American Compass Tariff Claims Break Down Under Scrutiny

For the one-year anniversary of “Liberation Day,” American Compass, a conservative think tank that supports tariffs, published an evaluation of economic developments since the imposition of Trump’s new global tariff Tariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. policy.

In “The Tariff Tally,” American Compass argues that tariffs would modestly increase prices, improving conditions in the manufacturing sector by increasing demand for domestic output and boosting production. This would be followed by a surge in capital investment, and then productivity and growth would rise, eventually materializing into more manufacturing jobs with higher wages. As capacity comes online, the trade deficit would fall over time.

The piece presents a flawed, inconsistent framework for how tariffs affect the economy. At each stage, key links in the theoretical chain of events American Compass proposes break. The analysis also relies on selective and asymmetric presentations of economic indicators: when the economic data is good, American Compass points to tariffs; when the data is mediocre or bad, it says it is too soon to make a judgment or points to other potential causes.

The evidence overall paints a far different picture than American Compass presents, and a consistent theoretical framework undercuts its assertions of how tariffs should be expected to impact the economy moving forward.

Prices

The entire chain of events that American Compass suggests will occur after the imposition of tariffs begins with the impact on prices. It claims that tariffs will increase prices modestly and stabilize quickly, describing this as a short-term cost for a long-term gain. It claims that detractors say, “prices will increase substantially and drive an inflationary spiral,” and that if inflation Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin surged, it would be a sign of much higher upfront costs and indicate the tariffs were ineffective.

American Compass’s analysis confuses which price concept is relevant for analyzing tariffs. We should not expect tariffs to cause an inflationary spiral or a persistent rise in inflation. In fact, what matters for American Compass’s framework is the movement of a different price concept altogether: relative prices.

First, tariffs can increase the price of imported goods. Import prices are the costs paid to bring a good into a country, not the final retail prices paid by consumers at stores, and increasing what it costs to import a good by imposing a tariff will discourage people in the US from buying foreign goods. The extent to which import prices rise depends on the relative elasticity of supply and demand for these goods. Most evidence so far suggests importing firms in the US, not foreign exporters, bear most of the tariff burden, implying that tariffs are raising the cost of buying goods from abroad. The European Central Bank, Federal Reserve Bank of New York, and others establish a range between 86 percent and 95 percent pass-through to US import prices. A new NBER working paper on the 2018-2019 trade war suggests foreigners bore a larger share of that tariff burden than previously understood, but still finds higher prices for imports and resulting domestic welfare losses. If foreigners bore most of the tariff burden, tariffs would not meaningfully boost demand for domestic alternatives to imports, undermining what tariff proponents claim is the main goal of the policy.

Second, tariffs may increase final retail prices that consumers pay if importers pass tariff costs from increased import prices forward. Domestic producers may also increase the prices of domestic substitutes in response. How much of the tariff costs reach consumers depends on retail pass-through. The extent to which this occurs depends on how much US firms can shift the tax A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.. Current evidence from Cavallo et al. suggests partial pass-through of 24 percent as well as increases in domestic substitutes. Pass-through to the retail level is not necessary for tariffs to discourage imports. How the overall price level changes further depends on monetary policy.

Lastly, tariffs on their own do not generate persistent inflation, but with Federal Reserve accommodation, they may result in a one-time rise in the price level. Depending on the size of tariffs, firms may be prompted to lay off workers due to higher costs from the tax imposed; this could prompt the Federal Reserve to accommodate the tax, raising the price level to allow real wages to fall while nominal wages remained constant, averting the large rise in unemployment. There is some evidence that tariffs have caused the overall price level to rise, contributing by about 0.76 percentage points to headline inflation—meaning without tariffs, measured consumer prices would have been lower. Further, research from the Royal Bank of Canada shows that across categories of goods that face tariffs, consumer prices have risen since Liberation Day.

American Compass claims there was little impact on headline inflation, and that this is evidence tariff costs were small and short-lived, without acknowledging that its framework requires a lasting change in relative prices. Moreover, even if headline inflation stayed the same after tariffs (evidence indicates it did not), it would not indicate the absence of a relative price effect or lasting costs. Without a permanent relative price effect that increases the price of foreign goods relative to domestic ones, tariffs would not change incentives to shift production back to the US.

