When President Donald Trump and several of his economic advisors projected that new and expanded tariffs would raise “well over half a trillion, maybe toward a trillion dollars,” they framed the policy as a fiscal windfall—an elegant solution to U.S. revenue needs in an era of soaring deficits. But new data show the tariffs are underperforming dramatically. According to estimates analyzed by Pantheon Macroeconomics, tariff revenues are coming in $100 billion lower than expected, undermining the central economic argument behind the policy and exposing a series of flawed assumptions.
Pantheon Macro identifies three key reasons for the shortfall, all of which reflect deeper structural realities in global trade, global supply chains, and American consumption patterns. At the center of the issue is China—the primary target of Trump’s tariff regime, and the player best positioned to adapt, reroute, and shield its exports from tariff burdens.
The divergence between projections and outcomes provides an important lesson in modern trade economics: tariffs rarely behave the way politicians expect.
Reason 1: China and Its Partners Have Rebuilt Supply Chains to Evade Tariffs
The first, and most significant, factor in the revenue gap is China’s ability to redirect, disguise, or restructure export flows, minimizing tariff exposure while keeping goods flowing into the United States.
Pantheon Macro highlights several mechanisms China has used:
1. Transshipment through third countries
Chinese goods increasingly enter the U.S. via:
- Vietnam
- Mexico
- Malaysia
- Thailand
- Indonesia
These countries process, assemble, or repackage goods before shipping them to the United States, sometimes adding enough value to change the product’s country-of-origin designation.
This loophole reduces the volume of imports directly subject to U.S. tariffs—cutting into expected revenue.
2. Reengineered supply chains
Chinese manufacturers have strategically:
- shifted final assembly outside China
- diversified component sourcing
- restructured corporate ownership chains
This allows them to circumvent tariff classifications without reducing production volumes.
3. Absorption of tariff costs
Many Chinese exporters have lowered prices to keep goods competitive even after tariffs are applied.
This lowers the taxable base—reducing tariff revenue.
4. Currency adjustments
The Chinese yuan has depreciated over time, cushioning the dollar-denominated tariff impact.
The core problem:
Tariffs assume that trading partners are static and powerless.
China has shown it is neither.
Reason 2: U.S. Importers Are Reducing Purchases or Switching Suppliers
Another major factor behind the shortfall is that U.S. importers—facing higher landed costs—have changed their behavior in ways that reduce tariff revenue.
Pantheon Macro points to several dynamics:
1. Reduced demand for tariffed goods
U.S. importers have cut orders for tariff-targeted categories, especially:
- machinery
- electronics components
- industrial inputs
- consumer goods
- intermediate parts for U.S. factories
If fewer goods subject to tariffs enter the country, revenue falls—straightforward economics.
2. Supplier switching
American firms have accelerated diversification away from China, increasing imports from:
- Mexico
- India
- Taiwan
- ASEAN nations
While diversification helps reduce strategic dependence on China, it also reduces tariff revenue, since only a fraction of these flows are tariffed.
3. Inventory adjustments
Some companies stockpiled goods ahead of tariff rounds in 2023–2024.
Those inventories are still being unwound, leading to temporary dips in tariff-eligible imports.
4. U.S. consumers are price-sensitive
Tariff-induced inflation has limits. When prices rise:
- consumers downshift to cheaper brands
- they delay purchases
- they switch categories or reduce spending
This reduces tariff intake on high-value goods.
The net result:
The U.S. is importing fewer tariff-eligible goods than Trump’s team assumed—shrinking the pool of potential tariff revenue.
Reason 3: The U.S. Government Miscalculated Behavioral and Economic Responses
The third major reason is internal: the economic modeling behind tariff revenue projections was flawed.
According to Pantheon Macro, Trump’s team made overly optimistic assumptions about:
1. Import elasticity
The projections assumed Americans would keep buying the same amount of tariffed goods regardless of price increases.
In reality, imports dropped when tariffs rose.
2. China’s inability to adapt
Forecasts treated China as if it lacked flexibility, ignoring decades of adaptive manufacturing expertise.
3. Revenue “multipliers”
Some political advisors assumed tariffs would not only raise revenue but also strengthen the U.S. manufacturing base—leading to more taxable economic activity. This has not materialized.
4. Price pass-through rates
The assumption was that China would bear most of the tariff cost.
In practice:
- U.S. importers
- U.S. manufacturers
- and U.S. consumers
absorbed the majority of the cost.
If tariffs raise costs for Americans, the government does not receive “extra” money—it merely collects revenue offset by higher domestic inflation.
5. The scale of imports from China
Trump’s advisors repeatedly cited annual Chinese exports to the U.S. of ~$500–$600 billion.
But tariff categories apply to narrower sectors, and China’s export volumes have shifted.
In short:
The administration overestimated economic compliance and underestimated the global ability to adapt.
The Political Narrative vs. Economic Reality
When Trump advisors—including Scott Bessent—forecast tariff revenues approaching $1 trillion, the projection served a political purpose:
- It framed tariffs as a source of “free money.”
- It portrayed tariffs as painless for U.S. households.
- It reinforced the narrative that China would foot the bill.
- It allowed tariffs to be pitched as an alternative to tax increases or spending cuts.
But as Pantheon Macro’s analysis shows, the real world is far more complex.
Tariffs did not produce a trillion-dollar windfall.
They did not reshape global trade in the way their designers intended.
They did not extract the hoped-for fiscal gains.
Instead, they triggered global supply chain shifts, reduced import volumes, and exposed the limits of unilateral trade coercion in a deeply interconnected world.
What the Shortfall Means for U.S. Economic Policy
The disappointing tariff revenue outcome has broad implications:
1. Tariffs are not a sustainable revenue source
Relying on them to fund federal programs or offset deficits is unrealistic.
2. Tariff-induced inflation complicates monetary policy
Higher consumer prices reduce real wage gains and complicate the Federal Reserve’s inflation fight.
3. Tariffs may accelerate decoupling—at a cost
While reducing dependence on China may be strategically wise, tariffs are a blunt tool that imposes near-term economic pain.
4. Future administrations must reconsider tariff strategy
Any tariff regime must:
- account for supply chain adaptation
- integrate with allies’ strategies
- avoid overly optimistic projections
- consider consumer impact
- align with industrial policy
5. U.S.–China relations remain structurally adversarial
Tariff performance aside, economic pressure will continue to be a core U.S. policy lever.
Conclusion: A Reality Check for Tariff Optimists
Trump’s tariff projections were politically powerful and rhetorically bold—but economically unrealistic. As Pantheon Macro makes clear, tariffs function in a dynamic global system where manufacturers adapt, supply chains reroute, consumers change behavior, and foreign governments find ways to neutralize pressure.
The result: a $100 billion revenue gap that exposes the limits of coercive trade policy in the 21st century.
The lesson is clear:
Modern trade cannot be bent to political will by simple tariff increases.
Global supply chains adapt, markets adjust, and political narratives collide with economic complexity.
America’s challenge now is to design a trade strategy rooted not in wishful thinking, but in the realities of a multipolar, interconnected global economy.
