The Trump trade war 6 months later

Trump’s trade war…… Yes, it’s already been 6 months since Trump kicked off his presidency by announcing tariffs against China, Mexico, and Canada. This triggered a massive fall in the US stock market. But, today, the stock market is higher than ever, despite Trump threatening more and more tariffs.

And, yes the US Dollar went down by a lot since Trump started talking about Tariffs. But, big picture, it’s really not that much lower than just a year ago.

On top of that, tariffs have NOT caused much inflation in the US.

And, yes, the US economy is projected grow more slowly due to tariffs. But so far, the US is likely to keep growing quite a bit faster than other major advanced economies like Germany, the UK, and Japan.

So, what was all the fuss about? And, what ACTUALLY happened in these last 6 months? Trump announced tariffs, paused, them, increased them. Got deals done with some countries, while others keep getting delayed.

In this video, we’ll create some order in all of this chaos by (1) giving you a visual overview of what actually happened, (2) discuss what the effects on the US economy are so far (3) discuss the effects on the US’s biggest trading partners, some of whom could actually be benefitting, and finally (4) discuss whether or not Trump’s plan to re-industrialize the US, and let foreigners pay for it, is already working.

So, let’s jump right into:

1 Trump’s trade war - 6 months later

This graph by economist Joey Politano is the best graph I could find to summarize what Trump’s been up to. Tariffs are difficult to keep track of because they target different countries and different products. For example, Trump has put particularly high Tariffs on countries like China and products like steel and cars. But, what does this actually mean for the American economy? That is what this graph is all about, as it shows the average US tariff rate based on what type of goods, and from whom, Americans imported in 2024.

For example —and this is just hypothetical— if 10 percent of all US imports were steel and aluminum, then a 50% steel & aluminum tariff would, raise the average US tariff rate by 5%.

So, what happened so far?

This graph shows 10 important milestones. After announcing impending tariffs against Mexico and Canada on his first day, Trump first hit China with a 10% tariff increase in early February. Second, he hit China, Mexico and Canada with more tariffs early March. Third, he excluded goods that fell under the original US, Mexico, Canada agreement, causing the average tariff rate to drop. Fourth, he raised tariffs on steel and aluminum. Fifth, he introduced 10% tariffs for most countries and 25% more for cars. Then we get to the big stuff. Number 6. This big spike here is liberation day, with its sky high ‘reciprocal’ tariffs against everyone. Seven: Trump then quickly paused most of these tariffs while raising Tariffs by a lot against China, meaning that the average tariff rate dropped, but remained pretty high. Eight, Trump slapped some more car tariffs on Canada and Mexico. Ninth, the average tariff rate dropped by a lot after Trump paused Tariffs against China. Finally, the average rate increased again when Trump announced a new 25% steel and aluminum tariff in June. So, there you have it. that was Trump’s entire trade war. At least, until early July…

As, I’m recording Trump is threatening a bunch of countries with new tariffs. So, when you watch it, this chart may already be outdated. Still, I hope it has helped provide some clarity about how, on average, tariffs have gone up and down under Trump.

That is all nice and well. But, it, of course, it does not tell us anything about the positive or negative effects of these tariffs. On the negative side, Tariffs were widely expected to wreck the US economy. Did they indeed do that?

Let’s dive in.

What did 6 months of tariffs do to the US economy?

Right from the start of Trump’s trade war, economists have been warning about 3 possible negative effects from tariffs: (1) inflation, (2) less economic growth, and (3) a more valuable Dollar…. Yes, a more valuable Dollar can be positive… but it may make it more difficult to export from the US, which Trump does not like. So, in this light, the Trump team mostly talked about a higher Dollar as a negative side-effect of Tariffs.

Finally, after the sky high tariff increases of liberation day, investors expected US companies would make far fewer profits, meaning financial markets lost trillions of Dollars.

In total that is 4 negative effects.

So, which of these have held up? And, which did not?

Let’s start with inflation. What happens if you increase tariffs by roughly 15% in a short time? You’d think the price of imports would go up dramatically, and therefore average price of goods would at least go up by a couple of percentage points. But, as you can see here, inflation has NOT gone up. It continued to fall. Of course, it could be that inflation would have fallen way faster if not for Trump’s tariffs. However, more detailed research by the Economist on how much highly tariffed products have gone up in price also shows that the initial impact on inflation has been modest.

How is that possible?

In a recent blog, economist Noah Smith discusses three reasons. The first is that US importers bought a lot of stuff from China and other countries right before the tariffs came into effect. Therefore, importers could keep prices low up to now. The second possible reason is that tariffs are already having an effect but that companies are absorbing the costs. This could be American companies. But, there is also some evidence that Trump was partially correct when he said foreigners would pay the tariff. That is, professor Marcelo Olarreaga and Sara Santander from the university of Geneva have estimated that, on the median, foreign exporters are paying 53% of US tariffs so far. Finally, it is possible that Trump’s chaos has caused Americans to spend less overall. This would have reduced prices throughout the economy, partially cancelling out increased prices on imported goods.

