When Donald Trump famously announced his Liberation Day tariff assault on the world last April, economists, almost en masse, warned the US economy was headed for a major supply-side shock.
It was self-evident, they said, that tariffs of this scale would push up prices and input costs, simultaneously squeezing real income and profits.
Liberals could hang their hat on the prospect of a major Maga own-goal.
Trump’s 2025 tariffs went far beyond the tariffs announced during his first term and even beyond the infamous Smoot-Hawley Tariff Act of 1930 when then US president Herbert Hoover raised import levies on more than 20,000 imported goods to protect domestic US industries from foreign competition as the economy fell off a cliff in the wake of the 1929 Wall Street crash.
According to the Yale Budget Lab, the average effective tariff on US imports rose from 2 per cent to 18 per cent in 2025, the highest level since 1934.
Combined with the uncertainty of Trump’s on-off tariff announcements, an adverse impact on inflation, employment and income was seemingly inevitable.
But things haven’t panned out like that. US inflation was clocked at 2.4 per cent in February, lower than the consensus forecasts of 2.5 per cent and lower than the rate recorded in the closing months of 2024 before Trump came into office for a second time.
The impact on employment has been even more muted.
Apart from some high-profile job cuts at Amazon and shipping giant UPS, lay-offs have been limited while the headline unemployment rate remains steady at 4.3 per cent.
The latest labour market report indicated the US economy created 130,000 jobs in January (economists had expected 70,000).
The dire economist forecasts attached to Trump’s America First agenda have, to date, not played out.
Why? A new working paper published by economists at Harvard and the University of Chicago – The Incidence of Tariffs: Rates and Reality – goes part of the way to explaining this.
“A key reason why the price impact of the tariffs remains below many forecasts made in April is that the implemented policy remains much smaller than the announced policy,” the paper says.
The reason was threefold: the US government afforded certain countries and industries exemptions; the actual tariff rates were lower than those announced; and in some cases companies evaded them.
There was an exemption for products that were in transit when tariffs were announced. Shipping goods to the US can take months, hence the duties paid by US firms rose more slowly than expected.
There was also exemptions for products and countries. Think of the exemptions for pharma and semiconductors that have insulated Ireland’s export trade.
Canada and Mexico also received exemptions from the tariffs Trump threatened them with and many of their exports qualify for zero tariffs under the US-Mexico-Canada Agreement, which Trump signed in his first term.
“Uneven enforcement or evasion of tariffs” also drove a wedge between the statutory and actual rates, the report says.
It concludes that the actual tariff rate “has risen far more slowly and modestly” and was just 14.1 per cent at the end of September, about half the rate officially announced by the White House.
Of course there were other factors which caused economists’ predictions to be wrong, ones we could see from the outset. Companies front-loaded goods into the US during the first four months of 2025, giving themselves a certain amount of breathing space while delaying the impact of tariffs.
Eli Lilly shipped about $42.3 billion (€36.4 billion) of ingredients for its weight-loss drugs Zepbound and Mounjaro from Ireland in the first four months of last year.
Another factor, and perhaps the most important one, is that many US firms absorbed the additional costs to maintain market share, insulating consumers from the hit.
High-frequency retail microdata measuring the short-run impact of tariffs on US consumer prices bears this out.
This might be a temporary phenomenon. Companies are not expected to let tariffs erode their profit margins indefinitely.
US consumers should, if this theory holds, see higher prices as 2026 progresses.
All of this is not to say that Trump’s economic policies are working.
The economy there is convulsed by a cost-of-living squeeze that drove Joe Biden out of office and which is projected to see the incumbent lose heavily in the upcoming midterm elections.
The heavy-handed actions of Ice agents are also feeding into a widespread dissatisfaction with Trump.
There are two big factors that are difficult to account for that might lessen the negative impact of tariffs and that make economic forecasting difficult: the gargantuan investment in artificial intelligence (AI) and the weaker dollar.
AI investment has driven stock-market indices to record highs while bolstering productivity and gross domestic product in the process.
The weak dollar makes the US economy and its exports more competitive, potentially boosting local manufacturing.
Brexit has been a slow, negative burn for the UK rather than an instant snap backwards.
The US may be on a similar path, albeit with mitigating factors, despite the stronger-than-expected employment data of recent days.