Why The Economist is always wrong about Trump’s tariffs

Economics PhD student Thabo Huntgeburth argues that Trump’s tariffs deliberately consolidate U.S. corporate power, revealing how mainstream models misjudge their impact by ignoring global structures and political motives.

It’s hard to resist clickbait – especially when a prestigious magazine like The Economist titles its video “Were we wrong about Trump’s tariffs?”. The video starts promisingly with a self-critical intro by the editor-in-chief: “We’ve had the biggest rise in tariffs since the 1930s. Lots of predictions, including from us, [warn] of serious troubles ahead […] here we are seven months on nearly [17/10/25] and the US economy hasn’t crashed.” Not only that, but one could also add that the US500 Stock Market Index grew 10% since the previous historical high this January on the day of Trump’s inauguration.

Despite this evidence from the stock market, the magazine’s economics editor responds to the question “were you wrong?” with a clear position: No. From there, a discussion ensues among a panel of experts from The Economist, making various points about the toxicity of the tariffs. All this talking makes it seem that Trump’s tariffs are simply unpredictable, erratic, and thoughtless. 

Trump’s tariffs work as intended and it is the analysis of The Economist and its models that are fundamentally flawed. These models presume that Trump acts haphazardly, which is misleading and misunderstands his underlying goal.

To the very contrary, I would argue that Trump’s tariffs work as intended and that it is the analysis of The Economist and its models that are fundamentally flawed. These models presume that Trump acts haphazardly, which is misleading and misunderstands his underlying goal. 

This is because The Economist fails to take a more holistic perspective on the international economic system and the domestic US political economy. Trump imposes tariffs in such a heavy-handed manner to reaffirm the dominance of US corporations in trade and distribute some of the gains to medium-sized businesses.

Excessive use of static models

The models of The Economist cannot appreciate this due to their decidedly insular approach. They predicted a disaster for the US economy on so-called Liberation Day, when Trump announced in April 2025 an expansive range of tariffs. The magazine based its prediction on models of the Yale Budget Lab. These models calculate an “effective tariff rate” that considers both the mix of tariffs and US imports. This is not all, though, since this calculation includes assumptions about “product substitution”, meaning that with these tariffs, people will start buying fewer imported goods. This would bring the effective tariff rate on “Liberation Day” to 19.8% and the value of tariffs to between 2.5 and 3.1 trillion US dollars over the next ten years.

These calculations are highly dubious, though. The reason is that the Yale Budget Lab relies on a general equilibrium model, assuming perfect competition and constant returns to scale. These technicalities mean that they are assuming that prices are rising in step with nominal tariffs and that domestic production is merely increasing by the same increment. From this, we can only conclude that tariffs do nothing more than rising prices for US consumers and preserving inefficient businesses.

This is not what happens in the real economy, though. In fact, US businesses have never invested more into production in the past years (like machines, plants, trucks, etc.), increasing fixed capital this year alone by almost 3%, amounting to 120 billion USD. Also, the stock markets expect historic returns in the industry, with the stocks of manufacturing firms growing by 12.7% since Trump’s inauguration. 

And far from perfect competition, there is evidence that even businesses unaffected by tariffs have been seizing the opportunity to increase their prices – so-called spillover effects – hitting poor households the hardest. In reality, instead of a general economic malaise, we see signals of increased profits for capital owners, at the expense of workers.

In reality, instead of a general economic malaise, we see signals of increased profits for capital owners, at the expense of workers.

Another blunder of The Economist’s use of static models is their political ignorance. The predictions for a tariff-induced depression assumed that all the tariffs announced up until “Liberation Day” would stay in place for the next ten years – the pinnacle of static modelling. Accordingly, the magazine’s economics editor explained that initially he did not consider that Trump would re-negotiate trade deals, make exemptions, or that businesses would relocate their production. An assumption that is completely out of touch with Trump’s long-standing rhetoric: saying already in 2016 that “[t]rade reform and the negotiation of great trade deals is the quickest way to bring our jobs back to our country,” or proclaiming in early 2025 that “great trade deals are making the U.S. economy stronger and helping American business and workers and farmers.” This ignorance is not unique to the journalist, as the Yale Budget Lab also made these assumptions to come up with catastrophic predictions for the American GDP.

