Candice Horbacz
One year after the Trump administration’s "Liberation Day" — the informal moniker for the imposition of a new global tariff policy — a comprehensive review of economic developments challenges the optimistic evaluation published by American Compass, a conservative think tank. American Compass’s report, "The Tariff Tally," posited that these tariffs would modestly increase prices, stimulate domestic manufacturing demand, boost production and capital investment, and eventually lead to more manufacturing jobs with higher wages, ultimately reducing the trade deficit. However, a closer examination of economic data and theoretical frameworks reveals a narrative far more complex and often contradictory to the think tank’s assertions, indicating that the foundational premises underpinning American Compass’s claims are inconsistent with observed economic realities.
Background to the "Liberation Day" Tariffs
The concept of "Liberation Day" emerged from the Trump administration’s broader "America First" trade agenda, which sought to address perceived unfair trade practices and protect domestic industries through the strategic imposition of tariffs. Announced in February 2025, this policy initially targeted imports from China, Canada, and Mexico, with a 10 percent tariff on China taking immediate effect and escalating to 20 percent by March, alongside 25 percent tariffs on Canada and Mexico (though Canada and Mexico received a temporary USMCA exemption). The policy was expanded on April 2, 2025, to include a wider range of imports, a date subsequently dubbed "Liberation Day" by proponents, signifying a perceived freeing of American industry from foreign competition. The stated goals were ambitious: to rejuvenate American manufacturing, create jobs, and rectify the long-standing trade deficit, which the administration viewed as a sign of economic weakness. The tariffs were designed to make imported goods more expensive, thereby making domestically produced alternatives more competitive and encouraging reshoring of production.
The Flawed Framework of Tariff Impact
American Compass’s theoretical chain of events begins with a modest, quick-stabilizing increase in prices, dismissed as a short-term cost for long-term gain. This initial step, however, immediately encounters conceptual difficulties. The think tank conflates general inflation with relative price changes, which are crucial for assessing tariff effectiveness. While tariffs do not typically cause a persistent inflationary spiral, they significantly alter relative prices. Evidence from institutions like the European Central Bank and the Federal Reserve Bank of New York suggests a substantial pass-through of tariff costs to U.S. import prices, ranging from 86 percent to 95 percent. A recent National Bureau of Economic Research (NBER) working paper on the 2018-2019 trade war, while noting a larger foreign share of the burden than previously thought, still confirms higher import prices and domestic welfare losses. Critically, if foreign exporters bear most of the tariff burden, the intended boost in demand for domestic alternatives, a core tenet of tariff advocacy, is undermined.
Furthermore, the transmission of these costs to final retail prices, known as retail pass-through, is only partial, with studies by Cavallo et al. indicating a 24 percent pass-through, alongside increases in domestic substitute prices. This means consumers bear a portion of the cost. The overall price level’s response also hinges on monetary policy. With Federal Reserve accommodation, tariffs can lead to a one-time rise in the price level, as observed by research showing tariffs contributing approximately 0.76 percentage points to headline inflation. The Royal Bank of Canada also reported rising consumer prices across tariff-affected goods since "Liberation Day." American Compass’s dismissal of headline inflation impact as proof of minimal costs ignores the critical need for a lasting relative price effect to incentivize a shift to U.S. production.
Manufacturing Sector: A Selective Narrative
American Compass attributed positive manufacturing indicators, such as durable goods orders and industrial production data, to the tariffs, arguing that higher domestic prices stimulate demand for local output. However, this interpretation presents a selective view of the data, overlooking confounding factors and the nuanced impact of tariffs across different subsectors. Tariffs’ effects on manufacturing are highly dependent on the targeted goods. Tariffs on consumer goods might shift production, but tariffs on intermediate inputs like steel can raise costs for manufacturers relying on those inputs, potentially reducing their output and employment.
