Trade-Offs

Editor’s Note: This is the concluding article in a two-part series exploring how global trade dynamics influence risk, investment, and insurance.

---

Tariffs and labor market shifts are changing costs, liabilities, and the assumptions that underpin actuarial models.

By Carlos Fuentes

This article is a follow-up to “Global Trade and Risk Under Full Employment,” which appeared in the May/June issue of Contingencies. Both articles draw on established economic theory.

This article moves from the foundational logic of comparative advantage to the complex realities of protectionism, addressing conditions of unemployment. It examines how the pursuit of national self-interest on a global scale can produce collective harm. The analysis goes beyond economic efficiency to consider compelling non-economic rationales for tariffs, including national security and the infant industry argument.

Two key case studies illustrate the effects of such policies: the Smoot-Hawley Tariff Act and the evolving 2018 tariffs. The article emphasizes that widespread tariffs create financial risk, which in turn presents opportunities for actuaries to manage increased claim severity and volatility.

Key Points

• Historical and recent trade measures illustrate how policy uncertainty amplifies financial volatility.
• Actuaries must update modeling assumptions to account for inflation, discount rates, and macroeconomic shocks driven by trade dynamics.
• Opportunities exist in trade credit insurance, supply chain risk, and scenario-based stress testing, reinforcing the actuarial role in global economic risk management.
• Understanding both economic and non-economic drivers of trade policy is essential for risk assessment and strategic planning.

International Trade and Unemployment

In periods of cyclical unemployment, even robust economies must turn to policy interventions that stimulate demand and restore full employment. Fiscal instruments¹ such as targeted increases in public expenditure or reductions in taxation remain the most direct means of generating jobs, provided that the stimulus is channeled toward domestically produced goods and services. Yet, expanding exports while curbing imports can also absorb idle resources. A surge in foreign sales, say an additional billion dollars’ worth, not only raises domestic output but also sets in motion multiplier effects² that amplify the initial gain, potentially doubling its impact on overall economic activity. From the perspective of a single country facing unemployment, export growth thus functions as a consumption boost and a job‑creation mechanism.

The picture becomes more complex when multiple nations simultaneously pursue export‑led recovery. In such cases, the collective drive for external demand often provokes protectionist countermeasures, producing outcomes reminiscent of the tragedy of the commons.³ What appears rational at the national level can, in aggregate, erode welfare globally. The consequences are well documented: Tariffs and trade barriers raise consumer prices and input costs, supply chain disruptions force reliance on less efficient alternatives, export industries contract when foreign demand weakens, and overall growth slows as uncertainty deters investment.

Empirical evidence from recent trade disputes underscores these dynamics. The U.S.-China trade war, for example, disrupted global supply chains, raised costs for firms, and introduced inefficiencies across industries.⁴ Spillover effects on third countries were uneven: Brazilian exporters gained in some sectors but lost in others⁵, while Vietnam’s exports to the United States rose by 14%⁶, according to difference‑in‑differences⁷ analysis, though the benefits varied sharply across industries. Such findings highlight the uneven distribution of gains and losses when large economies engage in protectionist conflict.

Ultimately, advanced economies retain the capacity to reduce unemployment through well‑designed domestic measures, enhance productivity by concentrating on sectors of comparative strength, and raise living standards through open trade. However, the temptation to impose barriers, whether driven by political pressures or industry lobbying, remains strong. While blanket protectionism is economically costly, carefully calibrated restrictions may, in certain contexts, serve as a pragmatic complement to broader strategies for stability and growth.

Non-Economic Rationales for Protectionism

Debates over trade policy are often framed in terms of efficiency and welfare, yet many of the most persistent arguments for protectionism rest on non-economic grounds. Tariffs, quotas, and currency interventions⁸ are not merely instruments of economic adjustment; they are frequently justified as tools to safeguard social, political, and strategic interests.

One recurring justification is the protection of domestic industries. Exposure to global competition can erode employment in sectors deemed vital to national identity or resilience. The U.S. tariffs on steel and aluminum illustrate this logic: They were designed not only to preserve jobs but also to maintain the industrial base considered essential for long-term security. Closely related is the infant industry argument, which contends that emerging sectors require temporary shelter until they achieve scale and competitiveness. While historically central to industrialization strategies, critics warn that prolonged protection risks entrenching inefficiency and dependency.