American Compass focuses on the wrong price concept to determine whether tariffs are having an effect, and it fails to engage with studies finding that tariffs have contributed to headline inflation.

Manufacturing Sector Conditions

American Compass claims that higher domestic prices caused by tariffs will boost demand for domestic output, improving conditions like utilization, output, and sentiment in the manufacturing sector, citing several positive indicators it attributes to tariffs. It argues that detractors claim tariffs will hurt manufacturing by raising input costs and slowing overall economic growth, which will hurt the manufacturing sector even further.

The effects of tariffs on the manufacturing sector will depend on the types of goods that are targeted and the overall composition of the domestic manufacturing sector. For example, if tariffs target consumer goods like toys, we would expect them to raise the price of toy imports and incentivize domestic producers to shift toward toy production, increasing production and employment in that subsector. If tariffs target intermediate inputs and capital goods like steel or machinery, we would expect them to raise input costs and reduce employment and output for certain manufacturers that rely on those inputs, while steel and machinery-producing firms would benefit.

While American Compass highlights durable goods orders and industrial production data to argue that manufacturing is experiencing a resurgence, its presentation of the data is selective and ignores other factors that may better explain those trends.

To assess whether tariffs are boosting output in manufacturing, it is more useful to look at specific subsectors, because some sectors are more tariff-exposed than others. Many intermediate inputs were exempt from the tariffs, including chemicals, minerals, pharmaceuticals, electronics, semiconductors, aircraft, and energy imports. We estimated that 47 percent of imports were exempt from the tariffs in 2025.

The table below shows the change in output in 9 of the 10 durable goods manufacturing subsectors in the FRED database. We exclude aircraft and other transportation due to volatility in that dataset.

The strongest output gains are in the computers, communications, and semiconductors subsector (7.6 percent), followed by electrical equipment and appliances (5.9 percent). The computers and semiconductors subsector was significantly insulated from the new tariffs due to the exemptions on both the inputs and outputs of that sector, and has been undergoing an AI boom that preceded the tariffs and likely accelerated in 2025. Similarly, the electrical equipment subsector has also benefited from the AI boom, which has increased demand for data center inputs like transformers. Tariffs may have made it even more costly to produce in that subsector, as transformers, for instance, contain steel and copper content that is subject to the Section 232 tariffs.

Looking at the other sectors that explicitly face protection, five reported declining output post-Liberation Day, with only primary metals and machinery posting gains of 1.4 percent and 2.5 percent, respectively.

While tariffs may support some sectors over time, it is simply too early to draw any meaningful conclusions from this data, especially without more sophisticated analysis. Currently, gains are concentrated in sectors least exposed to tariffs and most affected by unrelated trends.

Nonetheless, American Compass cites “impressive growth figures” after Liberation Day as very encouraging signs for tariffs, without acknowledging that the strongest output growth is occurring in tariff-exempt sectors.

Output Up Mostly in Manufacturing Subsectors Related to AI Boom, Not Tariffs

Sector	Post-Liberation Day (April 2025 to Feb 2026)
Computers, Comms & Semis	+7.6%
Motor Vehicles & Parts	-0.2%
Electrical Equipment & Appliances	+5.9%
Primary Metals	+1.4%
Nonmetallic Mineral Products	-0.2%
Wood Products	-2.3%
Fabricated Metal Products	+0.5%
Machinery	+2.5%
Miscellaneous Manufacturing	-1.2%
Furniture & Related Products	-2.4%
Total (Excluding Aircraft and Other Transportation)	+1.2%

Source: Federal Reserve Board, Industrial Production and Capacity Utilization (G.17 Statistical Release); Tax Foundation calculations. American Compass acknowledges that capacity utilization has been roughly flat over the past year, but points to an increase in manufacturing job openings at the end of the year and early into 2026 to assert that the outlook for the sector is improving. The latest data on job openings shows a decline in manufacturing job openings for February, bringing it back to even lower than the openings that were reported in January 2025. Openings are volatile from month to month, but there is no clear evidence of a trend suggesting an improvement in this metric that could be attributed to the president’s tariffs.

