The cost-of-living crisis has become a 'powder keg' in the U.S. midterm elections! Goldman Sachs warns: Trump's tariffs, besieged by inflation concerns from 29% of voters and rulings on judicial overreach, are accelerating their collapse like 'melting ice cubes,' potentially leading to a strategic retreat by 2026.
As the 2026 midterm elections approach, the core issue of greatest concern to American voters is singular: the cost of living.
Alec Phillips, Chief U.S. Political Economist at Goldman Sachs, noted that this economic anxiety has placed Trump's aggressive tariff policies under political and legal 'crossfire.' In the coming months, trade barriers are more likely to decrease than increase.
Phillips pointed out that among voters focused on their 'wallets,' 29% listed the cost of living as their top concern, a proportion higher than before the 2024 general election. Predictive market data shows that the likelihood of Democrats securing a majority in the House next year has significantly increased. The most obvious policy tool in response to this situation is cutting tariffs.
Although the Trump administration continues to defend tariffs, Treasury Secretary Bessent acknowledged that tariffs are shrinking 'like melting ice cubes.' Democrats, such as Schumer, have astutely seized on the issue of 'affordability' and attributed blame to the tariff system—a strategy that has already proven effective in recent elections. Former White House advisor Gene Sperling noted that the affordability crisis faced by the public is real and directly stems from tariffs.
Federal employment data corroborates this: since Trump announced global 'reciprocal tariffs,' job growth has been sluggish, with unemployment reaching a four-year high. Small businesses have experienced declining profits due to rising costs and recruitment difficulties. However, Trump appears to remain in denial of political realities, not only dismissing the crisis as a 'hoax' but also boasting about economic achievements, which starkly contrast with public sentiment.
Goldman Sachs predicts that the reversal of tariff policies will result from a combination of political necessity and judicial intervention. Courts are expected to rule early next year that most tariffs imposed by Trump under the International Emergency Economic Powers Act (IEEPA) are illegal due to overreach, rendering the majority of currently effective tariffs invalid.
Even if the White House attempts to invoke Section 122 of the Trade Act of 1974 as a temporary remedy, it faces significant limitations (restricted to 150 days with a maximum rate of 15%), far below Trump’s current aggressive tariff rates.
Given the lengthy process required for alternative Section 301 investigations, Goldman Sachs anticipates that effective tariff rates will decline by approximately two percentage points by the end of 2026.
The heightened sensitivity of voters to economic pain has also thwarted government efforts to offset tariff costs through fiscal measures. Trump’s proposal for a 'USD 2,000 tariff rebate per person' has stalled due to Republican opposition, with an implementation probability of only 2%. Estimates suggest the plan would cost USD 600 billion, twice the annual revenue from tariffs, making it an unsustainable funding cycle.
Furthermore, if the Supreme Court rules the tariffs unconstitutional, importers may be eligible for refunds, further undermining tariff revenues.
Faced with reality, the U.S. government has begun a "strategic retreat" in the trade war. Goldman Sachs predicts that, considering the political risks associated with raising prices on essential goods, new tariffs targeting pharmaceuticals and semiconductors will not take effect in 2026.
Confronted by a skeptical Supreme Court and voters enraged by high living costs, the Trump administration appears to have no choice but to let the air out of this trade war. The only question now is: Will Trump himself accept this inevitable outcome?
Editor/Doris