Mad About Affordability? Trump’s Tariffs are to Blame

Last week, the Kiel Institute for the World Economy released a report that detailed who exactly has paid the costs of President Trump’s tariffs. In a scathing indictment of the Trump Administration’s claim that foreign entities will “eat” the tariffs, resulting in no increased costs to everyday Americans, researchers at Kiel estimated that 96% of the tariff burden has been borne by US consumers and businesses. Of the $200 billion in tariff revenue raised in 2025, $192 billion represents value that was passed on to consumers through higher prices incurred by US importers. In simpler terms, $192 billion of wealth was extracted from you and me and directed towards the US Treasury as a result of President Trump’s tariffs policy.

Analyzing over 25 million transactions valued at nearly $4 trillion, the Kiel Institute found that foreign entities failed to lower their costs in response to the tariffs but rather accepted a reduction in export volume to the US.  Alternative markets in Europe and Asia allowed these firms to shift sales elsewhere without having to cut margins. This should have been expected: US importers have long-standing relationships with foreign suppliers and cannot easily switch to alternative providers. The notion that US firms will engage in import-substitution—that is, they will find domestic firms to supply their needs—is impeded by the makeup (and relative wealth) of the US economy. Our workers don’t knit Nike sneakers; they design them.

This speaks to the root of the issue. Trump Administration officials believe that our current account deficit is a problem that should be corrected. In reality, this deficit is an accounting identity that reflects our relative wealth to other countries—as well as those countries’ desire to send capital to the US. The only way we could turn our current account deficit into a surplus would be for the US to become poorer, or for the US dollar to weaken substantially against other currencies. Mercantilism—the idea that a country’s wealth is dictated by its current account surplus—was rightly disproved as a conduit to economic prosperity in the late 18^th century. Yet rather than read any history on the subject, President Trump sent Commerce Secretary Howard Lutnick to Davos last week to argue that “globalization has failed the US.”

Any economist will tell you that tariffs are a blunt instrument that are only beneficial in specific circumstances. For instance, if a country is trying to build up a nascent industry and would like to protect it from global forces that could impede its development. However, employing them across the board to try to export our way to prosperity is not a sound strategy. Americans will get poorer in the process—and most have since Trump’s “Liberation Day.” It is not surprising that affordability is the top issue for voters in the coming mid-terms. Purchasing power has indeed declined.

The more telling reality from the Administration’s stance on foreign trade is that officials fail to understand that a current account deficit has to be matched by a capital account surplus. (Again, this is an accounting identity.) It is not so much that we want to buy more goods from China or India than they buy from us, but rather that these countries wish to send us more capital than we send them. If they did not recycle the funds we send them back into US capital and real estate markets, then we would not be able to purchase as much from them. But Americans seem to like the price of foreign consumer goods, and foreign firms enjoy the stability of the dollar and the US treasury market.

I apologize if this has been a bit esoteric, but these concepts can be difficult to explain without charts and multi-variable calculus. The upshot is that you and I have been forced to pay more for everyday goods and services because the people in this Administration fail to understand how the global economy works. This is not a new phenomenon—as most politicians don’t understand these dynamics. But good politicians defer to the experts when they are beyond their depth. Let’s hope that President Trump begins to do this. But I wouldn’t hold my breath.