American Compass cites the Purchasing Manager’s Indices (PMIs) to suggest that manufacturing sentiment has improved. But its own graph shows that S&P manufacturing PMI was below 50 (negative) for most of 2025, only improving early in 2026. The latest report looking at the ISM prices paid index, a measure of input costs, shows prices remain significantly elevated, which will affect the future outlook.

Additionally, sentiments reported in surveys reflect not just the tariff policy, but any other policies or trends that might affect the industry, such as improved tax polices. Digging deeper into those surveys, The Economist reports that manufacturers overwhelmingly report negative sentiments when mentioning tariffs, with only a small percentage of respondents reporting neutral sentiments, and none reporting positive. The same article also reports that economic policy uncertainty remains considerably elevated, as President Trump has announced his intention to impose more tariffs once the Section 122 tariff expires. In the Federal Reserve Board’s latest Beige Book summary for January and February 2026, another measure of business sentiment, 9 of the 12 districts mentioned that tariffs contributed to increased costs for businesses.

Overall, the evidence does not suggest that the manufacturing industry as a whole is bullish about tariffs.

Investment

American Compass then turns to total private sector investment, arguing that “tariffs encourage exporters in other countries to relocate production into the United States and domestic firms to expand” and that “if the market has confidence that the new status quo will persist, it will drive substantial increases in investment.” American Compass characterizes the opposing view as follows: “For all the reasons that tariffs would weaken the sector, they also make it an unattractive place to build. Investment should slow and foreign firms should steer clear altogether.”

Tariffs can change relative incentives for investing in protected sectors, but American Compass is fundamentally incorrect about the way tariffs affect economy-wide investment incentives. It notes several appropriate caveats but applies these caveats inconsistently, mostly invoking them when the data is mixed but not when trends appear positive. Notably, the analysis omits discussion of how the 2025 tax law’s permanent bonus depreciation Depreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco and research and development expensing provisions would lower the cost of capital and increase investment.

Contrary to American Compass’s claims, tariffs reduce the returns to investment in the United States. This occurs through two channels.

First, tariffs reduce investment by directly increasing the cost of capital. When tariffs apply to capital goods and production inputs, they raise the relative price of capital goods and increase the cost of capital. A higher cost of capital reduces economy-wide incentives to invest, even if relative incentives change across sectors. For example, a new NBER working paper on auto tariffs finds that policies that tax inputs raise firms’ marginal costs, potentially offsetting the protective effect for producers of tariffs on final consumer goods.

Second, tariffs reduce investment by lowering returns to labor and reducing overall economic output compared to what it would have been without the tariff. A tariff creates a wedge between the price a consumer pays and the price a producer receives, reducing the income left to compensate workers and capital owners. Lower after-tax wages reduce the return to work, leading to fewer hours worked and lower total output. When output falls, the return to capital falls, reducing investment.

Some tariff supporters argue that tariffs can increase domestic production and investment because they reduce demand for foreign-produced goods.

Tariffs can induce more resources to flow toward producing protected goods by changing relative returns, but total, economy-wide investment will be lower than it otherwise would have been because of lower returns to capital. Steel tariffs, for instance, may help domestic steel producers expand production but cause a greater decline in industries that use steel, from oil and gas extraction to car manufacturing to residential housing construction.

A firm shifting production to the United States would avoid the tariff, but it would not increase total domestic investment and output. The level of investment and the size of the capital stock are determined by the return to investment in the United States. If a firm invests in the United States to avoid a tariff, it will, at the margin, drive down the return to capital on the rest of the capital stock. This will reduce the incentive to invest in other projects, leading to an offsetting reduction in investment elsewhere.

American Compass acknowledges that investment data is mixed, with no clear trends emerging across investment in manufacturing structures, industrial equipment, or new orders for industrial machinery. Here, it considers confounding factors, including changes to green energy and semiconductor policies and the AI boom. The analysis partially attributes the mixed picture to tariff instability. A frequently changing tariff environment and heightened trade policy uncertainty do exert economic costs, reducing investment, but this would be an additional cost on top of the reduced returns to capital from the tariffs.

