Why Things Are Not (Yet) as Bad as We Thought

Commentary by William Alan Reinsch

Published September 29, 2025

One of the debates percolating since Liberation Day is how significant the impact of the Trump tariffs will be. So far, two answers have presented themselves. First, the Trump answer: The economists are all wrong, the foreigners are paying the tariffs, and there will be no adverse impact. Second, the answer from everybody else: That may be true so far, but wait and see-the worst is yet to come.

So far, Trump appears to have a point. The tariff impact has been less than expected, although the assertion that this is because foreign countries are paying is, for the most part, wrong. The important question, of course, is whether the "wait and see" crowd ends up being right, something we will not know for several more quarters.

There are four main reasons for the thus-far modest impact: stockpiling, mitigation, lack of retaliation, and pass-through differentials. Let's look at those one at a time.

Stockpiling is neither new nor unusual. It used to be standard procedure for manufacturers in the United States to maintain substantial inventories, but global economic integration facilitated the introduction of "just in time" supply chain management, which allowed companies to reduce the costs of carrying large inventories. Covid-related supply chain problems pushed companies to return to "just in case" and build up inventories. After the 2024 election, having heard Trump's campaign promises and knowing he had a reputation for doing what he promised, many companies decided to stockpile in anticipation of higher tariffs. The result was significant increases in imports in Q4 2024 and Q1 2025 and another smaller wave last summer in the wake of the U.S.-China ceasefire that at least temporarily reduced tariffs. The economy is still working through those inventories, but once they are gone, additional imports will be subject to the higher tariffs.

Mitigation refers to the fact that many of the tariffs have not ended up as high as initially threatened. With a few exceptions, the tariffs imposed in August were less than those announced in April. In addition, there were some items exempted from the tariffs, initially including laptops, cell phones, commercial aircraft and parts, and pharmaceuticals, with more added over time, largely products not made or grown in the United States. Some were exempted because they were also subject to Section 232 national security investigations, such as pharmaceuticals and semiconductor-containing products, and those chickens are now coming home to roost. Pharmaceutical tariffs were announced last week, effective October 1. In addition, products from Canada and Mexico have been exempted to the extent they comply with United States-Mexico-Canada Agreement rules, which has prompted many companies in those countries to complete the paperwork necessary to establish compliance, something they had not bothered to do earlier since the tariffs were previously zero.

The first two factors were predictable; the third one less so. Economists generally expected-and factored into their cost estimates-retaliation by countries receiving high tariffs. That assumption magnified the predicted negative economic impact because retaliation would reduce U.S. exports, creating lost profits and jobs in the United States. In reality-so far-only China and Canada have retaliated, the latter to a limited extent on steel and aluminum. The result has been a smaller hit on U.S. exports than expected and a smaller overall economic impact.

The fourth factor goes to the core of Trump's beliefs. He has believed for years that foreign producers pay the tariffs. Economists point out that studies of past tariffs have concluded that is wrong and that most of a tariff is ultimately passed on to the consumer. It is too soon to draw any conclusions about what is happening this time, but there are some hints that U.S. manufacturers are trying to resist increasing prices as long as they can to maintain their market share, which means either smaller profits for them or success in pushing the tariff burden back on to their foreign suppliers. The pending litigation, now at the Supreme Court, also encourages companies to wait to see how that turns out in the probably vain hope that the whole thing might go away.

There are other factors that push predictions in a more negative direction. Experience has shown that when domestic producers benefit from the protection afforded by higher tariffs, they often raise their prices to take advantage of their foreign competitors' higher prices. In addition, prices tend to be sticky upwards; that is, once raised, they often do not go back down, even if costs are reduced, as producers hope that consumers will become accustomed to the new normal. That "stickiness" can also be the result of long-term contracts that lock in higher costs, although that can work both ways if producers were able to negotiate favorable long-term arrangements in the past. These are all secondary effects, that is, they come into play after tariffs have been put in place, which means it will take time for their impact to appear.

At this point in late September, it is not clear where the economic effects are going to settle. Clearly, the negative impact thus far has been less than predicted, although there is growing anecdotal evidence that pain is coming. How soon it will come and how much it will be is a mystery, so stay tuned!

William A. Reinsch is senior adviser and Scholl Chair emeritus with the Economics Program and Scholl Chair at the Center for Strategic and International Studies in Washington, D.C.

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