Tariffs have become the central tool in economic policy of late. Conventional economic theory would suggest that imposing tariffs will have negative effects on domestic consumers, manufacturers and overall growth. Yet, despite significant trade frictions with its trading partners and previously unseen levels of tariffs being charged, the US economy has displayed a surprising level of resilience and negligible inflationary effects. So, is economic theory no longer valid, or why have the predicted negative outcomes failed to materialise?
Economists generally view tariffs as a ‘tax on trade’, which invariably increases the cost of imported goods. In theory, this hurts both consumers and businesses, as higher import prices reduce consumer purchasing power and increase production costs for companies relying on foreign inputs. US manufacturers with imported raw materials or semi-finished components will therefore see their profit margins erode, or they will need to pass these costs on to consumers, which should result in an inflationary spike. Especially in modern manufacturing, which relies on intricate global networks (known as global value chains), where intermediate goods cross multiple borders before final assembly. A disruption at any node – whether due to tariffs, regulatory changes or geopolitical tensions – is said to have cascading negative effects. Accordingly, economists predicted that tariffs would lead to increased costs and lower economic output in the US.
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However, despite these commonly recognised theoretical risks, the economic effects on the US economy have remained surprisingly muted. It appears that the economic impact is much smaller than suggested by economists’ models. While tariffs have affected some industries, the overall effect is very moderate. Whether this is because many companies have absorbed costs, delayed price increases or found alternative suppliers to mitigate the impact, it is hard to tell. In any case, the economy has proven more adaptable than policymakers and economists had assumed.
By front-loading imports (accelerating shipments of goods before tariffs took effect), trade figures are skewed towards the first two quarters of 2025 (Q1 and Q2 2025). Whether we experience a sustained drop in imports and an inflationary spike when these effects have run their course remains to be seen. Furthermore, the US has arguably softened the blow through fiscal and monetary stimulus measures. Maybe most importantly, however, the overall US economy is increasingly driven by intangible products such as software, digital services and AI. Sectors where the US dominates, which are also less exposed to traditional trade risks, dampen the overall average effect.
However, while the US economy has shown resilience so far, it would be naive to believe that trade tensions have no negative effects. Agriculture, automotive and manufacturing are beginning to show rising pressure. On the export side of the equation, companies like Meta, Google and Apple, which generate a sizeable share of their turnover in Europe, increase the vulnerability of the US, should Europe’s legislative plans go ahead (think of the recent €3b fine for Google or €120m fine for X as opening salvos). The challenge is to understand the aggregate future outcomes of import/export effects on the overall economic performance of the US.
Additionally, the long-term effects of an emerging trade war may differ from our current short-term observations. Even if supply chains are adaptable, repeated disruptions can affect investment decisions and encourage companies to relocate production to more politically predictable ground. Consumers may thus face higher prices as companies adjust to sustained tariffs.
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By GlobalDataWhile the overly pessimistic projections of traditional economic theory with regards to the negative effects of tariffs were clearly exaggerated, trade disruptions are not costless. We are seeing a gradual tightening of economic conditions, as the effects of front-loaded imports and fiscal stimulus fade. Manufacturing will face greater margin pressures and consumer demand will slow due to increasing costs gradually filtering through. The uneven distribution of impacts across sectors will start to take its toll – also in the US.
Dr Martin G. Kaspar is vice-president of corporate strategy and development at a German Mittelstand company and an FDI expert.
