US Tariffs Pay Off as Europe Holds Fire

The United States has implemented some of the most extensive tariff increases in nearly a century since 2025, defying traditional economic forecasts that trade barriers reduce overall welfare. The expected economic costs were largely attributed to retaliatory measures by trading partners, but major players like the European Union and Japan have refrained from broad-based retaliation. This lack of response has blunted some of the adverse effects and allowed the US to benefit from tariff revenues, which have helped finance substantial corporate and income tax cuts.

Economic theory suggests that a large country can gain from unilateral tariffs if trading partners do not retaliate. By reducing import demand, the US has shifted part of the tariff burden onto foreign producers, improving its terms of trade. However, the overall macroeconomic effects remain ambiguous, as tariffs can stimulate domestic production but also reduce households' purchasing power and raise production costs.

The US tariff policy should not be analyzed in isolation but as part of a broader macroeconomic strategy. Tariff revenues, projected at roughly 400 billion US dollars a year in February 2026, are used to support domestic tax reductions, resembling a fiscal devaluation. This approach combines import tariffs with reductions in corporate and income taxation, aiming to improve international competitiveness without changing the nominal exchange rate.

The current tariff regime's stability is questionable, as Washington has reopened steel, car, and digital tax issues since April 2026. The EU must cut its dependencies and build a credible capacity to respond to potential further increases in US tariffs.