Ignorance of global value chain dynamics

To be fair, The Economist also proposes some dynamic models on tariffs. In the panel discussion, the editor-in-chief argues that “the US [is] essentially building a fortress around itself”, meaning that the tariffs isolate US businesses from healthy competition. This would make businesses in the rest of the world much more efficient, leaving the US economy to deteriorate over time. The central idea here is that free global markets create perfect competitive conditions, resulting in the success of the most efficient businesses.

The global economy does not consist of a myriad of interchangeable businesses on equal terrain...trade-intensive sectors are dominated by a handful of super large corporations.

This sounds very desirable in the abstract model of Econ 101. Unfortunately, the global economy does not consist of a myriad of interchangeable businesses on equal terrain. The reality of globalised production is much more oligopolistic: trade-intensive sectors are dominated by a handful of super large corporations – so-called lead firms – which lay out their own specialised production networks across the globe. For example, to manufacture an iPhone, the production involves crossing the borders of 50 countries. These so-called global value chains (GVCs) are not a marginal phenomenon – they represent 70% of global trade.

Certainly, there is competition on the way. But this is deliberately structured as a monopsony. This means a myriad of suppliers – typically in a Global South country – undercut each other to gain a lucrative contract from a big buyer. Even the World Bank admits the unequal benefits of global trade: “[al]though buyer firms in developed countries are seeing higher profits, supplier firms in developing countries are getting squeezed.” While economic models capture this downward pressure on prices as efficiency gain, they are ignoring the economic power relations that these markets serve.

A model that takes account of GVC power relations concludes that the cost pressure from tariffs ripples down to workers in the Global South.

Where do US firms stand in this trade hierarchy? Examining the US trade structure is instructive: over 70% of imports are for further processing. This indicates that US firms are at the lower end of the GVCs, meaning that they have the upper hand in negotiating their suppliers down. This is especially so since exporting firms cannot forgo trading with the US, as the US total value of imports represents the biggest market in the world, more than double that of China.

With these power relations in mind, it seems illusory to assume that the costs of the tariffs will be 100% absorbed by US businesses (and subsequently US consumers) – but this is exactly the claim of The Economist, the Yale Budget Lab and other oft-quoted models. Even when US corporations are absorbing some tariff costs in the short-term, it is likely that they will use their position to renegotiate supply contracts in the mid-term to their benefit. In fact, a model that takes account of GVC power relations concludes that the cost pressure from tariffs ripples down to workers in the Global South. This is also in line with our current reality, where trade perpetuates precarious informal labour, such as 70-80 hour work weeks, widespread fainting at work, and an unusual amount of miscarriages.

Apolitical politics of tariffs

Nevertheless, The Economist experts do consider power relations when it comes to international negotiations. In fact, they express that they are “very gloomy about tariffs, because it is not clear how to get rid of them”. They assume that convincing the US government to get rid of tariffs requires other countries to exert some pressure. According to the journalists, the problem is that the international reaction to Trump’s tariffs has been extremely timid. Until today, most trading parties have not announced any retaliatory tariffs or suspended them, while the US keeps their tariffs in place.

What The Economist is presenting here as a problem is another piece of evidence that Trump’s tariffs are a roaring political success. Trump demonstrated that the US can aggressively disadvantage other countries at will. An approach that the panel of journalists denounces as a lack of “discipline”, creating uncertainty. The journalists argue that “there is a kind of randomness and arbitrariness to tariff policy, which makes it completely unpredictable and that acts as a constant weight on the US.” How, then, can we explain the record-high investments? What the panel misses is that even more important than tariff uncertainty is the trust that Trump will negotiate better deals.

