Tariffs Are More Destructive Than You Think (Şebnem Kalemli-Özcan, 1/26/26, Project Syndicate)
In today’s economy, tariffs are not just a demand shock; they are also a supply shock. While it is still true that tariffs shift demand toward domestically produced goods, domestic production now relies heavily on imported intermediate inputs. From manufacturing components to energy, logistics, and business services, firms source inputs globally and depend on complex cross-border supply chains. When tariffs raise the cost of imported inputs, they directly increase firms’ marginal costs.
These higher costs then propagate across sectors and countries through production networks. Industries that appear only indirectly exposed – such as services or downstream manufacturing – can experience substantial cost increases and price pressures. As a result, tariffs distort not only what consumers buy, but also how firms produce. As output contracts, productivity falls and inflationary pressures emerge well beyond the initially targeted sectors.