A detailed look at manufacturing subsectors reveals a different picture. Many intermediate inputs, including chemicals, pharmaceuticals, electronics, semiconductors, and energy imports, were exempt from the tariffs, accounting for an estimated 47 percent of imports in 2025. The strongest output gains were observed in tariff-insulated sectors like computers, communications, and semiconductors (7.6 percent) and electrical equipment and appliances (5.9 percent). These sectors largely benefited from a pre-existing AI boom that likely accelerated in 2025, rather than tariff protection. In fact, tariffs might have increased production costs in the electrical equipment sector due to duties on steel and copper content in components like transformers. Conversely, five of the ten durable goods manufacturing subsectors explicitly facing protection reported declining output post-"Liberation Day," with only primary metals and machinery posting modest gains of 1.4 percent and 2.5 percent, respectively. Attributing overall manufacturing resurgence to tariffs without more rigorous analysis is premature, especially when gains are concentrated in tariff-exempt sectors driven by unrelated trends.
Manufacturing sentiment also fails to uniformly support American Compass’s claims. While the think tank pointed to an increase in job openings late 2025 and early 2026, the latest data for February showed a decline, reverting to levels even lower than January 2025. Capacity utilization remained largely flat. Furthermore, Purchasing Manager’s Indices (PMIs) showed negative sentiment (below 50) for most of 2025, only improving in early 2026, while input costs remained significantly elevated, as reported by the ISM prices paid index. Surveys reported by The Economist indicated overwhelmingly negative sentiments among manufacturers regarding tariffs, with only a small neutral percentage and no positive responses. The Federal Reserve Board’s latest Beige Book summary for January and February 2026 further confirmed that nine of the twelve districts cited tariffs as a contributor to increased business costs. This comprehensive evidence suggests that the manufacturing industry, as a whole, is far from bullish on tariffs.
Investment: Distorted Incentives and Confounding Factors
American Compass argued that tariffs would encourage foreign exporters to relocate production to the U.S. and domestic firms to expand, leading to substantial increases in investment, assuming market confidence in the new policy. This view fundamentally misrepresents how tariffs influence economy-wide investment. While tariffs can redirect investment towards protected sectors, they generally reduce overall returns to investment in the United States through two main channels.
First, tariffs directly increase the cost of capital, especially when applied to capital goods and production inputs. This higher cost diminishes economy-wide investment incentives. An NBER working paper on auto tariffs, for instance, found that taxing inputs raises firms’ marginal costs, potentially negating the protective effect for producers of final consumer goods. Second, tariffs reduce investment by lowering overall economic output and returns to labor, creating a "tax wedge" between consumer prices and producer receipts. Lower after-tax wages disincentivize work, leading to fewer hours and reduced output, which in turn lowers returns to capital and thus investment. While tariffs might encourage resources to flow into protected sectors (e.g., steel), this often comes at the expense of industries that use those protected inputs (e.g., car manufacturing, construction), resulting in a net decline in total investment.
The investment data itself, as American Compass acknowledges, is mixed, showing no clear trends across manufacturing structures, industrial equipment, or new orders for industrial machinery. However, American Compass inconsistently applies caveats, citing confounding factors like green energy policies and the AI boom only when data is ambiguous, not when trends appear positive. Crucially, the analysis completely omits the significant impact of the 2025 tax law, which introduced permanent bonus depreciation and research and development expensing. These provisions significantly lower the cost of capital and increase investment incentives, making it challenging to isolate tariff effects. The Tax Foundation’s modeling estimated that these expensing provisions would increase the long-run capital stock by 1.2 percent, while the pre-Supreme Court ruling tariffs would reduce it by 0.4 percent.
Furthermore, foreign direct investment (FDI) data from the Bureau of Economic Analysis (BEA) shows that inflows of FDI were lower in 2025 than in the preceding four years, with most of it being reinvested earnings rather than new investment. This contradicts the notion of a surge in foreign investment due to tariffs. While some countries made non-binding investment pledges within framework agreements, these have yet to materialize into substantial new capital inflows. The expectation that tariffs should lead to higher overall capital investment is incompatible with established economic principles regarding returns to capital.
Productivity, Growth, and the Unaddressed Counterfactual
American Compass argued that tariffs would boost manufacturing productivity and economic growth, despite potential short-run costs. This claim is undermined by internal inconsistencies, as the report simultaneously acknowledged that the investment necessary to drive productivity had not yet materialized and capacity utilization remained flat. Without these precursors, attributing increased manufacturing productivity growth to tariffs becomes tenuous. Alternative drivers, such as the AI boom, offer a more plausible explanation.
