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In early April 2025, the United States sharply increased its average effective tariff rate—which some analysts estimate rose from approximately 10% to over 24%, with projections soon expected to peak near 27% once additional Section 232 trade actions are finalized (Section 232 of the Trade Expansion Act of 1962 allows tariffs to be imposed for national security reasons). Targeting our most significant trading partners, such as China, Canada, Mexico, members of the EU, India, Japan, and several BRICS economies, these tariffs span consumer goods, automobilies, pharmaceuticals, critical minerals, and semiconductors.

These moves, aimed at narrowing trade deficits and compelling new trade deals, have introduced significant uncertainty. Businesses and investors are reacting with caution, evidenced by slumping stock indices, restrained corporate planning, and cautious M&A activity.

Meanwhile, tariff revenues surged to $24.2 billion in May—an all-time high since World War II, according to the U.S. Treasury Department, contributing to inflationary pressure on U.S. consumers.

Global retaliation and diplomatic strain

The world has responded, and international trade has been profoundly impacted. China has rerouted goods through Southeast Asia to sidestep U.S. duties. Washington has fought back by imposing a 40% tariff on Vietnamese trans-shipments. This sort of reactive diplomacy has reduced the ability of manufacturers and exporters to operate within a predictable tariff regime.

India, the EU, and BRICS nations have responded defensively with systematic, selective retaliation by announcing retaliatory tariffs on U.S. goods. Simultaneously, they are attempting to engage in bilateral tariff reduction talks. However, the results of such diplomatic discussions will be slow and unpredictable. This dynamic creates a challenging environment for international trade negotiations.

Sovereign risk and market instability

The vast economic uncertainty from the U.S. tariff regime has contributed to increased volatility in sovereign risk premiums (the additional return that investors demand to hold debt issued by a particular country) to increase as currencies and bond yields fluctuate, reflecting investor anxiety over intensifying trade friction.

Domestic consequences: Manufacturing and supply chains

The tariffs have already caused dramatic U.S. domestic economic strains. Manufacturing has been hit hardest: the Institute for Supply Management (ISM) index, a monthly economic report that measures the health of U.S. manufacturing and service sectors, has remained below 50 for four straight months, with new orders and job creation in decline. An ISM index reading of below 50 indicates a contracting manufacturing sector.

The tariffs have also resulted in supply chain issues. U.S. port congestion, stockpiling, and logistical realignments have exacerbated cost inflation.

The inflationary impact of supply chain challenges will continue to result in increased inflation over the term of the new U.S. tariffs. Also contributing to inflation is the direct pass-through cost of tariffs, particularly in imports and intermediate goods.

Market reaction and slowing growth

While the labor market remains relatively resilient and financial markets have rebounded from the initial shock, there are warnings of slowing growth. JP Morgan has forecasted that the U.S. GDP could drop to 1% in the second half of 2025, edging toward stagflation.

A cautionary parallel: Smoot–Hawley redux?

This tariff wave draws stark comparisons to past periods of extreme protectionism. Several times over the last 100 years, U.S. tariff policy has resulted in extreme tariff rates enacted with the goal of protecting U.S. businesses. Perhaps, the most instructive example is the 1930 Smoot-Hawley Tariff Act, a lesson in tariff-driven economic dislocation, and a cautionary tale with profound legal and economic implications.

Sponsored by Sen. Reed Smoot and Rep. Willis Hawley, the legislation was passed in June 1930 amid a growing wave of protectionist sentiment following the 1929 stock market crash. Its stated aim was to shield American farmers and manufacturers from foreign competition during a time of economic contraction.

The act raised duties on over 20,000 imported goods, pushing the average tariff rate on dutiable imports to nearly 60%—one of the highest in modern U.S. history.

Legal evolution Post-Smoot–Hawley

Unlike earlier trade policies governed by reciprocal negotiations (such as the Wilson-era Underwood Tariff), Smoot–Hawley was largely unilateral. It leveraged Congressional authority under Article I, Section 8 of the U.S. Constitution, which grants Congress the power to regulate foreign commerce during a period when tariff policy remained tightly controlled by the legislature.

Notably, it predated the formation of the General Agreement on Tariffs and Trade (GATT) in 1947 and the World Trade Organization (WTO), which now function as checks on such sweeping actions.

