Trade, tariffs, and business strategies in uncertain times: insights on aggregate demand and entrepreneurial dynamics
By Lorenzo Bona
The ongoing period of uncertainty and geopolitical tensions, which has dominated global discourse, has prompted further exploration of ideas introduced in two of our previous Insights*. As the world appears to face emerging concerns over potential new trade scenarios involving tariffs and forms of protectionism, it seems helpful to revisit basic economic concepts commonly discussed in introductory macroeconomics courses like ECO 201, particularly those related to aggregate demand (AD). Reexamining these foundational concepts can open new perspectives on the workings of trade and economic policies. Building on this possibility, this writing aims to adopt a business strategy perspective, offering practical insights – and perhaps a note of cautious optimism – on how firms can preserve their resilience and competitiveness in times of uncertainty.
Recalling the Idea of Aggregate Demand
As introductory courses teach, aggregate demand at its core represents the total quantity of goods and services demanded across all levels of an economy at a given price level.
A simple equation that is usually used to express the idea of the aggregate demand (AD) is:
AD = C + I + G + (X – M)
Where:
C is consumption
I is investment
G is government spending
X is exports
M is imports
In times of economic uncertainty, tariffs – which are usually conceived to make imports more expensive – tend to reduce the M component. At first glance, this reduction may seem beneficial, encouraging domestic production and consumption. However, the reality may be much more complex. While tariffs can seem like a way to strengthen local industries, they also can disrupt supply chains and raise prices, particularly on products that depend on imported materials or components.
Historically, trade has flourished precisely because no place in the world appears as able to efficiently meet all of its needs. If tariffs limit imports beyond excessive levels, economies risk retreating into inefficient self-sufficiency, echoing a time when specialization was less possible. Moreover, higher import costs can erode consumers’ purchasing power, thereby diminishing consumption (C) as people may no longer afford certain goods.
Further, if tariffs are set at excessively high levels, they can discourage I (investment). In open economies, businesses are more likely to innovate and improve their processes because of competitive pressures. Policies that can be seen as linked to a protectionist nature tend to reduce these incentives, as firms are shielded from external competition. As relevant streams of research in the area of economics have emphasized, much of economic progress arises from small, often invisible improvements that emerge in competitive markets.
Trade is rarely a one-way relationship. Countries often tend to retaliate against tariffs by imposing their own measures, leading to a decrease in X (exports) and further contracting the X – M component, which reduces aggregate demand. Cycles of retaliatory tariffs tend undermine the flexibility of open economies, making it harder to navigate external shocks and diminishing the ability to adapt to changing global conditions.
The net effect of tariff scenarios, therefore, usually tends to be a contraction in AD, which can lead to lower economic growth and diminished innovation. Trade is not just an economic transaction; it is a force that fosters cooperation and prosperity. When economies remain open, they benefit from interconnectedness, which helps them overcome scarcity and promotes global resilience.
Possible strategies in turbulent times
To navigate the turbulent times that appear to characterize our reality, with aspects that seem marked by potential fluctuations in aggregate demand, businesses – as influential studies in the area of entrepreneurship tend to suggest – need to stay alert for opportunities overlooked by others – and act decisively to exploit them. In other words, businesses and firms are called to find and adopt new strategies or approaches to strategy making that can help them to preserve their resilience and competitiveness despite the challenges posed by the risk of excessive levels of tariffs and protectionism.
From this business development perspective, and in light of the remarkable opportunities that modern times present, at least three key approaches to strategy making may appear especially helpful to consider:
Embrace Digital Transformation
If excessively high levels of tariffs and geopolitical uncertainty disrupt trade, a helpful strategy for firms can be enhancing resilience by shifting to digital platforms, investing in digital infrastructure, and leveraging automation. This allows businesses to reach global markets without being heavily dependent on physical borders, contributing to global economic growth by stimulating international trade.Leverage Global Talent and Strengthen International Teams
In the face of the risks posed by potential rising tariffs, fostering global talent and building diverse, highly-qualified international teams can help businesses navigate challenges by leveraging regional insights and expertise. Collaborative leadership models encourage shared decision-making, enabling faster adaptation to market shifts and trade barriers. This approach enhances flexibility, resilience, and innovation, ensuring businesses remain competitive even in uncertain economic environments.Invest in Strategic Partnerships and Global Networks
To counter potential risks of rising protectionism, firms can build and/or reinforce international partnerships, diversify suppliers, and establish strategic alliances with different organizations. These strategic forms of collaboration can stabilize operations, encourage knowledge exchange, and ensure the continued flow of goods and services, ultimately helping businesses thrive while contributing to a more interconnected global economy.
Strategies like these appear to be particularly valuable in helping businesses navigate economic challenges and preserve their competitiveness.
Moreover, these strategies can actively contribute to a resilient, innovative global economy – not only expanding the chances of business success but also stimulating broader economic progress. In other words, renewed forms of entrepreneurship within firms tend to positively impact investment levels (I) in the aggregate demand equation, making the economy more dynamic and responsive to changing conditions. By driving innovation and increasing productive investments – which, in turn, lead to the creation of new products and services, and consequently to the encouragement of expanded levels of consumption (C) – entrepreneurship strengthens aggregate demand and fosters long-term growth
Looking at the broader arc of human civilization, it is worth remembering that many of the most transformative and well-being-enhancing solutions have emerged precisely during times of great uncertainty – thanks to the initiative of individuals and firms that acted with entrepreneurial spirit and adaptability. If this spirit continues to thrive, there may indeed be good reasons to remain cautiously optimistic about the ability of firms and businesses – and more generally, all of us – to navigate and contribute positively to a more prosperous future.
Notes:
*The reference is to two previous analyses that appeared on this website: "The Tariff Debate: Rethinking the Concepts of Open and Closed Economy and Other Related Ideas" (January 27, 2025), and "From Simple Screws to Global Prosperity: Rethinking Trade in Uncertain Times" (February 24, 2025)