Concerns over trade deficitsadd another layer of complexity. Deficits are politically salient, often interpreted as evidence of economic vulnerability. They can pressure domestic firms, increase reliance on foreign borrowing, and accelerate offshoring. Yet they also deliver benefits: Consumers enjoy cheaper imports, firms reduce input costs, and strong demand can reinforce currency strength. Economists remain divided on whether persistent deficits signal fragility or reflect the dynamism of a consumption-driven economy.⁹

Dependency on global supply chains has also become a prominent concern. The COVID-19 pandemic revealed how reliance on foreign producers for critical goods, such as medical supplies and vaccines, can leave nations exposed to external shocks. Similarly, accusations of unfair tradepractices, including dumping and currency manipulation, have fueled calls for defensive tariffs, particularly in industries like steel where sustainability of domestic production is at stake.

National securityarguments extend this logic further. Dependence on external suppliers for food, medicine, or defense-related technologies is often framed as a strategic liability. Historical examples, such as U.S. restrictions on high-technology exports to adversarial states in the 1980s, illustrate the intersection of trade and security. Environmental concerns add yet another dimension: Global demand for commodities like beef and soybeans has been linked to deforestation in the Amazon, raising questions about the ecological costs of trade liberalization.

Social arguments also feature prominently. Trade agreements can exacerbate inequality and facilitate exploitative labor practices in lower-income countries as evidenced by reports of poor working conditions in textile and electronics factories. Tariffs, meanwhile, serve as revenue tools, functioning like consumption taxes. While often criticized as regressive, they remain a significant source of fiscal income in many states.

The strategic uses of tariffs highlight the diversity of motives behind protectionism. Japan’s post-war tariff regime sought to nurture infant industries, encourage technology transfer, and build globally competitive firms such as Sony and Toyota. More recently, U.S. tariffs under the Trump administration were framed as part of a broader strategy to counter intellectual property theft, restructure supply chains, and reinforce national security.

The short-term appeal of tariffs lies in their ability to provide breathing space for struggling industries. Yet long-term evidence suggests, that on a purely economic basis, broad protectionist measures often backfire. OECD modeling¹⁰ shows that liberalization tends to expand opportunities for exporters and reallocate resources toward more productive uses, supporting net job creation. Empirical studies reinforce this point: IMF analysis¹¹ across 151 economies finds that higher import duties are associated with rising unemployment and inequality, while their impact on trade balances remains modest. Labor-market research identifies two key channels: Higher import prices erode real wages, and retaliatory tariffs depress output in export-oriented sectors.

Taken together, these findings suggest that while tariffs can serve as strategic instruments under specific conditions, broad protectionism often imposes wider costs—diminishing consumer welfare, disrupting supply chains, and undermining employment in the very industries it seeks to protect.

Case Studies

The history of U.S. trade policy¹² is punctuated by moments when tariffs became the centerpiece of economic strategy. These episodes reveal not only the political pressures of their time but also the enduring tension between short-term protection and long-term growth. The two cases discussed below illustrate how tariffs have been deployed with different aims. From a purely economic point of view¹³, they raise the question of whether such measures can genuinely foster sustainable prosperity or whether they risk undermining broader economic health.

The Smoot–Hawley Act of 1930

Passed in the shadow of the 1929 stock market crash, the Smoot–Hawley Tariff Act represented one of the most sweeping protectionist experiments in U.S. history. Championed by Sen. Reed Smoot and Rep. Willis Hawley, and signed reluctantly by President Herbert Hoover, the law raised duties on more than 20,000 imported goods. Average tariffs climbed to nearly 60% on over a third of imports, with special emphasis on the automobile, steel, and textile sectors.

Despite warnings from many economists and business leaders, including a high-profile petition led by Irving Fisher¹⁴ and Paul Douglas¹⁵, Hoover yielded to political pressure and industry lobbying. The hope was that higher duties would stabilize farm incomes and preserve industrial jobs. Instead, the measure triggered a cascade of retaliatory tariffs from 25 trading partners. Between 1929 and 1934, global trade contracted by roughly two-thirds, aggravating deflationary pressures, accelerating bank failures, and deepening unemployment.

