Trump’s tariffs didn’t spur economic growth but did encourage trade between spurned U.S. partners.
ET
A year ago Thursday, President Trump raised the average effective tariff rate to 22.5%, and proclaimed April 2 “Liberation Day,” which would “forever be remembered as the day American industry was reborn.” Financial markets convulsed. Within a week, the president began suspending and modifying his tariffs. By the time the Supreme Court ruled that tariffs issued under the International Emergency Economic Powers Act were unlawful, the average effective rate had fallen to 11.6%, still higher than at any point between World War II and Liberation Day. Convinced that his tariffs were “quickly building the greatest economy in the history of the world,” Mr. Trump responded by invoking Section 122 of the Trade Act of 1974 to impose a 10% across-the-board tariff, that he promises to raise to 15%. A year into this experiment, how is Mr. Trump’s tariff policy working out?
Although the average U.S. tariff rate in 2025 approached the level of the infamous Smoot-Hawley tariff of 19.8% for all imports, our trading partners haven’t retaliated against the U.S. so much as pivoted toward other trading partners, initiating the greatest peacetime trade diversion of the modern era. To compensate for lost U.S. markets, they have mutually lowered barriers and increased trade with each other. As economist David Hebert of the American Institute for Economic Research observed in these pages, “the world isn’t deglobalizing. It’s reglobalizing around partners who commit to rules rather than those who wield tariffs like a club.”
While the economic damage to America and the world would have been far greater had a full-blown trade war erupted, our economy will nevertheless suffer from this diversion of trade from the U.S. Most obviously, U.S. households, denied access to the lowest-priced goods on global markets, will have less purchasing power.
The tariffs will also make American goods less competitive globally and more expensive at home. Tariffs raise the prices of inputs used by U.S.-based producers, which is no small matter. Dartmouth economist Douglas Irwin finds that more than half of U.S. imports are inputs used in producing goods and services in America. Tariffs steer resources toward expensive domestic products that we would otherwise import at a cheaper price. Tariffs thus divert capital and labor away from uses that would have yielded higher returns to capital and higher wages for workers. This combination of higher consumer prices and higher producer costs will slow economic growth as long as the tariffs are in place. The Yale Budget Lab estimates that if pre-court-ruling tariff levels are reimposed, consumer prices will rise by an additional 1% annually and economic growth will fall by 0.25 percentage point.
Investors share this negative assessment of the tariffs. While U.S. equities outperformed those of other developed countries in the decade prior, in 2025 the three major U.S. stock indexes underperformed indexes in most other developed countries. Last year the Dow Jones Industrial Average rose by 13%, the S&P 500 by 16%, and Nasdaq by 20%. But Germany’s DAX was up by 23%, Japan’s Nikkei by 26%, Canada’s S&P/TSX by 29%, and South Korea’s Kospi by 76%. Given financial markets’ forward-looking nature, these numbers testify that the global economy is finding ways to prosper despite Mr. Trump’s tariffs’ denial of access to the American market.
Additional evidence of the destructiveness of Mr. Trump’s tariffs comes from comparing America’s economic performance in 2025 to its performance in 2024, when, according to the president, the economy was “dead.” While Liberation Day didn’t occur until April 2, imports surged in the first quarter in anticipation of the tariffs, so the impact of Mr. Trump’s second-term tariffs can’t be assessed without including the first quarter of 2025.
Despite the administration’s boast of extracting foreign pledges to invest in the U.S. in return for lowering crippling tariff rates, 2025’s 1.2% increase in inbound foreign direct investment was considerably less than the 2.7% increase in 2024 and the 7.6% increase in 2017, the first year of Mr. Trump’s first presidency, when taxes were cut, regulatory burden was reduced, and tariffs were unchanged. Domestic investment also grew more slowly in 2025. Real gross private domestic investment last year grew by only 2% after growing in 2024 by 3% and 4.4% in 2017. As the global trade diversion makes our trading partners less reliant on U.S. markets and reduces our trade leverage, many of the verbal promises to invest in America are unlikely to materialize. Promised foreign investments that do materialize, being the result of political pressure and not of market forces, will further divert American resources into less-productive uses.
Real U.S. gross domestic product grew by only 2.1% in 2025, compared with 2.8% in 2024 and 2.5% in 2017. It is therefore unsurprising that job growth in 2025, at 0.5%, was slower than job growth of 1.2% in 2024 and 1.6% in 2017. Importantly, given Mr. Trump’s fixation on manufacturing, in 2025 the pace of losing manufacturing jobs accelerated to 1.2%, faster than the decline in 2024 of 0.7%. In 2017 manufacturing jobs actually increased by 0.7%.
If the economy was “dead” in 2024, there’s no evidence Mr. Trump’s tariffs have brought it back to life. The only major economic-policy difference between the first year of Mr. Trump’s first term and the first year of his second term was the imposition of the highest tariffs since the Great Depression. Most economists predicted that the economy’s performance would be negatively affected. Thus far data overwhelmingly indicate that is what has happened.
Mr. Gramm, a former chairman of the Senate Banking Committee, is a nonresident senior fellow at the American Enterprise Institute. Mr. Boudreaux is a professor of economics at George Mason University and the Mercatus Center.