The misconception of The Economist journalists is that Trump’s approach to tariffs is not a problem, but the recipe for success. As a trading partner to the US, you have to worry that a mere perception of the slightest provocation might trigger an extremely aggressive response – so you just duck your head instead of resisting. This is sometimes called rational irrationality: that is, behaving in unpredictable ways to instil extreme caution on the other side. This might not be nice, but this “irrationality” can explain the virtually complete absence of counter-tariffs and incredibly unfavourable agreements that Canada and the EU swallowed.

The key to understanding Trump’s behaviour is power politics – another thing that The Economist brushes over. Take the magazine’s consideration of politics. They argue that tariffs tend to linger on because they benefit some select sectors, which will engage in fierce lobbying to keep the tariffs in place. The Wall Street Journal underscores this political perception by recounting the 1960s “Chicken War”: West Germany promoted a tariff on American chicken to protect domestic farmers, to which the US responded with a retaliatory tariff on light trucks – which is still in place after 60 years.

This political model of tariffs considers every economic group as equally self-interested, trying to use the state outside the market for their own interest. This understanding is devoid of an actual polit-economic rationale. Instead of a separation of state and market, it is more helpful to think of economic and political groups as intertwined. A certain political ideology is likely to resonate particularly well with people in a certain socio-economic position. For example, as a medium-sized business owner, you might experience harsh price competition from foreign producers. The idea, then, that “China is ripping you off” makes perfect sense with your experience in the market. This socio-economic grounding of political ideology is in line with voter data: business owners are more likely to have voted for Trump, while income-poor Americans – those that don’t have disposable income to invest in stocks – are more likely to vote for Democrats.

The key to understanding Trump’s behaviour is power politics – another thing that The Economist brushes over.

The Trumpian political talent is to make politics that is attractive to small, medium and big business owners alike. This is not straightforward, since these factions do not necessarily share the same interests: mega corporations engage happily in global trade, while smaller businesses suffer under global price pressures. How then is Trump able to build a political coalition of capital owners?

He simply uses other policy instruments: taxes and state commissioning. Trump’s “big beautiful bill” introduced immensely regressive tax cuts – for every single Dollar of taxes cut for the bottom 95%, $35 go to the top 5%. At the same time, the Trump administration spends billions on tech firms: multiple $200 million contracts for OpenAI, Musk’s xAI, and Google, some undisclosed contracts with Bezos’s Amazon and Zuckerberg’s Meta as well as a $10 billion contract for Thiels’ Palantir. The financial markets are very optimistic about the tech-military entanglement, as Venture Capital investment into US defense tech firms more than doubled since last year to reach $91 billion this year alone.

The distributive dimension of these policies is completely overlooked. For example, the Yale Budget Lab considers the state’s tariff income of up to 3.1 trillion US dollars purely as economic cost, as if the state is burning the money. This selective analysis results in the misunderstanding of Trump’s policies as mere service to some sector, or even pure thoughtlessness. To understand in depth the rationale behind Trump’s tariffs, we need to take a holistic perspective of the economic and political tools that he employs to create his political project.

Blessing in disguise?

This political project is to unite the varying factions of US capital owners. That way, Trump reassures the political backing of those people who hold the economic power in the country. On the flipside, this means a complete marginalisation of the workforce – domestically and globally. This is already evident in the distribution of tax reliefs, the subsidies to the tech-war economy, and the likely imposition of tariff costs on consumers and workers in the Global South. The one benefit that I can come up with is that this concerted anti-worker effort of capital owners at least reveals clearly the common interest of the global workforce. It demonstrates that the problem is not that Trump is crazy, but that capitalism is threatening all of us.

The views and opinions expressed in SOAS Blogs are solely those of the respective authors and do not necessarily reflect the views of the organisation or act as an endorsement. 

Header image credit: Igor Omilaev via Unsplash.