Why Tariff Is Not “the Most Beautiful Word in the Dictionary”

Tariffs, or taxes, duties or levies on imports and exports, have been placed center stage following the Trump administration’s imposition of sweeping tariffs on goods from countries across the world, wiping off trillions from stock markets around the world and unleashing a global trade war. 

When used prudently, tariffs can play a crucial role in shaping balanced international trade and economic development. However, when used hastily, they can wreak havoc in many ways – for both developed and developing economies. 

A large part of the reason for the Trump administration’s tariff increases is explained by an attempt to protect US workers, create more employment and place “America First”. However, by reducing foreign competition, not only is US consumer choice limited but local quality can fail to keep up with foreign improvements. Large tariff increases therefore tend to hurt local consumers at the expense of domestic industries, while developing countries lose out from foregone trade revenues driven by lower market access via their exports to developed economies. This effect is particularly pronounced when tariff increases are unilateral rather than reciprocal. 

Changes in tariff policies can significantly affect low-income and middle-income countries, albeit in different ways due to variations in their economic structures and trade compositions and relations. Low-income countries typically rely on exporting raw materials and agricultural products, whereas middle-income countries are more involved in the production and export of manufactured goods and services. This article delves into some of the impacts of tariff changes on these two country groups, focusing on how they influence trade balances, economic growth and social welfare – all generally for the worse of these countries. 

Differences in trade composition 

Low-income countries often depend on a few key low value-added commodity exports and face challenges in trying to move up the value chain such as limited industrialization, weak infrastructure (particularly energy) and low labor productivity. In contrast, their imports largely consist of essential goods, including machinery, pharmaceuticals and food products that cannot be produced domestically due to the limitations above. 

Middle-income countries, in contrast, have more diversified economies. They export a combination of raw materials, manufactured goods and, increasingly, services such as IT, tourism and financial services. They also import intermediate goods for production, making them more integrated into global value chains. These differences in trade structures mean that changes in tariff policies affect each group in distinct ways. 

Impact of tariff increases 

Low-income countries 

When tariffs rise in developed economies, low-income countries suffer disproportionately due to their reliance on exporting primary commodities. Higher tariffs on their exports of goods reduce demand in developed economies because of the higher price consumers face. This leads to lower export revenues, which undermines the trade balance (the net of exports and imports) assuming that low-income countries’ imports remain relatively stable. Given that these nations have limited fiscal space and low industrial diversification, they struggle to adjust to these shocks. 

Additionally, since low-income countries import a large share of their capital goods, higher tariffs on these products can slow industrial development. Increased import costs raise production expenses, making it harder for local businesses to compete. This can lead to slower economic growth, reduced foreign investment and weaker employment opportunities. Ultimately, we can expect to see these negative effects reflected in stagnating or decreasing GDP per capita, which in many OPEC Fund low-income partner countries is already very low. 

Middle-income countries 

For middle-income countries tariff increases on their exports, especially on manufactured goods, can disrupt their integration into global supply chains. Many middle-income nations rely on exporting intermediate goods that are processed elsewhere. If tariffs increase in key markets their competitiveness declines and multinational corporations may shift production to countries with more favorable trade regimes. 

On the import side, middle-income countries often rely on foreign inputs for their manufacturing sectors. Tariff increases on these inputs also raise production costs, reducing competitiveness in domestic and international markets. While these countries have more policy tools to adapt compared to low-income countries such as trade diversification and industrial upgrading, these take time to implement so rising tariffs still pose significant short-term challenges. 

Africa caught in the crossfire 

Many observers decry the tariffs imposed on Sub-Saharan Africa as the USA runs only a small trade deficit with the continent – US$7.4 billion in 2024 compared to a deficit of almost US$300 billion with China in the same year. Of this, around 85 percent of the US trade deficit covered just three countries: South Africa, Nigeria and Ghana. 

These countries’ primary exports, notably platinum and crude petroleum, are critical resources for which there is high demand in the USA, which would appear to make tariffs self-defeating. However, many Sub-Saharan African countries that displease President Trump have had broad, sweeping tariffs imposed upon them – South Africa for example due to its land reform policies, highlighting that tariff policy may be dictated by more than economics. Furthermore, by imposing tariffs on South Africa, it is effectively imposing tariffs on most of Southern Africa: Zimbabwe and Botswana, which are landlocked, and Namibia, which does not have access to sophisticated ports, all tend to trade through South African ports. There would be negative economic repercussions for most of the region. 

Meanwhile, now that the USA is waging a trade war on China, this will likely slow China's already under performing economy. More substantial decreases are not ruled out should the USA increase tariffs further or bring in more measures such as ending the US designation of Permanent Normal Trade Relations (successor to the most-favored nation status) with China, which dates back to 2000 and is under renewed attack from within the US political system. 

Weaker growth in China could be particularly felt by Sub-Saharan African countries such as Zambia, Angola and the Democratic Republic of the Congo, which rely on Chinese demand for copper, oil and cobalt. A weaker Chinese economy would likely dampen demand for these commodities, potentially leading to lower prices on global markets and revenue losses for African exporters. 

More broadly, Africa collectively could also suffer from any bid to alter or repeal the US trade deal, the African Growth and Opportunity Act (AGOA). 

Impact of tariff reductions 

Low-income countries 

The rush by the Trump administration to impose blanket tariffs on a wide range of countries counteracts the positive development effect that reducing tariffs can have. Lower tariffs as offered by developed economies have benefited many low-income countries by improving market access to developed economies for their exports: Sub-Saharan Africa’s trade was boosted enormously by the Clinton administration’s African Growth and Opportunity Act (AGOA), approved by the United States in 2000. After completing its initial 15-year period of validity, AGOA was extended in June 2015 by a further 10 years to 2025. Similarly, the European Union’s Everything but Arms (EBA) scheme that was launched in 2001 removes tariffs and quotas for all imports of goods (except arms and ammunition) coming into the EU from all low-income countries. 