While manufacturing productivity did grow at an annualized rate of 1.6 percent for three quarters post-"Liberation Day," this bucked years of stagnation. However, American Compass offered no explanation for the subsequent decline in Q4, which the Bureau of Labor Statistics (BLS) attributed to falling output in both durables (-2.6 percent) and nondurables (-3.1 percent) sectors – the opposite of what would be expected if tariffs were enhancing productivity.
Regarding overall economic growth, American Compass criticized economists for predicting significant slowdowns or recessions that did not fully materialize. However, these predictions were often conditional on the tariffs being immediately implemented at their announced scope and rates. Delays, lower rates, and numerous exemptions subsequently narrowed the tariffs’ impact. Economists, including the Tax Foundation, revised their projections accordingly, largely forecasting slower growth compared to a counterfactual, not an absolute contraction or recession.
American Compass’s claim of accelerated growth in 2025, based on a 2.9 percent GDP growth in the last three quarters, is flawed by its omission of Q1 2025. In Q1, President Trump’s earlier tariff announcements prompted firms to front-load imports to avoid higher future duties, leading to a surge in inventories and a 0.3 percent decline in GDP (as imports are subtracted from GDP calculations). Including Q1, real GDP grew by 2.1 percent in 2025 annually, lower than the 2.8 percent growth in 2024. Furthermore, real final sales to domestic producers, a measure that excludes net exports and government spending, showed a steady decline in 2025, contradicting the idea of tariffs spurring broader economic growth.
A critical omission throughout American Compass’s analysis is the absence of a counterfactual. Judging policy effects requires asking "what would have happened without the tariffs?" Economic models that predict GDP reduction due to tariffs do not necessarily mean an absolute economic contraction, but rather lower output than would have occurred in a tariff-free scenario. This distinction is crucial and cannot be gleaned by simply observing annual growth rates.
Employment, Wages, and the Trade-Off
American Compass suggested that tariff effects on employment and wages would be mixed in the short run, but that increased investment would lead to long-term gains. This assertion rests on the incorrect premise of increased total economy-wide investment. In reality, tariffs are expected to reduce total output, hours worked, and wages in the long run.
University of Toronto trade economist Joseph Steinberg’s research highlights that while tariffs on manufacturing can increase overall manufacturing employment in the long run, this comes at a cost to overall economic output. The short run involves a costly adjustment period, as domestic suppliers may not be readily available, and new capital investments take years. The immediate effects are often higher input costs without commensurate increases in domestic production, leading to manufacturing job losses. This implies a sectoral gain at an overall economic loss, rather than an overall long-term gain.
Recent data aligns with this short-run perspective: the manufacturing sector continued to shed jobs, losing 88,000 year-over-year as of January. Overall, 2025 was characterized as the weakest year for job growth since the pandemic, with some economists describing it as a "hiring recession." Real wages held steady overall, but in the manufacturing sector, real wage growth was lower post-"Liberation Day" compared to the preceding year, as even American Compass’s own graphs show. American Compass points to recent positive trends in the last three months of 2025 as signs of tariffs working, but these could be due to compositional changes (lower-wage employees leaving the sector artificially raising average wages) or other factors like the AI boom, explanations the think tank fails to consider.
The Trade Deficit: An Inconsistent Logic
The final link in American Compass’s chain of events concerns the trade deficit, claiming tariffs could quickly shift bilateral imbalances and slowly reduce the overall deficit. While correctly acknowledging the saving-investment identity (national saving minus national investment equals net exports), American Compass’s analysis falters in assuming that capital inflows will only temporarily increase trade deficits. Tariffs, by themselves, do not fundamentally alter national saving and investment imbalances; thus, they cannot fundamentally change the overall balance of trade.
If, for instance, Japan’s pledged $550 billion trade deal materializes as increased capital investment into the U.S., the resulting net capital inflow would increase the U.S. current account deficit dollar for dollar. This effect would persist, as continued foreign inflows would be required to maintain the larger capital stock, preventing the trade deficit from falling. A declining trade deficit would, in fact, signal an unwinding of the capital stock and an outflow of income, making it impossible to simultaneously sustain a larger capital stock financed by foreign capital and reduce the trade deficit. Paradoxically, if overall economic growth did increase as American Compass assumes, it would likely increase the trade deficit by boosting relative returns in the U.S. and attracting more capital inflows.
