How to understand Trump’s tariff policy and why it may have far-reaching consequences

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Since Donald Trump announced new tariffs on Wednesday, the markets have gone down. These measures are already being compared to the protectionist policies of the 1930s. And if we look at the situation through the lens of classical 20th-century economic thinking — whether Keynesian or Milton Friedman’s free-market perspective — such actions appear self-destructive. The so-called “liberation day” proclaimed by Trump smells more like economic lunacy, something that might be better explained by psychologists than by economists.

However, there is one economist whose work is particularly relevant today — Albert Hirschman. In 1945, he published a book called National Power and the Structure of Foreign Trade. For decades, this work was largely ignored, in part because it contradicted both Keynesian and neoliberal frameworks. But now, amid a new wave of trade conflicts, its importance is being re-evaluated.

Hirschman, who had survived the trauma of the Spanish Civil War and Nazi Germany, began to study autarky when he arrived at the University of California, Berkeley. He used the disastrous protectionism of the 1930s to build a framework for understanding economic coercion and the use of hegemonic power — the academic term for economic bullying. His analysis was largely ignored by trade economists at the time, as it didn’t align with dominant schools of thought.

Interestingly, his ideas later influenced antitrust policy. Economist Orris Herfindahl used Hirschman’s concepts to create an index to measure corporate concentration, which was later adopted by the US Department of Justice.

Had Hirschman been alive to witness Trump’s Rose Garden announcement of his new tariff strategy, he likely wouldn’t have been surprised. While neoliberal thinkers often see politics as a derivative of economics, Hirschman saw things in reverse. He argued that “so long as a sovereign nation can interrupt trade with any country at its own will, the contest for more national power permeates trade relations.”

From his work, we can draw three key conclusions: 1. Over-reliance on a single major trading partner is dangerous. Smaller countries become vulnerable when they’re too dependent. We need tools to measure that vulnerability. 2. The core of American hegemonic power today is not manufacturing — it’s finance. While China controls key supply chains, U.S. dominance is built on the dollar-based system. Trump’s tariffs aim to challenge another hegemon (China), but his financial policies aim to defend the existing dominance. This matters for other nations trying to respond. 3. Hegemonic power is not symmetrical. If a bully controls 80% of a market, it holds near-total power. But if that share drops to 70%, its influence crumbles quickly, as alternatives start to appear.

This also helps explain why the U.S. has failed to control Russia via financial sanctions. And we may see this pattern repeat globally if countries respond to Trump’s aggressive tariff strategy by accelerating development of alternatives to the dollar-based financial system. Bullies only seem invincible — until they aren’t.

Is this analysis discouraging? Yes. But it shouldn’t be ignored. And if investors and policymakers are seeking optimism, they might find it in Hirschman’s outlook. Despite everything, he remained a lifelong optimist — or a “possibilist,” as he called himself. He believed that people could learn from history to improve the future.

Trump is ignoring that lesson — with grim consequences. But no one else has to.

That’s why I believe that a transition to a new currency and the attempt to escape the dominance of the dollar make sense. Cryptocurrency could be a strong alternative, especially in times of instability and geopolitical pressure. This is an asset worth considering for potential future growth — despite all the political headwinds.