Completely absent from the analysis, however, is an acknowledgement of the significant changes in tax policy enacted in 2025. Permanent full expensing Full expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for capital investment in equipment and domestic research and development, and temporary expensing for qualified production property (certain structures), increase incentives for capital investment by lowering the cost of capital.

At Tax Foundation, we modeled the long-run economic effects of both the new tax law and the tariffs, estimating that improved expensing provisions would increase the long-run capital stock by 1.2 percent and that the tariffs imposed prior to the Supreme Court ruling (which struck down some of Trump’s tariffs) would reduce the long-run capital stock by 0.4 percent. (Other changes to individual income taxes in the new tax law would have a negative effect on the capital stock.) Fully disentangling the effects of tax policy changes from tariffs would require a more sophisticated approach than the one offered in American Compass’s piece.

Several countries have made investment pledges as part of framework agreements negotiated with the Trump administration. Currently, those pledges are largely non-binding, and foreign direct investment (FDI) is showing no major surges. Instead, the Bureau of Economic Analysis’s international transactions data shows that inflows of FDI (which measures foreign investors establishing, expanding, or reinvesting into businesses in the United States) were lower in 2025 than in each of the past four years. And most of that FDI was reinvested earnings, rather than new investment.

Though American Compass discusses some outside factors and messiness in the investment data, its expectation that tariffs should lead to higher capital investment overall is incompatible with the way tariffs affect total returns to capital.

Manufacturing Productivity and Economic Growth

American Compass argues that tariffs should create strong incentives to boost manufacturing productivity and economic growth, even though there may be some short-run costs. Detractors, it says, argue that tariffs have the opposite effect: by protecting inefficient producers from competition, tariffs discourage productivity gains and slow economic progress.

The argument American Compass presents is neither internally nor intellectually consistent: the analysis points to manufacturing productivity and GDP increases after Liberation Day, while acknowledging that the increased investment that would drive productivity has not yet materialized. If the investments have not taken place, and capacity utilization has not increased—as shown by American Compass’s own analysis—then increased manufacturing productivity growth cannot be attributed to tariffs. Other factors, such as the ongoing AI boom, are more plausible drivers of the manufacturing productivity increase.

American Compass notes that manufacturing productivity grew at an annualized rate of 1.6 percent during the three quarters after Liberation Day, bucking years of stagnation. It recognizes that manufacturing productivity declined in Q4 but offers no explanation as to why that would occur if tariffs were boosting productivity. Looking at the data, we can see that the Bureau of Labor Statistics reports in its “ Major Sectors Labor Productivity ” table that the Q4 productivity decline was driven by falling output in both the durables and nondurables sectors (-2.6 percent and -3.1 percent, respectively)—the opposite of what we would expect if tariffs were enhancing productivity.

American Compass criticizes economists for predicting significant slowdowns in economic activity, or even recessions, that did not materialize. But economists’ predictions that were made in April 2025 were conditional on the tariff increases immediately taking place and covering all imports, as announced. Shortly thereafter, the tariffs were delayed until August 2025, and the rates that eventually went into effect were lower than the ones announced in April. Additionally, the scope of the tariffs was narrowed by numerous exemptions, despite Trump originally proclaiming that there would be “ no exceptions ” to his tariff policies.

Tax Foundation gradually revised its economic projections with each change to tariff policy, as did other groups. Our projections were specifically forecasts of long-run GDP compared to a counterfactual, not 2025 GDP, and at no point did Tax Foundation forecast a recession A recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. in 2025, even when tariffs were at their peak. While one can find a handful of commentators who made dire predictions, others were predicting slower growth, not recessions.

Regarding the impact on overall economic growth, there is little evidence that tariffs accelerated growth in 2025. In fact, the topline estimate shows no such acceleration, contrary to American Compass’s framing.

American Compass compares 2024 growth to post-Liberation Day GDP growth, arguing that the 2.9 percent GDP growth in the last three quarters of 2025 indicates that the tariffs did not slow growth, noting that growth would have been even higher in Q4 without the government shutdown. First, it is improper to include only the last three quarters of 2025, given that some tariffs were imposed in Q1 and that the announcements alone were driving business activity before the Liberation Day tariffs went into effect.

