Trump’s tariffs are more a petulance than a policy, but some strategic uses of tariffs can make economic sense. Look at China’s declining trade surplus with the U.S.Click to view this email in your browser. [link removed]

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JANUARY 14, 2026

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**Tariffs: Maybe not so crazy**

**Trump’s tariffs are more a petulance than a policy, but some strategic uses of tariffs can make economic sense. Look at China’s declining trade surplus with the U.S.**

China’s trade surplus with the entire world hit an all-time record of $1.19 trillion in 2025, **Beijing just announced** [link removed]. But here’s the stunner in the report. China’s surplus with the U.S.

**declined** by 22 percent. The reason: U.S. tariffs on Chinese exports average over 50 percent.

That’s a good outcome, since China’s chronic trade surplus is based on illegal mercantilist policies, including currency manipulation, subsidies, and domestic market protection, that cost the U.S. and other nations jobs. In the past, the main loser has been the United States. China simply diverted subsidized exports to other nations with lower tariffs.

But what of Trump’s other tariffs? They are an incoherent mash-up.

As we all know, a tariff is a tax—in this case a tax on consumers, importers, and on producers who use foreign-made components. By raising tariffs, based on no pattern other than his own resentments and whims, Trump presumably has done serious economic damage. According to the authoritative **Yale Budget Lab** [link removed], Trump’s policies have raised the average tariff rate from about 2.4 percent in late 2024 to 17 percent by late 2025, the highest in nearly a century.

A disaster, right?

Well, maybe not quite. And herein lies both an interesting economic mystery as well as possible lessons for the next Democratic administration.

For starters, inflation is running below projections. In December, the just-announced inflation rate was 2.7 percent. The Fed’s favorite indicator was unchanged from November when **the core inflation rate, at 2.6 percent, was the lowest since 2021** [link removed].

Tariffs have had surprisingly little impact on higher consumer prices. “**Tariff pass-through to consumers has been much milder than anticipated** [link removed],” Olu Sonola, head of U.S. economic research at Fitch Ratings, wrote in a recent research note. Yet revenue from **tariffs brought in close to $300 billion in 2025** [link removed], up from about $80 billion in 2024, and is currently on track to produce over $350 billion this year.

Someone is paying these taxes, but who?

The evidence suggests that most costs are being absorbed by foreign exporters or by domestic sellers accepting lower profit margins. And since the actual tariffs on different countries are a crazy quilt of different rates, producers have also become expert at shifting their supply chains to countries with relatively lower tariffs.

In addition, it’s easy to overstate the impact of tariffs on household costs, since imports are only about 14 percent of GDP. In other words, there are no tariffs on 86 percent of GDP.

The high tariff rate on China skews the averages. Excluding China, the effective tariff rate on the rest of the world, adjusting for trade share and exempt categories, is not the average 17 percent. It’s well below 10 percent.

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Thanks in part to the tariffs, the chronic U.S. global trade deficit has been shrinking. The October deficit was $29.4 billion, down nearly 40 percent from September. The decline continued in November, the last month for which statistics are available.

Some of this radical decline is the result of fluky factors that may not be repeated, such as the rush to purchase gold and reduced pharmaceutical imports. Some of it reflects softening consumer demand, the result of stagnant wages and tapped-out consumer borrowing. But the trend is real.

A **research study by the San Francisco Federal Reserve Bank** [link removed], looking back at tariff policy and economic performance over more than a century and a half, even finds that higher tariffs actually correlate with modest

**reductions** in inflation. That doesn’t make a lot of sense, and the researchers don’t offer a comprehensive explanation. One likely reason: To the extent that high tariffs, such as Smoot-Hawley in 1930, reduce effective purchasing power, that dampening also restrains prices. The economic problem in the 1930s was depression, not inflation.

**OK, DISCLAIMER TIME.** This is not to endorse Trump’s tariff policies, which reflect his petulance and wish for retribution rather than any coherent trade and industrial strategy.

The one sensible exception, as noted, is the high tariff rate on China. Even so, Trump’s overall China policy stupidly combines high tariffs with far too much indulgence on export controls, reflecting Trump’s penchant for cutting corrupt deals.

However, a more strategically targeted tariff policy is not crazy, especially when it is linked to domestic industrial policies. Joe Biden was well on the way to such a strategy, an approach that dates back to **Alexander Hamilton’s Report on Manufactures of 1791** [link removed].

Shame on Trump for reversing that. A prime benefit of well-targeted tariffs is that they can be part of a well-considered plan to help the U.S. reindustrialize.

But just because Trump is in love with tariffs, they are not necessarily flat-earth economics, especially when used judiciously and coherently.

Robert Kuttner
Co-Editor, Co-Founder

Robert Kuttner
Co-Editor, Co-Founder

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