The domestic consequences were stark: Imports fell from $4.4 billion in 1929 to $1.5 billion in 1933, exports collapsed by two-thirds, and farm incomes, already battered by overproduction, dropped by a third. Consumer goods became more expensive, straining households and supply chains alike. Politically, the backlash was swift: Hoover lost the 1932 election, and both Smoot and Hawley were voted out of office.

The legacy of Smoot-Hawley was not only economic pain but also institutional reform. The Reciprocal Trade Agreements Act of 1934marked a decisive pivot toward liberalization, granting the president authority to negotiate tariff reductions. Over the following decades, the United States became a leading architect of multilateral trade frameworks—GATT¹⁶, NAFTA¹⁷, and eventually the WTO¹⁸—designed to prevent a repeat of the destructive tariff spiral of the early 1930s.

The Tariffs of 2018

Nearly 90 years later, the Trump administration launched the most ambitious tariff campaign since Smoot-Hawley. Framed as a defense of American jobs and a corrective to chronic trade deficits, the measures drew on two statutes: Section 232 of the 1962 Trade Expansion Act, which imposed 25% tariffs on steel and 10% on aluminum under the banner of national security, and Section 301 of the 1974 Trade Act, which targeted Chinese practices related to intellectual property and forced technology transfer. By 2019, tariffs covered $250 billion in Chinese imports, with additional duties levied on goods from the EU, Canada, Mexico, India, and Turkey.

The economic calculus was complex. On one hand, tariff revenues surged: By mid-2025, importers were paying $27 billion in duties in a single month, with annual collections projected to exceed $300 billion—nearly 1% of GDP. These revenues narrowed budget deficits and provided leverage in negotiations. On the other hand, long-term projections painted a darker picture: the Penn Wharton Budget Model¹⁹ estimated a 6% decline in GDP and a 5% fall in real wages under the prevailing tariff structure, with middle-income households losing roughly $22,000 in lifetime earnings. The Tax Foundation²⁰ reached similar conclusions, projecting a 0.8% contraction in GDP even before accounting for retaliation, alongside $2.4 trillion in tariff revenues over a decade—or $1.7 trillion after behavioral adjustments.²¹

Tariffs have often transcended their economic function to serve as instruments of geopolitical leverage. A striking example occurred in 2019, when the United States linked trade policy directly to border security and narcotics control. The administration signaled that escalating duties would be imposed on Mexican imports unless the government intensified enforcement at its southern frontier and curbed the flow of illicit drugs northward. The threat proved effective: Within weeks, Mexico mobilized 6,000 National Guard troops and expanded migration protocols, thereby averting the tariffs. This episode illustrates how trade measures can be repurposed as bargaining chips in foreign policy, blurring the line between economic protectionism and strategic coercion.

With China, tariffs paved the way for the Phase One Trade Deal of January 2020, which promised $200 billion in additional purchases of U.S. goods and services, though Beijing ultimately fell short of its commitments.

Supporters of the tariffs framed them as strategic tools. White House advisor Peter Navarro argued they were essential to rebuilding the industrial base­²²; Oren Cass emphasized that revitalizing local labor markets is essential to restoring the economic foundations of workingclass communities²³; Art Laffer highlighted their function in forcing negotiations²⁴; labor leaders such as the UAW’s Raymond Michalowski praised them for protecting auto jobs.²⁵ Hungarian Prime Minister Viktor Orbán, for example, acknowledged their disruptive impact on global trade norms.²⁶

For consumers, the immediate inflationary effects were muted: CPI data in August 2025 showed 2.7% year-over-year inflation, close to the Federal Reserve’s target. Yet analysts warned that delayed cost pass-through, particularly in import-heavy sectors like electronics and furniture, could trigger sharper price increases. Meanwhile, corporate pledges of new U.S. investment from firms such as Apple, Nvidia, and Hyundai often came with caveats, reflecting hesitation in the face of unpredictable trade policy.

