China has recently boasted that their trade surplus with the entire world just hit an all-time record of $1.19 trillion in 2025. But what China didn't boast about is their surplus with the U.S. declined by 22%. The reason: U.S. tariffs on Chinese exports average over 50%.
China's consistent trade surplus is based on illegal trade policies, including currency manipulation, subsidies, and domestic market protection, that cost the U.S. and other countries jobs. Until last year the main loser has been the United States. China simply diverted subsidized exports to other countries with lower tariffs.
But what about Trump's tariffs on exports from other countries? A tariff is a tax, a tax on consumers, importers, and on producers who use foreign-made components. By raising tariffs, which aren't based on any well-measured plan other than his resentments and whims, Trump presumably has wreaked serious, economic damage. According to the Yale Budget Lab, Trump's policies have raised the average tariff rate from about 2.4% in late 2024 to 17% by late 2025, the highest level in almost a century. Economic disaster, right?
Maybe not. Herein lies an interesting economic mystery as well as perhaps a possible lesson for the next Democratic administration. That's a big ask, but we'll continue.
Currently, inflation is running below projections. In December, inflation was 2.7%. The November/December 2025 inflation numbers were the lowest since 2021. Tariffs have had surprisingly little effect pushing consumer prices up. Olu Sonola, head of U.S. economic research at Fitch Ratings wrote in a recent article, "Tariff pass-through to consumers has been much milder than anticipated." Yet revenue from tariffs has generated close to $300 billion in 2025, up from about $80 billion in 2024. At this rate 2026 will produce over $350 billion.
So, who exactly is paying these taxes? The evidence suggests that most costs are being absorbed by foreign exporters or by domestic sellers accepting lower profit margins. Since the actual tariffs on different countries are a crazy matrix of different rates, producers have also become adept at shifting their supply chains to countries with relatively lower rates.
There's a tendency to overstate the effect of tariffs on household costs since imports are only about 14% of GDP. In other words, there are no tariffs on 86% of GDP. And the high tariff rate on China skews the averages. Excluding China, the effective tariff rate for the rest of the world, adjusting for trade share and exempt categories, is not the average 17%. It's well below 10%.
The chronic U.S. global trade deficit has been shrinking due in part to tariffs. The October deficit was $2.4 billion, down nearly 40% from September. The decline continued for November, the last month for which statistics are available.
Some of this radical decline is the result of fluky factors such as an increased flurry of gold purchases and reduced pharmaceutical imports. There is also softening consumer demand, stagnant wages and high consumer borrowing. But the trend is real.
A research study by the San Francisco Federal Reserve Bank reviewed tariff policy and economic performance over more than a hundred and fifty years finds that higher tariffs actually correlates with reductions in inflation. That doesn't really seem logical, and the researchers don't have a comprehensive explanation. One likely reason is high tariffs, such as those enacted by Smoot-Hawley in 1930, reducing effective purchasing power (and demand) which restrains prices.
This is by no means an endorsement of Trump's tariff policies. I was patently opposed to them when he introduced them, and I remain so. They were not the result of trade planning and industrial strategy, but more so his peevishness and desire for retribution.
The one sensible exception is the high tariff on China. Even so, his overall China policy stupidly combines excessive export controls which reflect his penchant for cutting corrupt deals (remember the deal cut with Nvidia?...). A more strategically targeted tariff policy linked to domestic industrial policy would actually make a lot of sense. A prime benefit of well-targeted tariffs is they can a part of a well-considered plan to boost U.S. industrialization. Just because Trump loves tariffs doesn't necessarily make them flat-earth economics. He just doesn't know how to use them wisely.
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