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China’s trade surplus with the entire world hit an all-time record of $1.19 trillion in 2025, Beijing just announced. 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, 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.
Tariffs have had surprisingly little impact on higher consumer prices. “Tariff pass-through to consumers has been much milder than anticipated,” 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, 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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