In the annals of American economic policy, few decisions are as universally condemned by economists as the Smoot-Hawley Tariff Act of 1930. Enacted during the throes of the Great Depression, the law sought to shield domestic industries from foreign competition. Instead, it provoked swift retaliatory tariffs from trading partners, contracted global trade, and deepened the economic crisis it aimed to remedy. Nearly a century later, echoes of Smoot-Hawley reverberate in the United States’ renewed embrace of sweeping protectionism under President Donald Trump’s 2025 tariff plan.
The policy, which imposes a blanket 10% tariff on all imports and as much as 54% on goods from China, marks a dramatic escalation in U.S. trade strategy. Far from a calibrated economic measure, it reflects a blunt-force approach that is already generating significant turbulence. In the immediate aftermath of the announcement, the S&P 500 fell by approximately 10% – its steepest one-day drop since March 2020 – erasing nearly $6 trillion in market value over just two days. Key sectors such as technology and automotive, deeply embedded in global supply chains, have been particularly affected. Apple saw its stock plunge 19% amid fears of rising input costs and declining international sales.
The damage is not confined to Wall Street. In an ironic twist, Cleveland-Cliffs Inc., a major U.S. steel producer and purported beneficiary of protectionist policy, has idled its Dearborn, Michigan plant, laying off 600 workers. The episode underscores a perennial flaw in tariffs-as-policy: their inability to anticipate and contain the downstream effects of a highly interconnected global economy.
Macroeconomic indicators are already flashing warning signals. Goldman Sachs recently downgraded its U.S. growth forecast for 2025 to 1.7%, while JPMorgan increased the probability of a recession to 60%. Inflation, meanwhile, remains persistently above the Federal Reserve’s 2% target, running at an annualised rate of 3%. The uncomfortable pairing of slowing growth and elevated inflation has sparked renewed fears of stagflation – a specter that haunted policymakers in the 1970s. Moreover, the administration’s claim that tariffs could generate $600 to $700 billion in annual revenue lacks credibility. Achieving such figures would require an implausible tenfold increase in customs revenue, ignoring fundamental principles of trade elasticity and behavioral response.
Tariffs imposed by one nation invariably ripple through the global economy, reshaping supply chains and altering investment flows
This raises an urgent question: is there an economic rationale behind this aggressive tariff regime? Some proponents invoke the “infant industry” argument, which historically argued for temporary protection to allow domestic industries to mature. While this theory found early support in the writings of Friedrich List, contemporary economic literature overwhelmingly cautions that high tariffs tend to raise production costs, disrupt supply chains, limit market access for exporters, and ultimately compound the burden on inflation-weary consumers. These consequences, in aggregate, often outweigh any long-term gains in industrial capacity resulting in a loss of overall economic welfare.
The global response has been swift and sharp. China has imposed retaliatory tariffs of up to 34% on U.S. imports. European leaders, including French President Emmanuel Macron, have publicly condemned the measures, with threats to restrict American investment in Europe and pursue alternative trade alliances. What is emerging is not merely a bilateral trade dispute but a broader fracture in the global trading system – one that risks reorganising international commerce along ideological and geopolitical lines.
Despite the disruption, a complete collapse of global trade is unlikely. Instead, the world is moving toward a more fragmented, politically influenced, and regionally focused system. Multinational corporations are already adjusting by recalibrating supply chains, and regional trade blocs are assuming greater importance. Trade will persist, but it will be more volatile, less predictable, and increasingly driven by political calculations rather than economic efficiency. Trump’s decision to wield platforms like TikTok as bargaining chips in these broader negotiations further complicates the trade landscape, blending national security concerns with economic tactics in an unprecedented way.
For emerging markets like Pakistan, these developments carry profound consequences. Although not targeted as harshly as China or Vietnam, Pakistan has nonetheless been hit with tariffs of up to 29% on key exports, particularly textiles and apparel. These products account for over 80% of Pakistan’s exports to the United States – nearly $5.5 billion annually – and are vital to its foreign exchange earnings. The garments sector alone contributes $3.2 billion, with home textiles adding another $1.5 billion.
Given the high price elasticity of these goods, tariffs are expected to significantly reduce U.S. consumer demand, directly threatening Pakistan’s export volumes. Compounding the challenge, countries like China, Vietnam, Cambodia, and Bangladesh – also affected by U.S. tariffs – are expected to reorient their exports toward the European Union and other alternative markets. This reallocation will intensify competition, further eroding Pakistan’s market share. The structural impact of these tariffs on Pakistan’s export sector cannot be overstated. Operating on thin margins, Pakistani firms depend on integrated supply chains that are difficult and costly to reconfigure. Trade disruptions of this magnitude jeopardise the viability of entire sectors, particularly in a country already grappling with economic instability.
Pakistan must decide whether it will remain a passive bystander or assert itself as a strategic actor in the new global trade architecture
Yet, even within this crisis lies opportunity. If Pakistan chooses to respond with strategic foresight rather than reactive measures, this global reset could catalyse a shift in industrial policy. Historically, Pakistan’s export strategy has prioritised horizontal expansion – producing more of the same low-value goods – rather than vertical upgrading. The current upheaval presents an inflection point: a chance to diversify products, adopt new technologies, and move up the value chain.
However, this path will require deliberate and targeted policy interventions. It is not enough to hope for alternative markets or seek tariff relief through diplomacy. Policymakers must prioritise support for firms that invest in innovation and quality, rather than subsidising inefficiency. The objective must be to build a resilient, globally competitive export base that can withstand external shocks.
Importantly, this is not a bilateral issue confined to U.S.-China or U.S-Pakistan trade relations. Tariffs imposed by one nation invariably ripple through the global economy, reshaping supply chains and altering investment flows. In this evolving ecosystem, new players – especially in Africa and Latin America – may emerge as winners. Pakistan must decide whether it will remain a passive bystander or assert itself as a strategic actor in the new global trade architecture.
The post-Cold War vision of seamless globalisation is giving way to a more fragmented order. The future of trade will be marked by recalibration, resilience, and adaptation – not business as usual. For the United States, the stakes involve not just short-term economic stability, but the preservation of its leadership in the global economy. Whether the U.S. will thrive in that new reality, or find itself increasingly isolated, may depend not just on tariffs, but on whether it chooses pragmatism over provocation. For countries like Pakistan, survival and success in this new environment will depend not on the policies of others, but on the will to reform from within.
History may not repeat itself exactly – but it often rhymes. The lessons of Smoot-Hawley remain relevant today. Tariffs may serve as compelling political tools, but their economic consequences are rarely as controllable – or as beneficial – as their advocates suggest.