The juxtaposition of Smoot–Hawley and the 2018 tariffs underscores the recurring dilemma of protectionism: Tariffs can deliver short-term political gains, fiscal revenues, and negotiating leverage, but they also risk long-term economic contraction, retaliation, and uncertainty. The historical record suggests that while tariffs may serve as tactical instruments in moments of crisis or negotiation, their strategic use must be weighed carefully against the broader costs to growth, stability, and global integration.

International Trade and the Actuarial Profession

Tariff policy reverberates through the actuarial domain by reshaping assumptions, models, and risk profiles across multiple lines of insurance. The imposition of duties alters cost structures, investment dynamics, and long-term liabilities, requiring actuaries to recalibrate their frameworks in response to shifting economic realities.

Claims Severity and Property & Casualty Lines

Rising input costs feed directly into claims severity. In auto insurance, for instance, a 25% tariff on imported vehicles and parts can translate into billions of dollars in additional annual claims expenditures—estimates range from $7 billion to $24 billion. Homeowner’s coverage is similarly affected: higher prices for Canadian lumber, Mexican gypsum²⁷, and Chinese fixtures elevate rebuilding costs, which in turn drive policy premiums upward.

Market Volatility and Insurer Balance Sheets

Tariff-driven volatility destabilizes insurers’ financial positions by squeezing margins when investment returns are under pressure. Reduced merger-and-acquisition activity and fewer initial public offerings further limit opportunities for diversification and growth, compounding the strain on earnings.

Inflationary Trends and Long-Term Liabilities

Broader macroeconomic effects also reshape actuarial assumptions. Elevated inflation expectations demand recalibration of discount rates, benefit indexing, and cost-of-living adjustments, alongside updated stress-testing protocols. Trade-induced slowdowns influence lapse and surrender behavior in life and annuity contracts, while heightened economic stress may increase disability claim frequencies.

Opportunities Amid Disruption

While tariffs introduce risk, they also create new avenues for actuarial engagement. Demand for trade credit insurance is likely to expand as exporters and financial institutions seek protection against payment defaults. Likewise, the onshoring of manufacturing activity generates novel exposures in product liability and workers’ compensation, requiring fresh actuarial analysis.

For the actuarial profession, tariff policy is not a peripheral concern but a central variable in risk management. Developing a working knowledge of international trade dynamics is indispensable for navigating an era defined by global uncertainty, where economic policy and actuarial practice intersect with increasing frequency.

Final Remarks

International trade remains one of the central pillars of global economic life, shaping not only the fortunes of nations but also the trajectory of industries and households. At its core, the logic of specialization and comparative advantage explains why countries gain from exchange: By focusing on what they produce most efficiently, they expand overall productivity and secure access to a wider spectrum of goods and services. The benefits are tangible: higher efficiency, faster innovation, and improved living standards. Yet, these gains cannot be taken for granted. Trade unfolds within a landscape marked by inequality, political frictions, and institutional barriers that complicate its outcomes.

Crafting intelligent trade policy is therefore less about choosing between openness and protection than about striking a balance: promoting fairness, reducing exposure to shocks, and channeling globalization’s benefits toward sustainable growth. Tariffs illustrate this tension. They are an enduring feature of the global economy, sometimes deployed strategically, sometimes defensively. But when imposed at scale, they introduce volatility that reverberates through financial markets and supply chains. Managing this uncertainty requires not only sound economic judgment but also the tools of risk analysis. Actuaries, with their expertise in quantifying and mitigating financial risk, can play a valuable role in this process if they complement their technical expertise with a working grasp of the economics of international trade.

---

Carlos Fuentes, MAAA, FSA, FCA, MBA, MS, is president of Axiom Actuarial Consulting. He can be reached at [email protected].

---

Disclaimer: This article is based on established economic theory. The discussion is interpretive and does not purport to advance new theoretical contributions.

