It’s too early to declare victory over Trump’s tariffs

 In January of this year, President Trump published an op-ed in the Wall Street Journal, declaring that his tariff policies “revitalized the economy.” Trump argued that all economists who predicted that large-scale tariffs would lead to market collapse, economic recession, and accelerating inflation were entirely wrong. He claimed that 80% of the tariff burden was borne by foreign producers and non-U.S. intermediaries, significantly improving the trade balance and securing commitments of over $18 trillion in U.S. investment.

 On “Liberation Day” (April 2, 2025), when Trump announced reciprocal tariffs with countries around the world, the market suffered a triple selloff. The risk of such a market collapse seems to have been completely forgotten. Furthermore, despite the U.S. unilaterally ignoring the most-favored-nation clause, other countries, with the exception of China, did not impose retaliatory tariffs; instead, they reduced tariffs targeting only the U.S. The trade balance improved as imports of U.S. products increased and exporters to the U.S. lowered prices. Ultimately, the United States appears to have benefited from optimal tariffs through improving its terms of trade.

 Concerns that the imposition of tariffs would lead to an economic recession and accelerating inflation have been alleviated by the remarkable progress of what could be called a “revolution” in artificial intelligence (AI). Labor productivity grew at an annualized rate of 4.9% in the third quarter of 2025 compared to the previous quarter, while unit labor costs fell 1.9%. The containment of accelerating inflation also made it possible for the Federal Reserve Board (FRB) to cut the policy interest rate in December.

 The management of monetary policy under the AI revolution will be entrusted to Kevin Warsh, the nominee for next chairman of the Federal Reserve Board. He has long advocated for interest rate cuts and a scale down of the Fed’s balance sheet. This would involve cutting interest rates and tightening monetary policy in quantity, but is this possible?

 The key to achieving both lies in deregulation of the banking sector. These measures include the “supplementary leverage ratio” (the ratio of core capital to unrisk-weighted total assets) and the “liquidity coverage ratio” (the ratio of liquid assets to one-month liquidity needs during market stress). Relaxing these regulations and lowering the interest rate on bank reserves below short-term Treasury interest rates would enable the banking sector’s holdings of government bonds to increase, offsetting the tightening effects of balance sheet reduction. Of course, deregulation encourages banks to expand credit.

 The problem is that simultaneously implementing fiscal policy expansion, interest rate cuts, and private credit expansion augments the risk of overheating economy and resurging of inflation. The Trump administration’s approval ratings are declining as affordability deteriorates, due to persistent inflation. Trump is trying to overcome this problem by spurring an AI revolution in an overheating economy. But will Kevin Warsh be able to cut interest rates three more times this year, as the market expects?

 A ruling on tariff policy under the International Emergency Economic Powers Act by the Supreme Court of the United States is expected soon. If the ruling goes against Trump’s wishes, maintaining tariff revenues will be called into question. It will also likely change the negotiating strategies of trading partners. The future of the tariff policy that Trump declared a victory for is unclear.

(Published in Nikkei’s Morning Edition on Februaryr 20, 2026)