The Price of Protection: How America’s Tariff Gamble Is Rewriting the Rules of the Global Economy

Estimated reading time: 17 minutes

On April 2, 2025, President Donald Trump stood in the White House Rose Garden and declared economic independence. He called it “Liberation Day.” The ceremony was theatrical: a poster-sized chart illustrated how the United States had, in his framing, been exploited by trading partners for decades. The solution was sweeping — a minimum 10% tariff on all US trading partners, with steep additional levies targeting China, Japan, and the European Union.

Financial markets reacted within hours. US equity indices dropped sharply. Treasury yields spiked. Bond investors began pricing in a structurally different economic trajectory. And within days, economists from institutions across the political spectrum — the Federal Reserve, the IMF, J.P. Morgan, Goldman Sachs — began revising their forecasts downward with unusual urgency.

What followed became the most consequential trade policy experiment in nearly a century. Within weeks, the United States pushed its average effective tariff rate from roughly 10% to over 23% — the highest level since the 1930s.

“By our calculations, this takes the average effective tariff rate from around 10% to just over 23%.”

Michael Feroli, Chief US Economist, J.P. Morgan

The new tariffs, J.P. Morgan calculated, would raise nearly $400 billion in revenue annually — approximately 1.3% of US GDP — representing the largest single tax increase since the Revenue Act of 1968. The Trump administration framed this as a triumph: revenue from foreign nations flowing into the American treasury. The empirical evidence would tell a different story.

The Myth That Foreign Countries Pay

The Trump administration’s central argument was simple and politically potent: foreigners pay the tariff. The president stated this directly in a January 2026 op-ed for The Wall Street Journal, writing that the “burden, or ‘incidence,’ of the tariffs has fallen overwhelmingly on foreign producers and middlemen.”

The evidence says otherwise — and it has accumulated with remarkable consistency across independent institutions.

A trio of Federal Reserve economists published a landmark study in April 2026, finding that the tariffs implemented through November 2025 raised core goods prices by 3.1% through February 2026. More striking still, the study concluded that the tariffs “can explain the entirety of the excess inflation in the core goods category since January 2025.” Without the tariffs, the Fed economists found, US inflation would have returned to pre-pandemic levels during 2025.

A separate analysis from the Federal Reserve and Columbia University found that Americans pay 94% of tariff costs. A February 2026 report from the New York Federal Reserve put that figure at nearly 90%. The St. Louis Fed confirmed that tariffs accounted for approximately 0.5 percentage points of headline PCE inflation in the June–August 2025 period alone.

“At the end of the day, tariffs are a tax on imports. The tax incidence nearly always falls on domestic sellers and consumers, and not foreign producers.”

Murat Tasci, Senior US Economist, J.P. Morgan

Goldman Sachs estimated that tariffs raised US inflation by half a percentage point across 2025. Roughly matching Fed Chair Jerome Powell’s public assessment. The Princeton-trained, Yellen-appointed Powell stated plainly that the tariffs were “responsible for the entirety of inflation’s rise” above the central bank’s 2% annual target. Core PCE ended 2025 at 2.7%. Research by Gita Gopinath and Brent Neiman of the Federal Reserve placed pass-through at close to 100%. Every dollar of tariff flows, eventually, to an American consumer.

The Slow Burn: How Price Pressure Builds

The story of tariff inflation in 2025 is not the story of an explosion. It is the story of a slow fire — one that companies and consumers tried, unsuccessfully, to contain.

Through the first half of 2025, many businesses absorbed the costs. A significant pre-tariff inventory buildup kept durable goods inflation artificially suppressed Companies that stockpiled goods ahead of the April 2 announcement. Retailers held the line on prices, worried about losing customers to cheaper alternatives.

But inventories deplete. Profit margins compress. And by the second half of 2025, the calculation changed.

“A lot of our clients really didn’t want to pass the costs on, but now they’re really having to.”

Kyle Peacock, Principal, Peacock Tariff Consulting

By January 2026, according to Deloitte Insights, producer-price inflation for processed intermediate materials used in durables manufacturing had surged to 14.4%. A stark reversal from the price declines recorded from September 2022 through February 2025. Consumer-facing prices followed. Clothing prices rose 14% above pre-tariff trends, household furnishings climbed 8%, and nondurable household goods. Cleaning supplies, paper products — rose 5%. Research tracking online prices across 350,000 products at five major US retailers found that import prices rose 6.8% relative to pre-tariff trends between March 2025 and May 2026. Carpets and floor coverings surged 54%. Clothing accessories climbed 24%. Coffee, tea, and seafood rose 16%.

