Introduction to the Trump Tariffs
When Donald Trump took office in January, most economists feared the consequences of his tariff increases. The expectation was that the new duties would drive up prices of consumer goods and inputs, affecting households and companies, and lead to surging inflation and falling real incomes. This would be a supply shock, which the US Federal Reserve could not counteract.
The Unexpected Outcome
However, things did not turn out as anticipated. Consumer price inflation (CPI) did not rise as expected, with the most recently reported rate, for the 12 months ending in November, being 2.7% – the same level as in the closing months of 2024. The unemployment rate rose only slightly, from 4.1% at the end of 2024 to 4.6% in November. Economic growth probably slowed toward the end of the year, but the situation remains unclear due to a US government shutdown that delayed data collection.
Reasons for the Limited Damage
There are four reasons why the economic damage caused by Trump’s tariffs was smaller than predicted. Firstly, US economic statistics are vulnerable to measurement problems due to the government shutdown, which affected data collection. Secondly, many of the highest tariffs are not fully in effect, as Trump has postponed some and rolled back others. Additionally, Trump introduced major tariff exceptions for some countries, such as exempting goods from Mexico and Canada from the 25% levy.
Delayed Effects
The third reason for the limited damage is that companies began front-loading imports to accumulate stocks of goods before the anticipated tariffs were introduced. This strategy saved US importers an estimated $6.5 billion through May 2025. After the tariffs entered into effect, most retailers did not raise prices, as they had not depleted their pre-tariff inventories. However, importers have continued to absorb much of the cost increase, even after depleting their pre-tariff inventories.
The Future of Tariffs
The final and most important point is that importers have continued to absorb much of the cost increase, but this will not last indefinitely. Assuming the tariffs remain, the US can look forward to more price increases and downward pressure on real incomes in 2026. Companies will not let tariffs erode their profit margins indefinitely, and the uncertainty surrounding the tariffs has helped to explain why many affected companies have so far refrained from laying off workers.
Conclusion
In conclusion, while the economic damage caused by Trump’s tariffs was smaller than predicted, it is likely that the adverse effects have simply been delayed. The tariffs have already led to some price increases, and further increases can be expected in 2026. The uncertainty surrounding the tariffs has helped to mitigate the effects, but it is unlikely that companies will continue to absorb the costs indefinitely. As the situation continues to unfold, it is essential to monitor the effects of the tariffs and adjust economic policies accordingly.