This brings us to our second predicted effect: lower GDP growth, which unlike inflation, is clearly what we are seeing. Concretely, the US economy was widely expected to grow by 2.4% in 2025. But, after 6 months of Trump’s trade war, most analysists now expect the US economy will only grow by around 1.5 or 1.7%.

So, tariffs are bad for economic growth. That prediction is holding up so far.

In contrast, the prediction that the Trump tariffs would increase the value of the Dollar are not holding up at all. Sure, the Dollar did not really fall that far, compared to just a year ago. But, it’s still interesting that it fell right after the Tariffs came into effect, while it went up during Trump’s last trade war.

What can explain this difference?

To answer that question, let’s look at the two main determinants of the exchange rate: trade and finance.

First, the value of a currency is determined by trade. If a country imports more than it exports, it will need to buy foreign currency to do so, reducing the value of its own currency. So, by reducing imports, tariffs can increase the relative value of a currency. For example, last time, Trump reduced how much the US imported from China, causing the value of the Dollar to increase, in comparison to the Renminbi.

However, this time, despite falling imports compared to exports, the Dollar fell. Why?

This gets us to the second determinant of exchange rates: finance.

If I, as a European I want to invest in the New York Stock Exchange, I’ll need to buy Dollars with my Euro’s to do so. So, foreigners investing more in America tends to increase the relative value of the Dollar.

Citing Trump chaos, foreign investors have increasingly been looking to invest in relatively stable places, like Taiwan, Switzerland, and the Euro area, rather than in the US. If this effect was bigger than the trade effect, it could perfectly explain why the Dollar dropped, rather than increased this time around.

This gets us to our final expected effect of the trade war. Trade wars are bad for business. So, it makes sense the US stock market collapsed after liberation day. However, today, US financial markets are back. How is that possible?

Essentially, I found 2 explanations: The first is that Trump recently passed his so-called big beautiful bill, which mas mostly about massive tax cuts for wealthy Americans and corporations. This has offset some of the negative effects of the tariffs.

The second explanation is what some Wall Street Traders have called the TACO trade, where TACO stands for Trump Always Chickens Out.

That is, if you look at this graph, yes clearly average tariffs are quite high around 17%. But, that is quite a bit lower than what Trump imposed at an average of 27% or so right after liberation day.

So, after 6 months, the US economy has definitely suffered. But, not by as much as expected right after liberation day. Does that mean that Trump was right when he said that trade wars are good and easy to win?

Let’s evaluate that claim by first having a look at the rest of the world.

What 6 months of tariffs did to the global economy

Of course, the world is too big to tell you about all effects Trump’s trade war had on every country. Therefore, I decided to focus on the US’s five biggest trading partners: the EU, Canada, Mexico, China and Japan. For each of these, I have 1 to 3 surprising, sometimes even positive, take-aways.

But, before getting into each of these, I just want to get out of the way that Trump’s trade war is bad news for every major global economy for two reasons. The first is that tariff uncertainty is making it difficult for firms to make investment decisions all around the world. What tariff rate should investors use to make their decision to build a factory somewhere? Yes, this uncertainty is hurting US growth. But, it is also hurting growth everywhere else. The second reason the trade war is bad for other economies is that, as we discussed, Trump was right that foreigners are indeed paying a substantial share of the tariffs. Yes, American importers technically pay the tariff. But, after six months we have seen that many foreign firms, like Japan’s car makers, have lowered their prices substantially to keep their market share in the US. This means, less export revenue for these countries.

So, with that obviously negative effect out of the way, let’s get into some surprising ways key trade partners have responded to Trump, starting with the biggest: the European Union.

Coming into the trade war, Europe’s ageing economy was performing quite weakly. However, so far, Trump’s trade war has benefitted the continent in three ways. The first is that Europe’s financial markets suddenly looked quite stable compared to those of the US, prompting European stocks to outperform US ones for the first time in a long time. Second, by tying the threat of tariffs to military spending, Trump has pushed Europeans to raise their defense spending, benefitting the economy in the short term. Finally, facing trade barriers from the US, the EU realized that its most important trade barriers are actually still inside the block, and set out to try to remove them. Of course, it is still uncertain whether or not the EU will actually do this and complete its single market. But, Trump’s actions are making this more likely than ever.

Next, here are three key take-aways for the US’s second biggest trade partner: Canada. First, Trump’s hostility probably helped the liberal party to win the election over the conservatives that were seen to be more aligned with Trump. Second, as a major energy supplier, Canada is actively trying to adapt its energy infrastructure to be less reliant on the US. This could make Canada more resilient it in the future. Finally, much like the EU, Trump’s aggressive conduct has caused Canada to take a long hard look at internal trade barriers between Canadians that the IMF has estimated are equal to a 21% tariff just between provinces. Again, just as with the EU, if Canada can remove these now under pressure, Trump could end up having done them a major service.