But the most alarming signal from researchers at the Federal Reserve Bank of San Francisco involves services. A category that makes up approximately 60% of the US consumer price index. Their March 2026 Economic Letter documented that tariff effects on services inflation appear with a significant delay compared to goods. After an initial demand shock that briefly suppresses prices, inflation in the goods sector builds. And then, with further delay, bleeds into services. Services inflation is stickier, harder to reverse, and more psychologically embedded. The full inflationary consequences of the 2025 tariff cycle may not manifest in price indexes until 2026 and beyond.

The Federal Reserve’s Impossible Calculus

Jerome Powell does not have good options.

As Federal Reserve Chair, Powell faces what he himself described as a “challenging scenario”. A central bank mandate to control inflation on one side, and a visibly slowing economy on the other. The technical term for this condition is stagflation: rising prices alongside stagnant growth. The Fed’s last serious encounter with this combination was in the 1970s. And resolving it required years of painful interest rate hikes that drove unemployment to nearly 11%.

“The tariff increases are significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”

Jerome Powell, Federal Reserve Chair, Economic Club of Chicago, April 17, 2025

Speaking at the Economic Club of Chicago in April 2025, Powell acknowledged that isolating tariff-driven inflation from broader price pressures was “very challenging”. A remarkable admission from the leader of the world’s most powerful central bank. “Some of it — a good part of it — is coming from tariffs,” he said. “We have had two very strong goods inflation readings in the last two months, which is very unexpected.”

At his April 2026 press conference, Powell articulated the central tension the Fed navigated throughout the tariff cycle. “We have been working on the hypothesis, really, that tariffs would lead to a one-time price increase and that that would go away over time… inflation is the thing we need to work on.”

Unemployment rate rose from 4.1% to 4.4%

The problem is that a “one-time” price increase is indistinguishable from permanent inflation if it becomes embedded in wages and services contracts. The Fed maintained its policy rate while watching data accumulate — an approach critics called too cautious and defenders called appropriately patient. The Stanford Institute for Economic Policy Research documented one consequence: the unemployment rate rose from 4.1% to 4.4% in 2025, as hiring slowed and job openings fell. Fed Chair Powell stated at his June 2025 congressional testimony that he believed payroll employment had been overstated and that revised data would show the US was losing jobs since April.

In June 2025 congressional testimony, Powell noted that “respondents to surveys of consumers, businesses, and professional forecasters point to tariffs as the driving factor” behind rising near-term inflation expectations. When consumers expect inflation, they demand higher wages. When workers demand higher wages, businesses raise prices to preserve margins. Preventing that wage-price spiral is precisely why central bankers monitor inflation expectations so closely — and those expectations moved, visibly and measurably, in response to the tariff shock.

Who Bears the Burden: A Class Analysis

Tariffs are regressive by design. When governments tax income, they can structure rates progressively — higher earners pay a larger share. When they tax consumption of imported goods, the mathematics work in the opposite direction. Lower-income households spend a larger fraction of their income on goods subject to tariffs. They cannot substitute into untaxed services. They have no access to domestic alternatives that wealthier consumers might find.

Yale University’s Budget Lab calculated this asymmetry precisely. The annual household tariff burden ranges from roughly $430 for the poorest families to $1,810 for the wealthiest — both in 2025 dollars, assuming Section 122 tariffs expire. If made permanent, those figures jump to approximately $740 and $3,100. When expressed as a share of income, the disparity is even starker: the bottom decile pays roughly 1.1% to 1.9% of post-tax income in tariff costs, versus 0.4% to 0.6% for the top decile.

Tariffs have done nothing but drive prices even higher

The Joint Economic Committee (Minority) calculated that the monthly tariff cost for a typical household jumped from $54.65 in February 2025 to $184.51 by October — a more than threefold increase in eight months. Projected across 2026, that trajectory points to annual household costs exceeding $2,100. Yale’s Budget Lab’s median estimate for 2025 landed at $1,400 annually. The Tax Foundation called the 2025 tariffs the largest tax increase as a share of GDP since 1993.

Senator Maggie Hassan, ranking member of the Joint Economic Committee, stated directly: “While President Trump promised that he would lower costs, this report shows that his tariffs have done nothing but drive prices even higher for families.”

The administration argued that tariff revenue would fund tax cuts elsewhere. But revenue of $187 billion in excess customs duties collected in 2025 — a roughly 200% year-on-year increase — means $187 billion extracted directly from American businesses and consumers, before any redistribution. The arithmetic of who pays does not change based on what the revenue finances.