Middle-income countries 

For middle-income countries, tariff reductions can enhance competitiveness by lowering the cost of imported inputs and improving access to global supply chains and markets. Given their more diversified economies they are better positioned to take advantage of trade liberalization. Lower tariffs on manufactured goods and services enable them to expand exports, increase investment and integrate further into global supply chains. In addition, many countries have successfully pursued efforts to reduce or offset the impact of tariffs, although past performance is no guarantee of future success. However, excessive reliance on tariff reductions without complementary policies (such as industrial development and technological upgrading) can leave middle-income countries vulnerable to external shocks. For example, if they rely too heavily on importing high-tech products while exporting low-value goods, they may face long-term developmental challenges as highlighted in the World Bank’s World Development Report 2024: The Middle-Income Trap published in August 2024. 

It finds that as countries grow wealthier, they usually hit a “trap” at about 10 percent of annual US GDP per person – equivalent to around US$8,000, which is in the middle of the range of what the World Bank classifies as “middle-income” countries. Since 1990, only 34 middle-income economies have managed to shift to high-income status – and more than a third of them were either beneficiaries of integration into the European Union or of previously undiscovered oil. 

What options can be used to reduce or offset tariffs? 
 

• Exemptions from duties - These may be harder to secure compared with President Trump’s first term given that he has promised “no exceptions”. Moving production from China to elsewhere in Southeast Asia may not shield firms from tariffs, particularly if President Trump follows through with his threat of applying “reciprocal” tariffs to those Southeast Asia countries. 
• Tariff engineering #1 - This includes tweaking products to change their official classification. Duties can vary significantly even when merchandise appears similar. Simply adding a layer of fabric on a shoe insole or adding pockets below the waist on a blouse can move a product into a category for which tariffs are lower. 
• Tariff engineering #2 - Changing where a product ostensibly comes from. Although the raw material can be processed in one country, most of the production can take place in China, with the finished goods then sent back to the original country for testing and packaging. Designing supply chains so that just enough production happens in a place that benefits from lower tariffs is cheaper than shifting manufacturing in its entirety and allows firms to be nimbler if new tariffs are imposed. 
• Other options - The “first-sale” term, created by a US court ruling in 1988, allows importers to value goods based on the price charged by the manufacturer, rather than the higher ones charged by middlemen prior to import. To preserve cash, companies can also delay the payment of tariffs by using “bonded warehouses” that allow companies to store goods without paying duties until they are sold, as well as “temporary import bonds” for goods that are set to be re-exported. 

Issues about US tariffs 

1. They are large The scale of the Trump administration’s tariffs launched on “Liberation Day” are huge – the highest US trade barriers since Smoot-Hawley in 1930. 
2. The importer pays Tariffs are a tax levied on goods that cross the border. Although the importer pays, who bears the ultimate cost is more complicated. 
3. Initial small net effect If imposed at the current levels, US tariffs could raise around US$600 billion for the US Treasury. However, this is less than one third of the expected US$1,865 billion US federal government deficit in 2025. Tariffs do not resolve fiscal pressures, which are a much larger problem. 
4. High tariffs undermine sentiment Higher import prices raise production costs for domestic firms, offsetting the increased output of those that benefit from protection. Higher costs for shoppers reduce their real incomes and hence their spending power. This effect already seems visible in a plunge in US consumer sentiment. 
5. Inflationary impact #1 US goods imports account for approximately 10 percent of GDP. An average 10 percentage point increase in tariffs is likely to raise consumer prices by around 1 percentage point, according to the Federal Reserve Bank of Boston, adding further pressure onto the Federal Reserve’s 2 percent inflation target. 
6. Inflationary impact #2 Following the COVID-19 pandemic-related rise in prices, a tariff induced price increase would lead to further, higher wage demands and second-round effects. 
7. Dual interest rate effect The damaging effects of tariffs on the supply capacity of the US economy puts upward pressure on US interest rates (which set lending rates globally). At the same time, rising investor uncertainty stemming from President Trump’s actions lowers investment decisions and imparts downward pressure on rates through lower credit demand.
8. Tariffs are not the solution #1 The USA is a very closed economy: total goods trade was 19 percent of GDP in 2023, compared with 53 percent in Canada. This is despite President Trump’s rhetoric that imports are destroying US jobs and “killing America.” 
9. Tariffs are not the solution #2 The USA has a trade deficit because it persistently consumes more than it produces at full employment. To cut the deficit requires efforts to generate a recession, which would reduce demand for imports – but this is politically unrealistic. 

In conclusion 

Tariff changes have varied effects on low-income and middle-income countries due to differences in trade composition and economic structures. While higher tariffs generally harm both groups by reducing export competitiveness and raising import costs, the specific impact depends on their trade profiles. Low-income countries, with their dependence on primary goods, struggle more with external shocks, while middle-income countries face challenges in maintaining their position in global supply chains. Conversely, tariff reductions can create opportunities but also expose domestic industries to stiff competition. Not surprisingly, to maximize benefits, both country groups must adopt policies that enhance industrialization, diversify trade partners and invest in infrastructure and human capital. There are also options to help reduce or offset the impact of tariffs, but these can be complicated and are not a permanent or viable solution for all low-income countries. With all the uncertainty that has recently been generated, further disruptions can be expected, with low-income countries and to a lesser extent US consumers paying the price of President Trump’s unorthodox approach.