Data from 2025 supports the view that tariffs primarily divert trade rather than reduce the overall deficit. While the U.S. goods trade deficit with China fell significantly, the overall goods and services trade deficit remained roughly flat year-over-year ($901.5 billion in 2025 compared to $903.5 billion in 2024), and the goods trade deficit actually rose by 2.1 percent to $1.24 trillion. Adjusting for inflation, the goods trade deficit reached its highest recorded level. This indicates that reduced imports from China were largely mirrored by increased imports from other trading partners, particularly in Southeast Asia, rather than reshoring of production to the U.S.
On currency effects, American Compass claimed detractors were proven wrong by a weaker dollar in 2025. Standard economic theory predicts tariffs lead to currency appreciation by reducing import demand. However, as the Tax Foundation noted in April 2025, the volatile nature of the tariff regime and heightened policy uncertainty can counteract this, potentially leading to depreciation. An NBER working paper from January 2026 corroborated this, finding that tariff increases lead to appreciation, but policy uncertainty leads to depreciation. American Compass’s claim of a weaker dollar supporting its thesis, while simultaneously touting foreign investment pledges (which would increase demand for the dollar and push its value up), reveals another internal inconsistency in its framework.
The Reality of Retaliation and Unfulfilled Promises
American Compass contended that tariffs prompted trade deals rather than retaliation. The reality is far more nuanced. In 2025, China indeed retaliated tit-for-tat, matching U.S. tariffs and imposing non-tariff barriers on U.S. agriculture exports. While some retaliatory tariffs were later reduced and agricultural purchases resumed, China still maintains a 10 percent retaliatory tariff. Canada also retaliated, boycotting certain American products, though most of its tariffs were withdrawn due to USMCA exemptions. The European Union threatened retaliation but did not implement widespread tariffs.
More significantly, trading partners have responded by pursuing new alliances with each other, effectively leaving the U.S. behind as it shifts towards less trade openness. Canadian Prime Minister Mark Carney’s offer to "broker a bridge" between the EU and Indo-Pacific countries for a new free trade agreement exemplifies this trend. When the U.S. is perceived as an unreliable trade partner, it risks being excluded from future agreements that could otherwise strengthen its economy.
The "trade deals" announced by the Trump administration were largely frameworks for future negotiations, lacking enforcement mechanisms and formal ratification by legislatures. For example, the Phase One deal with China, signed in January 2020 after an initial trade war, focused on China’s commitment to increase U.S. export purchases by $200 billion over two years. After this period, China had only met 58 percent of its targets, demonstrating the fragility and limited enforceability of such agreements. The fundamental tension remains: tariffs cannot simultaneously be a temporary negotiating tactic to be lowered after concessions and a means of permanent protection, as American Compass’s framework implies. All deals announced last year left U.S. tariffs higher than pre-"Liberation Day" levels, indicating a preference for sustained protection over free trade.
Conclusion: A Mismatch Between Theory and Reality
American Compass’s "Tariff Tally" presents a theoretical framework for tariffs’ impact on prices, manufacturing, investment, productivity, employment, wages, economic growth, and the trade deficit that consistently breaks down under scrutiny. The most fundamental flaws lie in its claims that tariffs should increase total capital investment relative to a counterfactual and that these sustained increases in investment, including foreign capital inflows, can coincide with a sustained decrease in the trade deficit. These mechanisms are economically unsound. Tariffs fundamentally create a "tax wedge" that reduces overall returns to labor and capital, even as they redirect resources across sectors, often at a net economic cost.
Throughout its analysis, American Compass selectively interprets economic data, attributing positive trends to tariffs while invoking alternative explanations for mediocre or negative outcomes. The evidence, drawn from numerous reputable economic institutions and studies, paints a consistent picture of tariffs imposing costs on consumers and businesses, distorting investment incentives, and failing to achieve their stated goals of broadly boosting manufacturing, employment, and reducing the trade deficit. The observed economic shifts are more plausibly explained by other factors, such as the AI boom and existing tax policy changes, or represent a costly reallocation of resources rather than overall economic enhancement. These theoretical problems are not merely short-term aberrations that will be resolved with more time; they reflect fundamental inconsistencies in the proposed economic mechanisms, indicating that the positive case for tariffs constructed by American Compass is deeply flawed.
