Six months after President Donald Trump declared a new era of protectionism with his sweeping "Liberation Day" tariffs, the global economic landscape looks surprisingly resilient. While economists predicted catastrophe and markets braced for impact, the full-scale reckoning has not materialised. Instead, the story is one of adaptation, evasion, and the enduring strength of international commerce.
The Gap Between Threat and Reality
On April 2nd, 2025, President Trump unveiled tariffs with much fanfare, presenting figures he claimed showed unfair treatment of America. The immediate reaction was one of alarm. Torsten Slok of Apollo Global Management put the odds of a tariff-driven recession in the United States at a staggering 90%. Certain sectors of the American economy have indeed felt the pinch. Prices for durable goods like appliances and cars rose by over 3% at an annual rate in Q2 2025, the fastest pace in decades excluding the pandemic. Toy prices, largely imported from China, jumped nearly 5%.
Overall, tariffs are estimated to be adding around 0.3 percentage points to inflation. Employment in tariff-exposed manufacturing and retail has weakened, and consumer sentiment has dipped. Yet, against expectations, the broader economy has held up. America's GDP grew at an annualised rate of 3.8% in the second quarter, with strong consumer spending and a booming stock market. Globally, the OECD upgraded its growth forecast to 3.2% in September.
A key reason is that the actual tariffs imposed have been far gentler than the initial threats. While America's average tariff rate was estimated to hit 30% in April, current models place it closer to 18%. The 145% tariff threatened on China was implemented at barely a third of that rate. Promised tariffs on South Korea were cut from 25% to 15%, and a bizarre 50% duty assigned to Lesotho was never applied.
Loopholes, Exemptions, and Creative Compliance
The impact has been further blunted by widespread carve-outs and delays. Nearly half of America's imports have been exempted from the new duties. Critical electronics like smartphones and computers were spared entirely. Brazil's headline 50% tariff includes nearly 700 exemptions, bringing the effective rate down to about 30%. For Canada, a 35% tariff is effectively near 6% in practice, as goods qualifying under the United States-Mexico-Canada Agreement (USMCA) are exempt.
Even within targeted sectors, loopholes abound. Trump's 100% pharmaceutical tariffs, announced for October 1st, excluded generics (90% of the US market) and branded firms with US investment plans. The measures were then paused as talks began. This gap between policy and practice is stark. The Budget Lab at Yale estimates America's implied tariff rate from customs data is roughly half of what official policy suggests.
This discrepancy stems from several factors. Firms engaged in "front-running," stockpiling imports before duties took effect. There is also significant "non-compliance," estimated at 10-15%, including tactics like under-invoicing and reclassification. For instance, the share of Canadian exports deemed compliant under USMCA rules has jumped, suggesting widespread relabelling of goods.
The Global Response: Diversification, Not Retaliation
Perhaps the most consequential development has been the lack of widespread, coordinated retaliation from America's trade partners. Economic models assumed tit-for-tat tariffs, but most countries have held fire. This is partly because America's share of global imports has shrunk from a fifth at the turn of the century to about an eighth today. Brazil, for example, now sends only 13% of its exports to the US, down from 26% in the early 2000s.
Instead of retaliating, nations are aggressively diversifying. China, the primary target, has seen its exports to America plunge, but its overall trade grew 6% year-on-year from June to August 2025. Exports to South-East Asia surged by a fifth and to Europe by nearly a tenth. Chinese textiles flooded European markets, and electronics poured into South-East Asia.
Trump's policies are also pushing other countries closer together. Canada has deepened ties with Mexico ahead of USMCA renegotiations. The EU signed a deal with Indonesia and is nearing a pact with India. Many nations are edging closer to China, with ASEAN upgrading its agreement with Beijing and Chinese investment in Brazil surging over 60% in the first half of 2025.
The American Balance Sheet: Costs and Uncertain Futures
So, what has America gained? Tariff revenues have increased by $19 billion a month compared to last year, offsetting some tax cut costs but not eliminating the large budget deficit. The trade deficit is widening, promised manufacturing investment hasn't materialised, and the tariffs risk becoming a regressive tax as revenue is used to compensate losers like farmers.
American firms have so far absorbed most of the cost, aided by fat profit margins and pre-levy inventories. But as these buffers erode, prices will rise. The Yale Budget Lab estimates tariffs will ultimately reduce average household incomes by about $2,400 per year. The staggered rollout risks turning a potential one-off shock into persistently higher inflation, which could force the Federal Reserve to keep interest rates higher for longer.
The next phase of global trade will be shaped by how nations navigate both America's tariffs and China's industrial capacity. Some, like Mexico and the EU, are erecting their own barriers against a flood of Chinese goods. Yet, the logic of openness persists. Small economies are banding together in pacts like the Future of Investment and Trade Partnership. The Regional Comprehensive Economic Partnership (RCEP) is exploring expansion. Even governments sceptical of globalisation, from India to Indonesia, speak of defending trade. The liberal order may lack its traditional leader, but it has not lost its disciples.