---

 Endnotes

1. Monetary policy (lowering interest rates to encourage borrowing and investment, leading to job creation) is another important macroeconomic tool, but it is not discussed here because it is unrelated to trade.
2. The multiplier, a concept developed by British economist John Maynard Keynes, refers to the effect that an initial change in spending (such as investment or government expenditure) has on the overall economy. Specifically, it measures how much additional economic activity is generated from an initial increase in spending. In the case discussed here and assuming a factor of 2/3, exports are increased by $1 billion and domestic consumption by $2 billion.
3. The tragedy of the commons is an economic model that describes how individuals, acting in their self-interest, can deplete shared resources, leading to long-term collective harm. The concept highlights the need for sustainable management practices and cooperation to balance personal interests with the well-being of the community and the environment. It was popularized by Garrett Hardin in 1968.
4. The Economic Impacts of the US-China Trade War; National Bureau of Economic Research; 2021.
5. US-China Trade War: an empirical evaluation regarding its impacts on Brazilian exports; International Economics and Policy; July 2024.
6. The impact of the US-China trade war on Vietnamese Exports to the US: a quantitative study using DiD approach;” Journal of Trade Science; November 2024.
7. Difference-in-differences is a quasi-experimental method for estimating causal effects using observational data. It compares how an outcome changes over time in a “treatment” group versus a “control” group to net out confounding trends.
8. Weakening the currency can be a tool to make goods and services less expensive to consumers of other countries. There are three problems with this approach: (1) devaluation makes imports more expensive, creating inflation; (2) external obligations denominated in foreign currency become costlier to service; (3) trading partners may devalue their own currencies or impose tariffs, eroding the initial advantage. The second problem, which can be significant for countries with large debts, does not exist for lender countries such as China.
9. It is surprising that economists do not share a single view on whether trade deficits are good or bad for the economy. Some argue that deficits reflect fundamental macroeconomic factors such as savings-investment imbalances and pose no direct harm, while others warn that prolonged deficits can undermine domestic industries and national security.
10. The Impact of Trade Liberalisation on Jobs and Growth; OECD; January 2011.
11. Macroeconomic Consequences of Tariffs; IMF Working Paper No. 2019/009; January 2019.
12. By analyzing historical events it is possible to evaluate economic theories. The interested reader may want to review the history and aftermath of the following episodes: The Tariff of 1828 (“Tariff of Abominations”), The McKinley Tariff of 1890, The Fordney-McCumber Tariff of 1922, and The Bush Steel Safeguard Tariffs of 2002.
13. Strategic considerations such as national security cannot be ignored.
14. Irving Fisher (1867–1947) was an American economist and statistician known for pioneering mathematical economics, developing the quantity theory of money, and formulating the Fisher equation, and debt-deflation theory.
15. Paul Douglas (1907–1959) was an American actor who won Theatre World and Clarence Derwent Awards for Broadway’s Born Yesterday.
16. General Agreement on Tariffs and Trade (1947–1994): A multilateral treaty to reduce tariffs and trade barriers, laying the groundwork for modern trade rules.
17. North American Free Trade Agreement (1994–2020): A free trade agreement between the U.S., Canada, and Mexico that eliminated most tariffs and created a North American trade bloc.
18. World Trade Organization: (1995–present): The global organization that succeeded GATT, regulating trade rules, resolving disputes, and overseeing agreements among over 160 member nations.
19. The Economic Effects of President Trump’s Tariffs; Penn Wharton Budget Model; April 2025; and “US Industrial Output To Be Worst Hit Globally by Trump Tariffs”;  Newsweek; April 2025.
20. The Tax Foundation is the world’s leading nonpartisan tax policy 501(c)(3) nonprofit. For over 85 years, its mission has been to improve lives through tax policies that lead to greater economic growth and opportunity.
21. Behavioral adjustments capture how importers and consumers change what and how much they buy when tariffs make foreign goods more expensive.
22. Cass, Oren. The Once and Future Worker: A Vision for the Renewal of Work in America, New York: Encounter Books, 2018.
23. American Compass policy report, March 2025 (Overview at STL.News: “Economists Who Support Tariffs,” April 20, 2025).
24. Commentary on Fox Business’s Varney & Co.; April 8, 2025 (See Varney & Co. clip).
25. UAW press release; July 10, 2025.
26. Interview on Kossuth Rádió (Hungary’s state radio); Aug. 1, 2025.
27. Gypsum is a soft sulfate mineral composed of calcium sulfate dihydrate (CaSO4·2H2O), mined worldwide for construction materials like plaster and drywall, as a fertilizer, and occurring in sedimentary evaporite deposits.