Domino effect of Tariffs

Tariff Wars: Are We Actually Hurting Ourselves?

Avery Sinclair in Business & Economy August 2025 • 4 min read.

"New research reveals the hidden dangers of protectionism and how tariffs can backfire spectacularly"

In an increasingly interconnected world, the concept of tariffs has resurfaced as a tool for governments seeking to protect domestic industries, boost employment, and secure economic advantages. However, beneath the surface of these seemingly straightforward measures lies a complex web of economic interactions that can lead to unintended and often detrimental consequences. Recent research sheds light on the often-overlooked 'spillover effects' of tariffs, revealing how these trade barriers can backfire, inflicting greater harm on the tariff-imposing economies than on their intended targets.

The study, "Tariff Barriers and Industrial Spillover Effects," challenges conventional wisdom by demonstrating that tariffs, far from being simple protective measures, can trigger a cascade of indirect impacts through industrial forward and backward linkages. These linkages, which represent the intricate supply chains that crisscross the globe, mean that tariffs in one sector can ripple outwards, affecting numerous other sectors both domestically and internationally. Understanding these spillover effects is crucial for policymakers seeking to make informed decisions about trade policy.

As we delve into the findings of this research, we'll explore how tariffs can ironically undermine the competitiveness of domestic industries, disrupt established trade relationships, and ultimately lead to greater economic losses. This analysis will not only equip you with a deeper understanding of the complexities of global trade but also empower you to critically evaluate the claims and promises made by proponents of protectionist policies.

How Tariffs Trigger Unexpected Chain Reactions

The core argument presented in the research is that tariffs, designed to protect specific sectors, set off a series of indirect consequences that extend far beyond the initial target. These consequences stem from the intricate nature of modern supply chains, where goods and services often cross borders multiple times during the production process. A tariff on imported steel, for example, might initially seem beneficial to domestic steel producers. However, it can increase the cost of manufacturing for industries that rely on steel, such as the automotive or construction sectors.

This increase in production costs can then make these downstream industries less competitive in the global market, leading to reduced exports and, ultimately, job losses. The researchers used input-output (IO) models to map these complex relationships and quantify the spillover effects of tariffs across various sectors and economies. The model uses data from 45 economies and 35 sectors, ensuring a detailed and comprehensive analysis of international trade.

Forward Linkages: When a tariff increases the cost of inputs for downstream industries, reducing their competitiveness.
Backward Linkages: When a tariff reduces demand for intermediate goods, hurting upstream suppliers.

The study also considers the possibility of substitution, where businesses switch to different import sources or sectors to mitigate the impact of tariffs. While substitution can lessen some negative forward linkage effects, it often exacerbates backward linkage effects, as domestic industries reduce their demand for inputs from their traditional suppliers. Regardless of substitution, the research consistently found that indirect impacts of tariffs were much more substantial than the direct impacts.

The Big Picture: Rethinking Protectionism in a Globalized World

The implications of this research are clear: tariffs are a far more complex and risky policy tool than often portrayed. In a globalized economy, where supply chains are deeply intertwined, protectionist measures can easily backfire, undermining the competitiveness of domestic industries and harming the overall economy. As policymakers grapple with the challenges of trade imbalances and unfair competition, it is crucial to consider the full range of potential consequences before imposing tariffs. A more nuanced approach, focused on fostering innovation, improving infrastructure, and investing in education, may be more effective in promoting long-term economic prosperity than resorting to protectionist measures.

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This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1108/jkt-03-2018-0018, Alternate LINK

Title: Tariff Barriers And Industrial Spillover Effects

Subject: General Economics, Econometrics and Finance

Journal: Journal of Korea Trade

Publisher: Emerald

Authors: Jong Woo Kang, Suzette Dagli

Published: 2018-07-04

Everything You Need To Know

What are 'spillover effects' in the context of tariffs, and why are they significant?

Spillover effects refer to the indirect consequences of tariffs that extend beyond the initially targeted sectors. The research "Tariff Barriers and Industrial Spillover Effects" highlights that tariffs can trigger a cascade of impacts due to intricate global supply chains. These effects, stemming from industrial forward and backward linkages, can undermine domestic industry competitiveness and disrupt established trade relationships. Understanding these effects is crucial for policymakers as they often lead to unintended economic losses, making them more substantial than the direct impacts of tariffs.

How do 'forward linkages' and 'backward linkages' function within the context of tariff impacts?

Forward linkages occur when a tariff increases the cost of inputs for downstream industries. This reduces the competitiveness of those downstream industries in the global market. For example, a tariff on imported steel can raise costs for the automotive sector. Backward linkages happen when a tariff reduces demand for intermediate goods, which harms upstream suppliers. If steel becomes more expensive, the demand for steel by industries that use it declines, hurting steel suppliers. The research emphasizes that understanding these linkages is vital for assessing the full impact of tariffs.

In what ways can tariffs undermine the competitiveness of domestic industries?

Tariffs, designed to protect specific sectors, can inadvertently harm the same domestic industries. A tariff on an imported input, such as steel, raises production costs for downstream industries, like automotive or construction. This cost increase reduces their ability to compete in global markets, leading to decreased exports and job losses. The research demonstrates that this is a common outcome, highlighting the complex and often counterintuitive effects of protectionist measures on industrial competitiveness.

What role does 'substitution' play in mitigating or exacerbating the effects of tariffs?

Substitution, where businesses switch to alternative import sources or sectors to avoid tariffs, can both lessen and worsen tariff impacts. While it can reduce some negative forward linkage effects by allowing companies to find cheaper inputs, it can also exacerbate backward linkage effects. As businesses shift to different suppliers, the demand for goods from traditional, often domestic, suppliers decreases, potentially harming those industries. The research shows that, overall, the indirect impacts of tariffs are usually more significant, regardless of substitution strategies.

What are the broader implications of this research for policymakers considering protectionist trade policies?

The research's main implication is that tariffs are a complex and often risky policy tool. In a globalized economy, protectionist measures can easily backfire, undermining domestic industry competitiveness and harming the overall economy. Policymakers should carefully consider the far-reaching consequences of tariffs before implementing them. The study suggests a more nuanced approach, focusing on strategies like fostering innovation, improving infrastructure, and investing in education, which may be more effective for long-term economic prosperity than relying on protectionist measures. A deep understanding of concepts like forward and backward linkages is key to evaluating trade policies effectively.