In February 2025, President Trump announced new tariffs on China, Canada, and Mexico. The 10 percent tariff on China took effect immediately and rose by another 10 percent in March, at which point 25 percent tariffs on Canada and Mexico also went into effect with a USMCA exemption. At the time, the exemption was scheduled to expire after 30 days, but was eventually extended. The president also announced in February that he would develop a plan to apply tariffs to other countries that would take effect on April 2, which eventually became the Liberation Day tariffs.

The impacts of these tariffs, both imposed and announced, were immediately evident in the underlying Q1 GDP data. Firms responded by front-loading imports in Q1 to avoid paying higher duties in the future, leading to a surge in inventories. GDP actually declined in Q1 by 0.3 percent due to the import surge, as imports are subtracted from GDP when it is calculated to avoid double counting consumption. American Compass ignores Q1 in its analysis.

Looking at the full year-over-year comparisons, real GDP grew by 2.1 percent in 2025 from the annual level, lower than the 2.8 percent growth in 2024 from the annual level. (American Compass appears to mistakenly cite 2.4 percent as growth for 2024 in its graph.)

We can also look at another metric of economic growth that is not confounded by reductions in government spending: real final sales to domestic producers. This measure also omits net exports, so if tariffs were generating broader economic growth, we would see it reflected here. Instead, we see real final sales declining steadily in 2025. We cannot attribute causation, but this slowdown does not enhance America Compass’s case that tariffs are improving economic growth.

Finally, here and throughout the analysis, American Compass never engages with counterfactuals—that is, it never asks “what would have happened without the tariffs?” Just because an economic indicator changes, or stays on the same trend, after tariffs does not mean tariffs caused that. A counterfactual is the baseline against which any policy must be judged. For example, when the Tax Foundation estimates that tariffs will reduce GDP, it does not mean the economy will shrink in absolute terms; it means output will be lower than it would have been without the tariffs. That distinction cannot be seen by simply looking at annual growth rates; it requires careful econometric analysis.

Employment and Wages

American Compass claims that in the short run, tariff effects on employment and wages are likely to be mixed, but that in the long run, increased investment from tariffs should boost long-run employment and wages. It claims detractors say tariffs should harm employment and wages, leading to a decline in real incomes.

While the ultimate impact of tariffs on manufacturing sector employment is less straightforward than either tariff proponents or some critics suggest, we would expect tariffs to reduce total, economy-wide output, hours worked, and wages in the long run. American Compass’s assertion of growth hinges on the incorrect assumption that tariffs will increase total, economy-wide investment. Because this assumption is incorrect, the ultimate outcome of increased growth in employment and wages in American Compass’s chain of events cannot materialize.

University of Toronto trade economist Joseph Steinberg analyzed how the types of goods targeted by tariffs affect the manufacturing sector, finding that while a tariff on manufacturing can increase overall manufacturing employment in the long run at a cost to overall economic output, in the short run, it is more likely to reduce it. The short run involves a costly adjustment process, as domestic suppliers may not be readily available, and certain industries require large capital investments that take years to come online. The immediate effects of tariffs are higher input costs without increases in domestic production, reducing manufacturing employment. In the long run, Steinberg shows that any increases in manufacturing employment come at a cost to overall GDP.

This contrasts with the mechanism American Compass presents: a short-term cost for an overall long-term gain. What is more likely (depending on how tariffs are structured) is a sectoral gain at an overall loss. This finding is also consistent with other modeling showing that growth in the manufacturing sector would come at the expense of the services, extraction, construction, and agriculture sectors. At best, tariffs change the composition of employment, not increase aggregate employment.

The short-run story appears consistent with recent data: the manufacturing sector continued to lose jobs, shedding 88,000 year-over-year as of January. Aggregate indicators present an overall unremarkable picture as well. Last year was the weakest year for job growth since the pandemic. Heather Long of Navy Federal Credit Union characterized the situation as a “ hiring recession.” Real wages held steady overall, and as American Compass shows in its own graph, real wage growth was lower in the manufacturing sector following Liberation Day than it was compared to the prior year.

American Compass asserts that the declines predicted by detractors are not present, without completing any real analysis that could identify the effect of tariffs on wages, employment, or output compared to a counterfactual.

