Why after Trump tariffs, the US and world economy are still holding up
News Summary
Despite economists' early-2025 predictions that renewed Trump tariffs would be disastrous, causing supply chain disruptions, reduced trade, and inflation, the US and global economies have shown remarkable resilience. Inflation has risen only slightly, and there are no signs of stagflation or recession, even as President Trump continues his tariff policies. This resilience contrasts sharply with the Smoot-Hawley Act era of 1930, attributed to the current robust global economy, countries' restrained response to tariffs (many absorbing costs to retain US market share), and the legal uncertainty surrounding Trump's executive-order tariffs, which await a Supreme Court verdict. Furthermore, businesses' pre-emptive preparations and tech-driven productivity gains have offset some negative impacts. Goldman Sachs estimates foreign producers absorbed 14% of tariffs, while US businesses absorbed two-thirds, passing only a fifth to consumers. However, the article warns this absorption capacity is not limitless; further tariff hikes by Trump could break global restraint and trigger broader retaliation.
Background
Since early 2025, President Trump's tariff policies have been a central topic in global economic discourse. Economists and the financial community widely feared these tariffs would replicate the negative impacts of the 1930s Smoot-Hawley Act, leading to global trade contraction and economic recession. The Trump administration has previously utilized tariffs as a trade negotiation tool. Currently, the US and nations like India are continuing negotiations to address trade barriers. Despite amplified trade uncertainty due to tariffs, the global economy has demonstrated unexpected adaptability over recent months. However, the long-term impact of tariffs and subsequent international responses remain key market concerns, especially with the US Supreme Court's final verdict on the legality of Trump's tariffs still pending.
In-Depth AI Insights
Does the current global economic resilience mask underlying structural vulnerabilities, setting the stage for future shocks? - While seemingly resilient, the capacity of businesses and foreign producers to absorb tariffs is not infinite. This strategy likely leads to compressed profit margins, reduced investment, and ultimately, a erosion of long-term competitiveness. - The uncertainty surrounding tariffs itself is a cost, potentially leading to inefficient investments in supply chain re-alignment rather than genuine productivity enhancements. - Relying on technological productivity gains to offset tariff negatives might imply risks of slowing or stagnant productivity growth in other economic sectors not directly impacted by tariffs. What profound implications will the Supreme Court's ruling on the legality of Trump's tariffs have for global trade dynamics and international relations? - If the Supreme Court rules the tariffs illegal, it would significantly curtail presidential power to implement trade policy via executive order, potentially pushing future trade disputes towards more legislative, predictable resolutions. - An illegality ruling could prompt countries to reassess their trade strategies with the US and potentially encourage a return to WTO frameworks, reducing unilateralism risks. - If the tariffs are deemed legal, it would grant US presidents greater discretion in trade policy, potentially emboldening other nations to adopt similar unilateral measures, escalating global trade fragmentation and geoeconomic tensions. What does the Trump administration's strategy of viewing tariffs as a revenue-generating tool signify for US fiscal health and global economic stability? - Treating tariffs as a revenue source, rather than purely a protectionist measure, could lead to continuous escalation of tariff levels until a critical mass of international retaliation is triggered, disrupting the current fragile balance of restraint. - This strategy risks creating a 'tariff trap,' where short-term government revenue gains are offset by long-term market inefficiencies, damaged corporate profitability, and ultimately, higher consumer prices, harming US constituents. - Major global economies might be pushed into a more confrontational trade environment, compelling them to establish non-USD denominated trade and settlement systems, posing a long-term challenge to the dollar's global reserve currency status.