The whole world is slapped in the face! Under tariffs, why hasn't stagflation arrived, and why has the dollar fallen?

The actual economic impact of Trump's tariff policy is starkly different from the predictions made at the beginning of the year, leaving Wall Street with a slap in the face.

Ruchir Sharma, chairman of Rockefeller International and a renowned investor, recently pointed out that despite the Trump administration significantly raising tariffs, the dollar not only failed to appreciate as expected but instead experienced its worst decline in half a year since the early 1970s.

At the same time, the anticipated "stagflation" effect—economic growth slowing down accompanied by rising inflation—has not been significantly reflected in macro data. Tariff revenues are growing at an annual rate of $300 billion, about four times that of the same period last year, yet the U.S. economy remains resilient.

The article states that the surge in artificial intelligence investment, government fiscal stimulus, and other macro factors have collectively offset the negative impacts of the tariff policy. This phenomenon challenges traditional economic theories, indicating that complex economic systems are rarely dominated by a single factor, even in the face of significant shocks like Trump's tariffs.

Expectations Missed: Dollar Weakens Instead of Strengthening

At the beginning of the year, nearly all economists, investors, and corporate executives reached a consensus: Trump's tariff policy would strengthen the dollar and trigger stagflation. Economists estimated that for every one percentage point increase in tariff rates, U.S. economic growth would decrease by 0.1%, while inflation would rise by 0.1%. However, the actual situation is quite different.

The article points out that the effective tariff rate in the U.S. has risen from 2.5% to 15%, but instead of rising, the dollar has fallen, experiencing its worst decline in half a year since the early 1970s. This unexpected trend is now attributed to the historic overvaluation of the dollar at the beginning of the year. Many foreign investors had held substantial dollar assets, but recently they have begun to hedge these risks and invest more in regions outside the U.S.

Several countries are becoming increasingly attractive safe havens for capital, partly because the threat of tariffs has prompted these countries to push for economic reforms and reach trade agreements with non-U.S. partners, further diversifying global capital flows.

AI Boom Offsets Negative Effects of Tariffs

Sharma believes that the tariff policy has failed to produce the expected stagflation effect primarily due to the offsetting effects of multiple positive factors, especially the AI boom and ongoing government fiscal stimulus.

Since January of this year, the projected annual spending by tech giants on AI infrastructure has increased by $60 billion, reaching $350 billion. Numerous small and medium-sized enterprises are also rushing to ride this wave, further promoting economic growth. This widespread optimism effectively neutralizes the potential decline in investment confidence that could arise from trade policy uncertainty.

Sharma wrote, “The AI-driven optimism boosts growth by maintaining a loose financial environment, even in the face of higher interest rates.” According to a new index from the Federal Reserve, if it weren't for the stock market (mainly driven by AI stocks) continuing to rise, the current financial environment would be neutral rather than loose

Corporate Tax Relief Buffers Tariff Costs

The tax reduction policies of the Trump administration have made it easier for American companies to absorb most of the tariff costs rather than passing them entirely onto consumers. According to Sharma's analysis, Trump's "Great Beautiful Plan" is expected to save American businesses about $100 billion this year, exceeding that figure by 2026, primarily in the form of tax relief.

Nevertheless, the negative economic impact of tariffs has begun to manifest, mainly reflected in rising prices for products such as household appliances, sporting goods, and toys. Economists estimate that foreign exporters are actually bearing 20% of the tariff costs—much higher than the proportion during Trump's first term—while the remaining 80% is roughly evenly distributed between American businesses and consumers.

Economic Complexity Beyond Single-Factor Analysis

Overall inflation is still being suppressed by falling rents and declining prices for other goods such as used cars and energy. These price declines are unrelated to tariffs; used car prices are still retreating from the highs caused by supply disruptions during the pandemic. Sharma wrote:

"Economists' predictions about tariffs are not entirely wrong. Stagflation may eventually occur, especially if the average effective tax rate continues to rise. But so far, even significantly increased tariff rates have not been enough to overwhelm the larger forces supporting growth and controlling inflation."

Sharma believes that the current situation somewhat mirrors the scenario of 2023. At that time, many anticipated that the Federal Reserve's interest rate hikes would significantly slow U.S. economic growth, only to find that the impact was offset by a surge in artificial intelligence spending and ongoing fiscal support from the U.S. government.

The core argument of this prominent investor is that the global overemphasis on Trump has magnified the limitations of simple economic models—namely, the belief that a prominent factor A necessarily leads to outcome B. However, complex economic systems are rarely shaped by a single factor, and even significant shocks like Trump's tariffs are no exception.

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