Trump's Tariff Theater Could Actually Help Fight Inflation 

With consumer confidence taking a notable dive in recent months and inflation still hovering above the Federal Reserve's target rate, economic anxiety has become a defining feature of the early days of Trump's second administration. While the president has begun implementing his promised tariffs against several countries, what's more remarkable is the pattern of threats, brief implementation, and subsequent rollbacks that has characterized his administration's approach thus far.  

This "tariff threat theater," though widely criticized, might inadvertently accomplish something that conventional economic wisdom would consider paradoxical: helping to combat inflation. 

Basic economics tells us that increasing the cost of imported goods feeds directly into higher prices across the economy. And the conventional understanding of tariffs, wherein they function as taxes that ultimately raise consumer prices, isn't wrong. Yet this surface-level analysis misses a more nuanced potential outcome when tariffs are repeatedly threatened but inconsistently applied, as we’re witnessing frequently as of late. 

When Trump threatens new tariffs, consumers rationally react by pulling back on spending, out of fear that prices will soon rise. This psychological dampening of demand can exert significant downward pressure on inflation, even if the tariffs themselves never fully materialize or persist. Essentially, the president may be creating an economic placebo effect — generating the demand-cooling benefits of tariffs without their sustained price-increasing consequences. 

This approach bears some resemblance to the Federal Reserve's own "forward guidance" strategy, where merely signaling future interest rate increases can cool markets without actually implementing those hikes. The difference is that the Fed's communication strategy is deliberate and calibrated, while any anti-inflationary benefit from Trump's tariff threats appears to be an entirely accidental artifact of his frenetic style of governance. 

For businesses, this persistent uncertainty creates a peculiar incentive structure. When tariffs are threatened but believed to be potentially temporary, companies are more likely to absorb temporary cost increases rather than pass them along to consumers. After all, raising prices is strategically risky if competitors might be able to undercut you once tariffs are withdrawn. This corporate hesitancy to pass through costs further dampens the inflationary impact that tariffs would typically have. 

What makes this dynamic particularly relevant is the current economic context. With the Federal Reserve keeping interest rates steady, as it navigates the delicate balance between fighting inflation and avoiding economic contraction, any additional demand-dampening mechanism could prove useful. Consumer confidence has already declined sharply, suggesting Americans are becoming more cautious with their spending. Tariff threats may be amplifying this caution without necessarily triggering the full supply-chain disruptions that permanent tariffs are likely to cause.

None of this suggests that "tariff threat theater" is good economic policy. The uncertainty it creates hampers business planning, undermines international relations and risks diminishing returns as economic actors learn to discount the threats. Moreover, if implemented permanently, these tariffs would certainly contribute to higher prices, and potentially trigger retaliatory measures from trading partners.

It's worth emphasizing that this potential anti-inflationary effect almost certainly isn't the motivation behind Trump's approach. His stated goals center on protecting American industries and reducing trade deficits — objectives that economists broadly agree tariffs are poorly suited to achieve. Any inflation-fighting benefit would be purely coincidental.

The irony here is palpable. Throughout the 2024 campaign, Trump criticized the Biden administration for high inflation, yet his proposed economic policies were widely expected to reignite inflationary pressures through disrupted supply chains and reduced labor supply. That his implementation strategy might accidentally serve as an inflation-dampening mechanism represents a peculiar twist that few economists would have predicted.

As we navigate this unusual economic experiment, policymakers would be wise to recognize both the potential short-term benefits and long-term risks of governing by threat. The psychological effects on consumption may temporarily help ease inflation, but the enduring damage to economic planning, international relations and policy credibility could ultimately prove far more costly than any transient benefit to price stability. 

Nicholas Creel is an assistant professor of business law and ethics at Georgia College and State University.