Further, American Compass points to trends over the last three months of 2025 as early possibilities that the tariffs are working, including trends in manufacturing jobs and real wage growth. However, with manufacturing continuing to shed employment, the recent positive wage effect could be due to compositional changes (lower-wage employees exiting the manufacturing sector mechanically raises overall wages) or due to other factors, such as the AI boom. American Compass never considers these alternative explanations.

Trade Deficit

The final link in the chain of events is how the balance of trade changes. American Compass claims tariffs can quickly shift bilateral imbalances and slowly reduce the overall trade deficit as new production comes online. It characterizes the opposing case as follows: “Trade deficits are a function of savings imbalances, so tariffs will do nothing to address them, or can even lead to higher trade deficits as they make exporters less competitive. The deficit would only fall because of declines in overall trade or a broader economic slowdown.”

American Compass correctly describes the saving-investment constraint: the difference between national saving and national investment is exactly equal to net exports. This identity always holds, and the analysis partially acknowledges this: “successfully attracting large amounts of foreign investment into the country may push the trade deficit higher initially.”

The analysis falters in its assumption that capital inflows will only increase trade deficits in the short run. Because tariffs do not fundamentally change national saving and investment (they do raise revenue, which would yield a small decrease in the government budget deficit), they do not fundamentally change the balance of trade.

To the extent Japan’s pledged $550 billion trade deal takes the form of increased capital investment into the United States, the resulting net capital inflow would increase the US current account deficit dollar for dollar. This would not change over time: continued foreign inflows would be required to maintain that increase in the capital stock, meaning the trade deficit would not fall.

A declining trade deficit would signal an unwinding of the larger capital stock and an outflow of income to the rest of the world: you cannot simultaneously sustain a larger capital stock financed by increased foreign capital inflows and reduce the trade deficit.

Second, if overall economic growth did increase, as American Compass assumes, that would likely increase the trade deficit, not reduce it. A pickup in economic activity would increase relative returns in the US, increasing capital inflows and expanding the trade deficit—another inconsistency American Compass does not address.

The analysis points to changes in the bilateral trade deficit with China as evidence of success, but while tariffs may affect the pattern of trade between countries, this does not affect the saving-investment imbalance. Indeed, in 2025, the US goods trade deficit with China fell significantly, while the overall balance of trade did not. This suggests that, so far, reduced imports from China are mirrored by increased imports from other trading partners, including Southeast Asian countries, not reshoring. The overall US goods and services trade deficit was roughly flat year over year ($901.5 billion in 2025 compared to $903.5 billion in 2024), while the goods trade deficit rose by 2.1 percent to $1.24 trillion. Adjusting for inflation shows the goods trade deficit reached its highest level on record, while removing trade in physical gold (which was volatile in 2025) further smooths out the pattern and shows very little change in the overall balance of trade. This aligns with what we have written: tariffs can divert trade and change bilateral trade balances, but they cannot fundamentally change the overall balance of trade.

Finally, the analysis claims detractors have been proven wrong about currency effects, revealing another inconsistency in America Compass’s review of economic developments so far.

Standard theory predicts tariffs lead to currency appreciation by reducing demand for imports and foreign currency. Pushing up the value of the dollar makes exports less competitive, meaning tariffs reduce overall trade rather than change its balance. American Compass points to a weaker dollar as evidence this mechanism is wrong.

The dollar did weaken throughout 2025, but that does not invalidate the theory; it reflects other channels offsetting the standard effect.

As Tax Foundation noted in April 2025, the volatile nature of the tariff regime might dampen the currency effects of tariffs, and other effects (such as the US becoming a less attractive place to invest) may dominate, causing the dollar to depreciate. A January 2026 NBER working paper supports this: tariff increases lead to appreciation, but tariff policy uncertainty leads to depreciation, overturning the standard result.

American Compass points to dollar weakening as support for its thesis, while also claiming victory on foreign investment pledges—yet if foreign capital inflows increased, it would increase demand for the US dollar, pushing its value up, not down.

Taken together, these mechanisms show that American Compass relies on an internally inconsistent framework: a sustained increase in investment (including foreign capital inflows) and output cannot coincide with a sustained decrease in the trade deficit.

