariffs give domestic companies a competitive advantage.
• Generating Revenue – Governments collect revenue from tariffs, which can be used for public spending.
• Negotiating Leverage – Tariffs can be used as a bargaining chip in trade deals.

How Do Tariffs Affect Prices and Trade?

The common argument against tariffs is that they increase prices for consumers. If American businesses have to pay more for imported goods, they may pass that cost onto consumers. Here’s how the cycle generally works:

1. Higher Import Costs – When tariffs are imposed, foreign-made products become more expensive.
2. Increased Domestic Demand – Higher prices on imports can lead to more demand for American-made alternatives.
3. Possible Price Increases – Domestic producers may also raise prices since they face less foreign competition.
4. Potential Trade Wars – Countries impacted by tariffs may retaliate with their own tariffs, restricting American exports.

Critics argue that tariffs make everything more expensive and disrupt global trade relationships. However, they often overlook the bigger picture of why Trump uses them in the first place.

Trump’s View on Tariffs: A Negotiation Tool

Donald Trump doesn’t impose tariffs just for the sake of it—he uses them as leverage in deal-making. Unlike career politicians who rely on traditional diplomacy, Trump approaches international trade the way he would a business negotiation. He creates pressure, introduces uncertainty, and forces his counterparts to the table.

Examples of Trump’s Tariff Strategy in Action

1. China Trade War (2018-2020) – Trump imposed tariffs on hundreds of billions of dollars in Chinese goods. Critics screamed that he was triggering a trade war. However, China eventually agreed to the Phase One Trade Deal, committing to buy more American agricultural products and making some structural trade reforms.

2. NAFTA Renegotiation (USMCA Deal) – Trump threatened to tear up NAFTA and imposed tariffs on Canadian and Mexican goods. The result? The United States-Mexico-Canada Agreement (USMCA), which modernized trade rules and provided better terms for American workers.

3. Europe and Auto Tariffs – When Trump threatened tariffs on European cars, it wasn’t because he wanted them permanently. He used the threat to push the EU into discussions about fairer trade practices.

Each time, Trump’s tariffs weren’t just economic policy—they were tactics designed to create leverage.

What is Trump Trying to Accomplish?

While many in the media see Trump’s tariff threats as reckless, there is a method to his approach. His goals include:

• Bringing Manufacturing Back to the U.S. – By making foreign goods more expensive, companies are incentivized to move production to the United States.
• Forcing Fair Trade Deals – Many countries have long had unfair trade advantages over the U.S. Trump uses tariffs to force renegotiations.
• Pressuring Companies to Invest in America – Businesses that might have offshored production may reconsider if tariffs make foreign operations less profitable.
• Reducing Trade Deficits – Trump believes the U.S. imports too much compared to what it exports. Tariffs are a way to shift the balance.

How Do Tariffs Affect the Stock Market?

The stock market reacts to tariffs in different ways depending on the time horizon. Here’s how tariffs typically impact the markets in the short, medium, and long term:

Short-Term Market Impact: Volatility and Panic Selling

• Market Uncertainty – The moment Trump announces new tariffs or threatens them, the market often reacts with volatility. Traders and investors don’t like uncertainty, so stocks tend to drop when there’s fear of a trade war.
• Sector-Specific Sell-Offs – Companies that rely on imports or exports—like tech, auto, and industrial firms—can see their stock prices decline sharply as investors fear higher costs or retaliatory tariffs.
• Safe-Haven Assets Rise – Assets like gold, the U.S. dollar, and government bonds tend to rally as investors seek safety from stock market swings.

Medium-Term Market Impact: Business Adjustments and Sector Shifts

• Companies Adapt – Businesses start adjusting their supply chains, either by passing costs onto consumers, absorbing losses, or shifting manufacturing to different regions. Some U.S. companies benefit, while others suffer.
• Sector Winners and Losers – U.S. steel and aluminum companies, for example, benefit from tariffs on foreign metals, but automakers who rely on those materials face rising costs.
• Trade Negotiations Influence Markets – If Trump’s tariffs lead to new trade deals, markets can recover and even rally, as seen when the U.S. and China reached the Phase One agreement in early 2020.

Long-Term Market Impact: Stronger Economy or Global Trade Shifts?

• Reshoring and Economic Growth – If tariffs successfully bring manufacturing back to the U.S., it can lead to job creation, wage growth, and a stronger domestic economy—ultimately boosting stock markets.
• Shifting Global Trade Dynamics – Countries and corporations may permanently adjust their trade routes, reducing dependence on China and diversifying supply chains.
• Market Resilience – While tariffs create short-term pain, they can force long-term efficiencies in trade, which may benefit U.S. markets in the long run.

Current Tariff Discussions: Mexico, Canada, EU, and China

• Mexico & Canada – Trump has announced new tariffs on imports from both countries, citing immigration and trade imbalances. Mexico has negotiated a temporary pause, while Canada considers retaliatory tariffs.
• China – A new 10% tariff on Chinese imports has reignited trade tensions. China has threatened countermeasures and is pursuing a WTO challenge.
• EU – Trump has hinted at tariffs on European goods, particularly in the automotive and agricultural sectors, unless trade imbalances are addressed.

These latest moves have rattled markets, with investors watching closely to see whether these tariffs lead to new trade deals or escalate into prolonged economic conflicts.

The Misconception: Trump Isn’t Anti-Trade, He’s Pro-Deal

The key misunderstanding about Trump’s tariff strategy is that he’s not looking to permanently restrict trade—he’s using tariffs to negotiate better deals. His approach is transactional: he applies pressure, creates a sense of urgency, and then negotiates favorable terms.

Critics who say, “Trump’s tariffs will ruin the economy” are missing the fact that, time and again, he has used them to extract better agreements. He doesn’t impose tariffs to punish foreign countries—he imposes them to get them to the table.

Conclusion: Tariffs as a Means, Not an End

Tariffs are often misunderstood. While they do have economic consequences, they are not simply a blunt instrument to raise prices or hinder trade. Trump, more than any recent leader, sees tariffs as a tool of negotiation—a means to force better trade deals, bring back manufacturing, and level the playing field.

Rather than panicking every time Trump threatens tariffs, it’s important to step back and recognize his broader strategy. He is a dealmaker at heart, and in his world, everything—including trade policy—is part of a larger negotiation.

So, before writing off tariffs as destructive, it’s worth asking: Is Trump really disrupting trade, or is he simply playing hardball to get the best deal for America? The evidence suggests the latter.