Trump is winning the tariff war hands down; markets remain unshaken

His tariffs are bringing in higher revenues, shielding American industry - and the markets remain unshaken

India is smarting from the tariff announced by United States President Donald Trump recently. It now faces a tariff of 25 per cent, plus an additional 25 per cent penalty for importing oil from Russia. Coming soon: Punitive tariffs on all pharmaceutical exports to the US, something that will bite Indian pharma companies. 

Nearly 70 countries have been hit by tariffs on top of the universal 10 per cent levy. The tariffs are not just about reducing America’s current account deficit. Mr Trump has weaponised them to make a political point — or even a personal one. 

After announcing the 25 per cent tariff on India, Mr Trump added insult to injury by calling India a dead economy. He flaunted the deal to explore oil reserves in Pakistan and hinted at Pakistan selling oil to India down the road, clearly a poke in the eye for New Delhi. 

India is not alone in being penalised and humiliated by Mr Trump for reasons other than trade. Canada faces a tariff of 35 per cent for not curbing the flow of fentanyl and other drugs. Mr Trump made it plain that Canada’s plan to recognise Palestine as a state is an aggravation. 

Switzerland has been hit with a tariff of 39 per cent, the highest for any European country. Mr Trump is irritated by the high prices Swiss pharmaceutical companies charge for their drug exports to the US. South African exports face a tariff of 30 per cent for “genocide” against whites. Brazil’s exports will be charged a tariff of 50 per cent, the same as India’s, because Mr Trump believes that his friend, the former Brazilian President Jair Bolsonaro, is being falsely prosecuted for political reasons. 

People everywhere are outraged by Mr Trump’s whimsical ways. Commentators fulminate against his actions. But here’s the bad news for Mr Trump’s detractors: Mr Trump is winning the tariff war hands down. When he announced “reciprocal” tariffs on April 2, pundits forecast a trade war in which other nations would retaliate by imposing tariffs on US exports. Everybody would be worse off as happened with the infamous Smoot-Hawley tariffs in the US of 1930, which led on to the Great Depression. 

Nothing of the sort has happened. The United Kingdom, Japan, Vietnam, South Korean, Indonesia and the Philippines have all caved in meekly to Mr Trump’s dictates and signed one-sided trade deals. The European Union (EU), the second-largest economy in the world in terms of gross domestic product (GDP), too capitulated — and how. 

EU chief Ursula von der Leyen, flew to Mr Trump’s golf course in Scotland to work out a trade deal. Mr Trump kept her waiting until he and his son had finished their second round of golf. Thereafter, he took her on a tour of his mansion where he bragged about the magnificence of his ballroom. Ms Leyen sought to flatter the American President. “You’re known as a tough negotiator and dealmaker”, she said. “But fair,” said the US President. “But fair”, the EU head dutifully echoed. 

There followed the announcement of a US-EU trade deal. EU exports to the US would be subject to a 15 per cent tariff while the EU would remove all tariffs on US industrial goods. The tariff of 50 per cent on the EU’s exports of steel, aluminium and copper would stay. Further, the EU has committed to buy $750 billion of US energy over the next three years and to invest $600 billion in the US over President Trump’s term. In the phraseology of the Second World War, it was “unconditional surrender”. 

Mr Trump’s detractors had warned of the dire effects of his brand of protectionism. The US would face higher inflation and lower growth. Equity and bond markets would tumble. The global economy would come crashing down. 

None of these forecasts has come true. In its July 2025 update for the world economy, the International Monetary Fund (IMF) raised its forecast for 2025 by 0.2 percentage points to 3 per cent, relative to its April 2025 forecast. That’s the rate at which the world economy has grown since 2011. As for the US economy, the IMF has revised its forecast for the US upwards to 1.9 per cent, from 1.5 per cent in its April forecast. That doesn’t look at all as if the US economy is hurting from Mr Trump’s policies. 

The American equity market is close to its record levels of the past five years. Yields on government bonds are below those in January 2025 when Mr Trump took over, and broadly in line with bond yields in 2023 and 2024. Inflation rose to 2.7 per cent in June, hardly the terrifying level it was projected to reach. 

Analysts are now trying to tell us why things have panned out very differently. Inflation staying low? American importers stockpiled goods in anticipation of higher tariffs, so the tariff increases are yet to translate into higher inflation. That may be true of current inflation, but why have forward-looking bond yields not moved up? Mr Trump’s critics conveniently ignore the role of oil prices in containing inflation. Brent crude oil prices are at least $8 below those a year ago — and Mr Trump is keen to drive them down even further. 

Financial markets not rattled? That’s because markets had expected much higher levels of tariffs and are relieved at the levels at which these have settled. Well, the present level of tariffs is seven times the level before Mr Trump took office!  Stock prices are sky-high? That’s because of the Artificial Intelligence (AI)  frenzy. But the AI frenzy was known when commentators were warning us that Mr Trump’s tariffs would cause a meltdown in equity prices. 

The Economist has been at the forefront of those castigating Mr Trump for his wayward ways and warning of the terrible consequences that will follow. It has now come up with an explanation for why the apocalypse hasn’t happened yet. 

The world economy, it contends, has a better capacity to absorb shocks today for a variety of reasons. Supply chains have become more efficient and resilient; changes in oil prices are less unsettling because a more diverse supply of energy is available; firms have become more adept at dealing with shocks; the services economy is less susceptible to shocks than an industrial economy; and governments are quick to take measures to cushion the economy from shocks. Capitalism has produced a “teflon economy”. The analysis begs the question: If the global economy is so resilient, why has The Economist got worked up about the disruptive effect of Mr Trump at all? 

As far as Mr Trump is concerned, his tariffs are bringing him higher revenues while protecting American industry and getting foreign firms to invest and manufacture in the US. All this without destabilising the financial markets. It’s no surprise that the torrent of criticism Mr Trump faces has left him unfazed. Mr Trump sees himself as a winner, not a whiner — and that’s not a minor difference.  

 

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