Tariffs, Inflation, and Energy: Rethinking U.S. Trade Policy Through History and Strategy

Tariffs have long been a central element of American economic policy, evolving from foundational revenue tools into strategic instruments of modern trade. As global markets respond to the prospect of renewed tariffs in the years ahead, it is worth re-examining the historical roots of U.S. tariff policy.

Their true economic impact deserves closer scrutiny, along with how complementary strategies—such as domestic energy production, often captured by the phrase “Drill Baby Drill”—can reshape their effects.

The Historical Context of U.S. Tariffs

Alexander Hamilton and the Birth of U.S. Tariff Policy

Tariffs are not a modern invention. They were among the earliest tools of American economic statecraft. Alexander Hamilton, the first U.S. Secretary of the Treasury, outlined the foundation for national economic development in his seminal Report on Manufactures (1791).

He argued that protective tariffs should be used to nurture America’s fledgling industrial base. His model was strategic and pragmatic:

• Impose high tariffs on goods that could be produced domestically, shielding emerging American industries from more advanced foreign competition
• Apply minimal or zero tariffs on goods the U.S. could not yet produce, ensuring access to essential imports
• Generate federal revenue through tariffs. This is particularly important in a pre–income tax era (prior to 1913)

This framework helped establish early U.S. economic independence. The Tariff Act of 1789, passed by the First Congress, was one of the most significant early pieces of legislation. It was designed to protect domestic industries and fund the federal government.

Before 1913, tariffs were not controversial. They were standard practice. For over a century, tariffs financed nearly all federal expenditures, from infrastructure to defence. This historical precedent reminds us that tariffs were once seen not as threats, but as essential instruments of national development.

Modern Implications of Tariffs (2024–2025)

Trade War 2.0 – A Market Catalyst

Today, we may be witnessing the return of tariffs as a defining feature of U.S. economic policy. Former President Donald Trump’s hardline trade stance has renewed concerns across markets, which are bracing for potential volatility.

This scenario echoes the 2018–2019 U.S.–China trade war:

• The Trump administration imposed tariffs on over USD 250 billion of Chinese imports
• China retaliated, targeting U.S. Exports, particularly in politically sensitive sectors like agriculture
• Equity markets experienced turbulence amid supply chain disruptions and rising input costs

Now, that fear has returned. Market participants worry that another wave of tariffs could again disrupt global trade. The risk is especially heightened in an environment already sensitive to inflation and slowing growth.

Tariffs and Market Psychology

Why Wall Street Is Nervous

Markets despise uncertainty. The prospect of new tariffs fuels several key concerns:

• Supply chain risk: Tariffs can undermine efficient foreign sourcing models
• Higher input costs: Companies reliant on imports face rising operational expenses
• Margin compression: Profitability may be challenged, particularly for import-intensive sectors
• Inflationary pressure: Higher prices may be passed to consumers, prompting central banks to keep interest rates elevated

But are these fears overstated?

The dominant narrative often ignores the potential upside. Tariffs are not necessarily inflationary or restrictive. Under the right conditions, they can act as a catalyst for structural change in the U.S. economy.

Tariffs as a Tool for Domestic Renewal

Bringing Back Jobs and Industry

When tariffs make imported goods more expensive, they can encourage U.S. companies to reshore production. This process could:

• Revive domestic manufacturing, especially in strategic sectors such as steel, semiconductors, and electronics
• Create high-quality jobs, supporting consumer spending and overall growth
• Strengthen national resilience by reducing dependence on foreign supply chains

Case in point, when steel tariffs were imposed in 2018, U.S. Steel reopened plants in Illinois and Alabama. Similar outcomes could occur in other industries, especially if tariffs are combined with investment incentives and infrastructure support.

Yes, tariffs may raise prices. But they can also raise wages and employment. This balance between costs and benefits is where strategy becomes critical. Tariffs on their own are blunt tools. When supported by domestic production and energy policy, their inflationary impact can be contained or even reversed.

Energy: A Strategic Tariff Inflation Hedge

Energy Policy as a Counterbalance

Energy policy is one of the most overlooked variables in the tariff-inflation equation. Under the Trump administration’s “Drill Baby Drill” agenda, U.S. oil and gas production surged.

At its peak, the country became the world’s largest crude oil producer and achieved a degree of energy independence not seen in decades.

Why does this matter?

• A surge in oil supply drives down energy prices, reducing transportation and production costs economy-wide
• These lower costs can offset the inflationary effects of tariffs
• The energy sector itself creates well-paying jobs and boosts export revenues

In short, a coordinated approach—one that combines tariffs with a strong domestic energy policy—can support growth while preventing runaway inflation. Strategic energy production can counterbalance the inflationary effects of tariffs.

Tariffs, Inflation, and Market Dynamics

Crude Oil as a Lead Indicator

Crude oil prices have long been reliable leading indicators of inflation. When oil prices fall, so do the costs of manufacturing and transport. This helps reduce overall prices and can give central banks room to lower interest rates,typically a positive signal for equity markets.

If new tariffs push import prices higher, those effects may be offset by falling energy costs. A renewed focus on domestic drilling would help lower fuel and input prices across the economy. As a result, the inflationary impact of tariffs may be muted before it fully reaches the consumer.

At the same time, reshoring production can lower unemployment and push wages higher. This strengthens demand and supports broader economic growth. While higher wages can drive some inflation, energy-led cost reductions could help maintain balance.

To summarise:

• Tariffs can raise consumer prices, but also prompt domestic production and job creation
• Domestic energy expansion drives down costs, easing inflation and supporting profits
• Falling oil prices have historically been linked to falling inflation and rising equities
• A coordinated approach such as combining tariffs with energy policy can drive growth while keeping inflation in check

If the U.S. implements both tariffs and domestic energy expansion, the outcome could be energy-led disinflation that offsets the impact of trade barriers.

Conclusion: Tariffs Are Strategic, Not Simply Risky

Tariffs have been part of America’s economic identity since 1789. While modern discourse often casts them in a negative light, a historically grounded and strategically framed view tells a more balanced story.

Key points to consider:

• Tariffs historically funded government and enabled industrial growth
• They can spur job creation and reduce strategic vulnerabilities
• Their inflationary impact is not inevitable, it depends on complementary policies
• Market fears may reflect reflexive sentiment more than fundamentals

Tariffs can be tools, not threats. When used as part of a well-planned national strategy, particularly one rooted in energy independence, they have the potential to reshape the U.S. economy for the better.

As the saying goes: Tariffs may raise prices—but they also raise jobs. And more jobs are bullish.