The Smoot-Hawley Act resulted in retaliatory tariffs, which again draw strong parallels to today’s tariff policy. Canada, then the largest U.S. trading partner, retaliated almost immediately with tariffs on 16 U.S. products, including agricultural and consumer goods.

Europe, already reeling from World War I reparations and U.S. loan recalls, launched reciprocal tariffs. Over 25 countries raised tariffs or implemented quotas against U.S. goods by 1932. Global trade volumes collapsed by over 60% between 1929 and 1933, intensifying the worldwide economic depression.

In the United States, the resulting economic impact was devastating. U.S. exports plunged from $5.2 billion in 1929 to $1.7 billion by 1933, crippling sectors like agriculture and manufacturing. Farm prices dropped nearly 50%, pushing thousands of family farms into foreclosure.

Unemployment soared from 8.7% in 1930 to nearly 25% by 1933, as industrial output contracted sharply. By 1933, U.S. GDP had fallen by nearly 30%, and stock market values had lost nearly 90% of their 1929 levels.

Historical legal shifts and diplomatic fallout

Smoot–Hawley’s economic devastation helped catalyze a shift in U.S. trade law. Beginning in 1934, the Reciprocal Trade Agreements Act (RTAA) allowed the executive branch to negotiate bilateral tariff reductions without direct congressional approval, laying the groundwork for modern trade policy.

Today, the law is often cited in U.S. Supreme Court amicus briefs and law review critiques as a textbook example of the dangers of economic nationalism without diplomatic coordination.

Smoot–Hawley is more than an economic artifact—it is a legal milestone in the evolution of trade policy. The massive retaliatory spiral it provoked highlights the danger of abandoning multilateralism in favor of unilateral trade barriers.

With current U.S. tariffs climbing to levels not seen since that era, comparisons are not just academic—they are urgent.

As current policies inch toward similar tariff rates, legal scholars and economists alike warn of repeating a cycle where protectionism backfires—hurting the very industries it seeks to protect, weakening global demand, and increasing the risk of diplomatic conflict.

Looking ahead: Legal and economic considerations

From a legal perspective, tariff hikes expose the United States to WTO disputes and diplomatic challenges and have already triggered retaliatory tariff schemes similar to those last seen on this scale during the Smoot-Hawley era.

The administration has chosen to address the retaliatory tariff situation by negotiating bilateral trade accords, such as the agreements reached with the United Kingdom and Vietnam. However, bilateral trade negotiations are time-consuming and lead to significant uncertainty in international trade. Manufacturers and exporters have no idea when and if tariff rates will change, resulting in a reluctance to enter into purchase orders or ship goods.

Some manufacturers have tried to shift the burden of increased tariffs, or changes in tariff rates between the date of the purchase order and the date of delivery, to the other transaction party. Negotiation of such terms has been met with limited success, and the ultimate impact will not be seen for some time, as these provisions will be tested on future deliveries. In all, bilateral trade negotiations lack the breadth, uniformity, and predictability of full-scale trade pacts.

From an economic perspective, although tariffs bring in revenue, they also distort the economy by raising consumer prices, undercutting downstream industries, and heightening uncertainty. U.S. tariffs now exceed even those preceding Smoot–Hawley, putting the country in uncharted terrain.

This heightened uncertainty alone has prompted a drop of about to a roughly 30% decline in M&A and investing investment activity. Long-term planning and growth have become somewhat paralyzed.

Outlook: Trade policy and global economic risks

The current U.S. tariff approach—marking the highest effective rates in over a century—has sown widespread economic uncertainty.

Historical analogues, especially the Smoot–Hawley period, highlight the risk of deep economic harm, including sustained trade disruption, depressed growth, and elevated consumer costs. Should retaliatory tariffs escalate, and absent robust legal or diplomatic countermeasures, the economic terrain bears some similarities to the 1930s.

Legal professionals should advise clients to monitor evolving WTO disputes and bilateral negotiations closely and consider contractual safeguards to mitigate tariff-related risks.

This evolving landscape demands careful legal scrutiny. As global trade frameworks shift, so too will the role of the courts, inter-governmental institutions, and contractual safeguards in defining the boundaries of sovereign tariff authority vis-à-vis private rights and international commitments.