Interestingly, Trump’s trade war could even benefit his third biggest trading partner: Mexico. Yes, the Trump trade war threatens Mexico’s entire development model, where it tried to get rich by becoming a low cost manufacturing hub for the US through its free trade deal with the US. However, so far, Trump has ‘somewhat’ respected that deal, only putting tariffs on goods that fall outside the terms of the existing deal. The one upside for Mexico is that because tariffs on other nations were so low, its 0% tariff free trade deal was not such a big benefit for Mexican factories. However now that US tariff rates against the world are up by a lot, if Mexico can prevent Trump from leaving that trade deal, it may actually become the best low cost manufacturing hub for firms that want to export to the US.

Even for China there are 2 bright spots. The first is that Trump’s chaos is causing many countries to reconsider relying on the US too much, markedly improving China’s image in the rest of the world. The second is that many experts have argued that China new trade deal with Trump does show that China has a stronger position than Trump expected.

Finally, for Japan, Trump’s threats may lower some of its incredibly outdated restrictions on food imports. For example, when it comes to rice, professor Kenichi Ueda from the University of Tokyo estimates that Japan’s barriers are equal to a tariff of 233%. As Trump remarked, it would actually make a lot of sense for Japan to reduce this, as it is currently dealing with a major rice shortage.

So, while Trump’s trade war has had some upsides for all major trading partners, on average, Trump’s trade war has damaged the global economy, putting it on a path towards multi-polarity, where trade wars become far more common.

But, according to Trump, all of this was necessary to re-industrialize the US, and potentially earn the American government so money so it can lower taxes for ordinary Americans… So,

4 Was Trump right?

When it comes to government revenue, we can see in this graph by the Economist that tariffs are definitely working in the sense that they are bringing in a lot more government revenue than in previous years.

But, what does that mean in the wider context? The best estimate I could find is that in 2025, tariffs will raise $189 Billion Dollars for the US government. However, meanwhile, Trump’s big beautiful tax cuts are projected to increase the US deficit by 3 Trillion Dollar. So, yes tariffs are bringing in a lot of money. But, not enough to make up for Trump’s massive tax cuts.

Okay. But, then what about the US’s re-industrialization. Trump’s main goal for the trade war was to make American manufacturing great again, which would be crucial for national security. Is that working?

So far, the answer is… we don’t know for sure…. but… it doesn’t look like it yet.

On the one hand, Trump has said businesses had “practically committed” 12 trillion Dollar in investments on his watch. That would be triple the number that businesses had invested in the entire last year… in just the first 6 months. However, the problem with Trump’s number is that many businesses seem to have told Trump they will invest more —thanks to him— but this included projects they were going to do anyway.

On the other hand, if we look at business investments in new machinery and other so-called fixed investments, we can see that the numbers for Trump’s first three month were pretty good, but those for the months after liberation day are the worst since the omicron wave of the Covid pandemic.

This is in line with anecdotal evidence that precisely because Trump is using tariffs as a negotiation tool, businesses of the type Trump wants to attract are not investing at all, neither in the US, nor in the rest of the world.

After all, yes, very high tariffs against the rest of the world, does make building a factory in the US to serve the US market more attractive. But, then, if these tariffs can be brought down at any moment due to Trump negotiating, your US factory may all of the sudden not be competitive anymore. And, because it takes years, if not decades, to make the money back on investing in a factory, it makes sense that, as long as Trump is negotiating, businesses are not investing in the US.

Of course, 6 months is a short time to truly judge Trump’s trade war. But, hopefully this video providing a tariff overview, review of impacts on the US, on major trading partners, and quick review of Trump’s goals, was useful nonetheless. If we are seeing longer term effects more clearly, I will give you an update. So, subscribe to stay in the loop.

In the meantime, if you want to know more about which products are most affected by the tariffs, I highly recommend these interactive graphics from our advertising sponsor, The Economist, that I will link below in the description of this video.

Here, you can select a category of goods or services, and see what the average tariff burden in if you want to buy these products in America. It also shows us specifically what country tariffs contribute the most to this burden. For example, as you can see here, the average foreign car tariff burden is now around 4%, thanks to tariffs on Japan, South Korea, Canada, and for the largest part, Mexico.

Then, in this interactive graph you can see where inflation has increased or decreased under Trump. For example, here you can see that food inflation has fallen under trump, television inflation is roughly the same, but personal computers and tablets are rapidly becoming more expensive.

These kind of detailed analyses and amazing graphs such as this one, used in this video are exactly why I highly recommend you subscribe to The Economist, who now offers an exclusive 20% discount for Money & Macro viewers.

Whether you prefer the digital edition, or you are like me and prefer to catch up on the global economy during the weekend, sitting down with a nice cup of coffee and the paper edition, you’ll always stay on top the latest global developments no matter where you are. So, don’t miss out – click the link in the description or top comment, or head over to economist.com/moneymacro to claim your exclusive 20% discount today.