New Walls, Cold Demand: Are We Heading for a Policy Error?

In 1930, the U.S. threw up a tariff wall to “protect” jobs. It won headlines and lost trade. Nearly a century later, Washington is back to broad-based tariffs and sectoral levies in the name of security—functionally a tax on tradables that makes housing, construction, and durables pricier.

At the same time, the Fed cut rates—clear evidence of cooling demand and a softer labor market. That mix is odd: monetary easing alongside a trade-cost shock. Mishandled, it delivers higher import prices and weaker investment as firms pause amid regulatory uncertainty.

China, meanwhile, is shifting credit and subsidies from property to industry and tech, generating excess capacity in EVs, solar, and steel, and keeping “zombie” firms alive. Consumers get cheap goods today; politics gets a backlash tomorrow. The EU throws up defenses, the U.S. follows, and we drift into selective walls around “strategic” sectors.

Tariffs promise reshoring, resilience, and discipline for subsidized rivals—but hide costs. Pass-through hits wallets, retaliation invites escalation, and broad levies act like a productivity tax by penalizing capital goods and allies, not just competitors. Tariffs buy time; they don’t buy capabilities.

Here’s the policy-mix trap: if the Fed props up demand while import costs rise, goods inflation can rekindle; if uncertainty chills investment, easing evaporates into cold expectations. Either way, the central bank’s room shrinks. Unlike the 1970s, today’s supply shock isn’t just oil—it’s trade policy.

China’s pivot from bricks to silicon has expanded capacity faster than global demand. Short-run smiles at cheaper EVs and panels give way to fragmented markets, lost scale, and weaker global TFP. Persistent overcapacity is a “gift” that poisons competition.

Globalization hasn’t died; it’s morphed from a hypermarket into an archipelago with checkpoints. From WTO rules to the “NATO-ization” of trade, friend-shoring is resilience with a surcharge; de-risking often re-risks by concentrating exposure among a few “friends.” Distance matters again, politics costs money, and logistics is no longer magic.

Best case: a cautious Fed, surgical tariffs with sunset clauses, and China letting zombies fail. Middling case: a tariff spiral, mild stagflation, and colder investment. Worst case: persistent fragmentation into tech blocs with rival standards and lower TFP. Watch the U.S. fine print on exclusions, goods inflation after the cut, EU/U.S. defenses and Beijing’s counter-moves, and Chinese credit cleansing—or lack thereof.

We’re cooling demand while raising walls on supply and dismantling the highways where price, scale, and competition used to travel. The goal—economic security—is legitimate; the method—broad tariffs, uncritical friend-shoring, and subsidies that keep zombies alive—buys campaign-season calm at the price of a decade of mediocre growth. The lesson from 1930 is not panic but the pedagogy of chained errors: if policies don’t talk to each other, the bill arrives anyway—higher prices today, lower productivity tomorrow, and a globalization that survives as an expensive club with a waiting list.