When President Trump returned to office for his second term in 2025, economists were quick to sound the alarm. Warnings flew across news outlets, research papers, and op-eds: imposing tariffs would push inflation higher, raise costs for global suppliers, disrupt trade networks, and isolate the United States economically. The predictions were dire and grounded in decades of classical economic theory.
Yet, in reality, the feared economic chaos did not materialize. Prices remained relatively stable, key industries continued operating without major disruption, and retaliatory measures from trading partners were limited. How could economists, armed with centuries of trade theory, get it so wrong? The answer lies in a factor they often overlook: political leverage.
The Traditional Economic View on Tariffs
Economists generally approach tariffs from a straightforward lens. A tariff is essentially a tax on imported goods. In theory, it raises the cost of foreign products, protects domestic producers, and discourages imports. While this may sound beneficial for domestic industries, the wider consequences are usually negative and can ripple far beyond national borders.
- Higher consumer prices: Consumers pay more for imported goods, and domestic competitors can raise their prices in response. This reduces purchasing power and can slow overall consumption.
- Disruption of global supply chains: Companies relying on imported components face higher costs and potential production delays, which can cascade through industries.
- Risk of retaliation: Other countries may impose counter-tariffs, affecting exports and harming domestic industries dependent on foreign markets.
- Indirect global inflation: By increasing the cost of traded goods, tariffs can drive up prices not only domestically but also internationally. Countries that rely on exporting raw materials or finished products to the U.S. may pass on these costs, creating inflationary pressures globally.
Economists often model these effects symmetrically, assuming all countries will respond proportionally and that no single nation can escape the economic repercussions. This framework led to stark predictions when Trump announced new tariffs on steel, aluminum, and a range of Chinese imports. According to traditional theory, these measures should have triggered higher prices, slowed growth, and caused a wave of international trade disruptions.
The Real-World Outcome of Tariffs
Despite economists’ warnings, the predicted economic disaster largely failed to appear. Several factors help explain why:
- Counteracting domestic policies: Tax cuts and fiscal measures reduced the impact of price increases. Consumers and businesses felt the burden less severely than models predicted. For example, corporate tax reductions increased business liquidity, allowing companies to absorb higher import costs.
- Market adjustments and anticipation: U.S. industries adapted quickly. Domestic producers ramped up production, and companies optimized supply chains to mitigate increased costs. Moreover, many of these policies were not entirely unexpected, similar measures had been implemented in 2018. Companies anticipated renewed tariffs and strategically shipped additional products ahead of Trump’s inauguration, particularly in early January, buffering the immediate impact on prices and supply chains.
- Moderate inflation: As a result of these factors, inflationary pressures remained surprisingly moderate. Robust domestic consumption, proactive supply chain management, and offsetting fiscal measures all combined to soften the blow that economic theory predicted would be severe.
These outcomes highlight a clear mismatch between theory and practice. Economists expected tariffs to trigger widespread harm, but real-world results show that timing, anticipation, and adaptive behavior play crucial roles in shaping economic outcomes.
The Missing Factor: Political Leverage
The most overlooked variable in economic models of trade is political leverage. The United States is not just another player in global commerce, it is the dominant economic and political power in the world. This status creates unique advantages in trade policy that economists rarely account for:
- Global dependence: Many countries rely on the U.S. for security and protection. Alliances and defense agreements make antagonizing the U.S. a risky proposition for nations that depend on its support.
- Economic blessing: For countries aiming to develop economically, gaining U.S. approval or maintaining favorable relations can be essential for trade, investment, and access to technology. Retaliating against U.S. tariffs could jeopardize these opportunities.
- Asset security: Numerous countries hold significant portions of their gold reserves, foreign currency, and other high-value assets within U.S. financial institutions. Any hostile response could put these assets at risk, creating a strong disincentive for retaliation.
- Supply chain entanglement: Many global industries are deeply intertwined with U.S. production and markets, further complicating retaliatory strategies.
Because economists often model trade in a vacuum, assuming symmetric, rational responses, they fail to capture how these forms of political and financial leverage allow the U.S. to impose tariffs without suffering the full consequences predicted by theory.
The 2025 experience provides striking evidence. Despite the broadest and highest U.S. tariffs in nearly a century, actual retaliation from most trading partners was close to zero, exactly the opposite of what standard models predicted.
Sources: U.S. Trade Representative, WTO tariff download facility, national customs agencies, White House fact sheets (Feb–Nov 2025).
Of more than $300 billion in retaliatory measures threatened worldwide, only 7–8 % materialized, and nearly all of that came from China. Every major U.S. security ally chose deals and concessions over retaliation. This is political leverage made visible.
Why Economists Keep Missing the Mark
Economic models are elegant, but elegance can come at a cost. Traditional trade theory relies heavily on assumptions such as:
- Rational actors responding predictably to price signals
- Symmetry in the global system, where all countries react proportionally
- Ceteris paribus conditions, a Latin term meaning “all other things being equal.” This assumption allows economists to isolate the effect of a single variable, such as a tariff, while holding everything else constant.
Ceteris paribus is essential in economic modeling because it provides clarity: without it, the interplay of countless factors would make analysis nearly impossible. It is a cornerstone of modern economic theory, forming the foundation of predictions, policy recommendations, and trade models.
However, in the real world, ceteris paribus rarely holds. Global trade is influenced by a complex web of political, strategic, and economic priorities that cannot be neatly isolated. This is a major omitted variable in traditional models: economists often fail to account for what countries actually prioritize, whether it’s security, economic development, or the protection of high-value assets like gold reserves.
Trade is therefore not just about supply and demand, it is a negotiation, where power, leverage, and strategic interests often outweigh pure economic incentives. By ignoring these factors, traditional models overestimate the risks of tariffs for dominant nations like the U.S. and fail to capture how real-world actors respond to policy shifts.
Implications for Economic Forecasting and Policy
Understanding the limits of economic models is crucial for policymakers and analysts alike. Some key takeaways include:
- Political context matters: Dominant countries can implement trade measures with less fear of retaliation than theory predicts.
- Policy offsets are powerful: Tax cuts, subsidies, and other fiscal measures can mitigate the negative effects of tariffs.
- Models need evolution: Economists should integrate geopolitical power, strategic behavior, and global dependencies into trade predictions.
In short, tariffs are not always catastrophic. While they carry risks, their real-world effects depend heavily on the political and economic context, a factor often missing from traditional economic models.
Conclusion
Economists have long warned that tariffs are inherently harmful, yet recent experience shows that power and policy can dramatically reshape outcomes. Political leverage allows dominant countries like the U.S. to impose trade measures with manageable consequences, while domestic policies can offset potential price shocks.
Economic theory may be elegant and mathematically precise, but in the messy, interconnected world of global trade, power and politics matter just as much as supply and demand. Tariffs may be more than just taxes, they are tools of leverage in a world that economists are only beginning to understand.