Retaliation

At the end of its analysis, American Compass claims that tariffs were supposed to prompt retaliation, but trading partners struck deals instead. The reality is more complicated.

Throughout 2025, China responded tit-for-tat to US tariffs, even matching the US’s 125 percent tariff during April and imposing additional non-tariff barriers against US agriculture exports. While the highest retaliatory tariffs have come down, and China has resumed agriculture purchases, the country currently maintains a 10 percent retaliatory tariff on US exports. Throughout 2025, Canada also retaliated against the US, including boycotting certain American products and pulling US wine, beer, and spirits from shelves. Canada withdrew most of its retaliatory tariffs in September because of the exemptions granted to USMCA-compliant goods from US tariffs, but it maintains retaliatory tariffs on US steel, aluminum, and autos. The European Union threatened retaliation throughout 2025 but never moved to implementation.

While most trading partners did not implement retaliatory tariffs, they are retaliating in a different way: pursuing alliances with each other, leaving the US behind as it continues its slide toward less trade openness. Consider Prime Minister of Canada Mark Carney’s latest speech, offering to “broker a bridge” between the EU and Indo-Pacific countries to reach a new comprehensive free trade agreement. When the US is not viewed as a credible and reliable trade partner, it is likely to be left out of future agreements that could strengthen its economy overall.

Moreover, the trade deals the Trump administration has entered are at best frameworks for future negotiations. The deals that have been announced include pledges to expand market access or invest in the US in the future, with no enforcement mechanism. None of the deals has yet been ratified by the legislatures in any of the negotiating countries, including the US.

Recall, this is not the first time the US has tried a tariff-induced negotiating approach. In January 2020, following an ongoing trade war with China where there was tit-for-tat retaliation, President Trump signed a Phase One deal with China. Far from addressing any long-standing grievances some US trade officials have cited against China, the primary focus of the deal was a commitment by China to increase purchases of US exports by $200 billion over the following two years. After two years, China had only hit 58 percent of its targets.

Of course, it would be desirable for the US if other countries agreed to relax their non-tariff barriers or reduce any tariff rates on US exports. But the president does not appear to desire a world in which both the US and these countries reduce their tariff rates to zero, which is why all the deals announced last year left higher US tariffs in place compared to pre-Liberation Day. Nor does American Compass seem to desire a tariff-free world, as it has repeatedly argued that tariffs are necessary to reduce the trade deficit. Tariffs can either be a negotiating tactic to be lowered after gaining concessions or a means of permanent protection, as American Compass’s framework outlines. But they cannot be both.

Conclusion

American Compass’s Tariff Tally presents a theoretical framework for how tariffs will affect prices, the manufacturing sector, total capital investment, productivity, employment, wages, economic growth, and the trade deficit. At several points throughout the analysis, the links in the chain break down; most fundamentally, the claims that tariffs should increase total capital investment relative to a counterfactual and that those sustained increases in investment (including foreign capital inflows) can coincide with a sustained decrease in the trade deficit are incorrect. Tariffs create a tax wedge Broadly speaking, a tax wedge is the difference between the pre-tax price or return and after-tax price or return. For labor income, it is the difference between the total labor costs to the employer and the corresponding net take-home pay of the employee. that reduces total returns to labor and capital, even as they redirect resources across sectors. At multiple points throughout the analysis, American Compass inconsistently interprets economic data, crediting tariffs for positive trends but pointing to other explanations for mediocre or bad trends.

More time will not fix these theoretical problems: the mechanisms American Compass wishes to rely on to construct a positive case for tariffs are wrong.

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About the Authors

Expert

Erica York

Vice President of Federal Tax Policy Erica York is Vice President of Federal Tax Policy with Tax Foundation’s Center for Federal Tax Policy. Her analysis has been featured in The Wall Street Journal, The Washington Post, Politico, and other national and international media outlets.

• Expert ### Alex Durante

Senior Economist Alex Durante is a Senior Economist at the Tax Foundation, working on federal tax policy and model development. Alex worked as a research assistant at the Federal Reserve Board and served as a staff economist on the Council of Economic Advisers.