The Illusion of Protection: Why Broad Tariffs Fail and Who Really Benefits

In March 2025, President Trump enacted sweeping tariffs targeting a wide array of imports from Canada, Mexico, and China. The administration framed these tariffs as a multi-pronged strategy—meant to pressure China on fentanyl production, reduce the trade deficit, and protect domestic industries from foreign competition (AP News, 2025). The immediate market reaction was sharp—a selloff in major indices and retaliatory measures from affected nations.

At first glance, tariffs might seem like a strong defense against economic threats. Politicians often promote them as a way to safeguard domestic industries and ensure national prosperity. But history tells a different story—one of higher consumer costs, economic inefficiencies, and industries that often decline rather than thrive under protectionist policies.

Despite their frequent use in policy debates, tariffs rarely work as promised. This article explores why protectionist measures often fail and uncovers who actually benefits when governments impose them.

Before we get into it, here are four main ideas that tend to govern tariffs and portfolios:

I. Tariffs Don’t Work Because They Violate Free Trade Principles

By definition, free trade means no taxes on goods moving between countries. Tariffs artificially raise prices, which distorts competition, reduces efficiency, and ultimately makes consumers and businesses worse off (Ricardo, 1817; York, 2024).

II. Tariffs Are Almost Always Driven by Politics, Not Economics

Despite overwhelming economic research showing that tariffs do more harm than good, they persist because they serve political agendas. Often, tariffs are loosely linked to unrelated issues—like using trade penalties to pressure China on fentanyl production or leveraging tariffs on Mexico to influence immigration policy (AP News, 2025; York, 2024).

III. Tariffs Create Market Volatility as the Economy Adjusts

Markets rely on price signals shaped by supply and demand. When a government suddenly alters pricing structures through protectionist policies, it throws supply chains into chaos. Investors should expect market volatility as businesses adjust prices, sourcing, and supply chains to offset the impact of tariffs (Krolikowski & McCallum, 2025).

IV. Economic Policy Impacts Investors and Market Participants

Major policy shifts like tariffs introduce economic uncertainty. Understanding how trade policies impact markets over time may be valuable for market participants and investors alike.

By the end of this article, you’ll understand why tariffs fail, who really benefits from them, and how market participants respond to the volatility they create.

Why Tariffs Fail: A Historical and Economic Perspective

For centuries, economists have warned against protectionist trade policies as a tool for economic growth.

• Adam Smith argued that free trade leads to greater national prosperity by allowing each country to specialize in what it does best. His "invisible hand" concept highlights how markets function most efficiently when trade flows freely, unencumbered by government interference (Smith, 1776).
• David Ricardo demonstrated that even if one country is better at producing everything, free trade benefits all nations by allowing each to focus on what they do most efficiently. Tariffs disrupt this natural efficiency, leading to higher prices for consumers and inefficiencies in production (Ricardo, 1817).
• Michael Porter explained that long-term tariffs weaken domestic industries by shielding them from competition. Without competition, industries stagnate, innovation slows, and consumers are left with higher prices and lower-quality goods (Porter, 1985).

History has often shown that protectionism does not create lasting economic strength—it delays inevitable market corrections while making the overall economy less competitive.

The failures of protectionist policies are not just theoretical—they have played out repeatedly in real-world markets. Across industries, we see similar predictable patterns: tariffs are driven by politics rather than sound economics, they introduce short-term market volatility, and they ultimately fail to protect domestic industries from global competition. The following case studies illustrate these economic realities in action

Three Real-World Examples of Protectionism Gone Wrong

1. The "Save Harley-Davidson" Tariffs That Backfired (1983)

The Story: In the early 1980s, Harley-Davidson was struggling against Japanese competitors producing high-quality, affordable motorcycles. In response, the Reagan administration imposed a 45% tariff on large Japanese motorcycles.

What Happened?

• Japanese manufacturers (Honda, Yamaha) built U.S. factories, bypassing tariffs while maintaining dominance.
• Harley saw a short-term boost but ultimately had to reinvent itself because tariffs couldn’t fix quality and innovation issues.

Lesson: Tariffs don’t fix business problems—they delay them. Harley survived only because it innovated, not because tariffs worked (NBER, 1999).

This example underscores how tariffs create market volatility and how businesses ultimately must adapt through innovation, not protectionism.

2. The Death of the U.S. Shoe Industry (1970s-1990s)

The Story: The U.S. had a thriving shoe industry, but as cheaper imports from Asia increased, domestic manufacturers lobbied for tariffs on South Korean and Taiwanese imports.

What Happened?

• Major U.S. brands like Nike moved production elsewhere, avoiding tariffs.
• The U.S. lost 90% of its shoe manufacturing jobs.

Lesson: Tariffs didn’t save the U.S. shoe industry—they just delayed the shift to globalized production (NBER, 1999).

This demonstrates that tariffs are politically motivated and rarely protect industries in the long run.

3. The Collapse of the U.S. Television Industry (1950s-2000s)

The Story: The U.S. once dominated TV manufacturing but struggled against superior Japanese competitors like Sony and Panasonic. Protectionist tariffs were enacted in the 1970s and 1980s.

What Happened?

• Foreign firms innovated, while U.S. firms stagnated.
• By the 1990s, most U.S. TV manufacturers had collapsed or been acquired.

Lesson: Protectionism doesn’t create innovation—it fosters complacency and industry decline (Porter, 1985).

The stagnation of American TV manufacturing highlights how protectionism fosters complacency rather than global competitiveness.

Despite their repeated missteps, tariffs remain a favored policy tool. Why? Because they can create short-term winners, even as they impose long-term economic costs.

Who Actually Benefits from Tariffs?

Despite their negative impact, tariffs persist because they create winners and losers—and the winners are often the loudest voices in Washington.

• Industries with Political Influence: Certain industries, like U.S. steel, have long lobbied for protectionist policies despite failing to generate sustainable growth (York, 2024).
• Politicians Seeking Votes: Tariffs are often political theater, presented as strong measures to address modern challenges—symbolic more than substantive—while their hidden costs remain overlooked (Krolikowski & McCallum, 2025)."

Understanding the historical missteps of tariffs provides insight into their potential impact on markets today. For investors, the key takeaway is recognizing that protectionist policies often generate short-term volatility but fail to provide lasting economic strength. Assessing how trade policy affects portfolio risk remains essential in a world where political motives often shape economic realities.