It was, by any measure, a lot of red ink. When Volkswagen announced its third-quarter profits at the end of October, the German auto giant said it anticipated heavy losses for this year. The reason? It is taking a 5 billion-euro hit from tariffs imposed in the American market.

Likewise, the German sportswear manufacturer Adidas warned of a 120 million-euro hit to its earnings, in part because the levies its sneakers now face in the United States, while Toyota warned of a $9 billion hit from tariffs.

For anyone following the corporate earnings season over the last month, a clear theme has emerged from the giants of European and Asian industry: President Trump’s tariff regime is starting to significantly reduce their profits.

But hold on. Weren’t we told that tariffs would simply be passed straight on to American consumers in the form of higher prices? That they were a tax on ordinary working people?

Instead, it is already becoming clear that at least some of the costs are being paid by foreign conglomerates and even by foreign governments.

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And yet, several months into what amounts to the most dramatic shift in American trade policy in generations, the evidence is starting to tell a remarkably different story. Yes, the tariffs are a tax. But they are a tax that’s being paid primarily by foreign companies and foreign governments, not by the American consumers we were all supposed to be weeping for. And that changes everything.

True, the tariffs regime was only fully implemented in August, and Trump has cut plenty of side deals that may mitigate their impact. Even so, the numbers speak for themselves.

The US now imposes an average tariff of 18.6%, the highest since 1933, according to Yale’s The Budget Lab. If the conventional wisdom were correct, we should be witnessing an inflationary spiral. American families should be groaning under the weight of soaring prices across multiple categories of consumer goods.

For example, the New York Fed chief, John Willians, warned soon after Liberation Day that inflation could climb to 4%, while fellow Fed Governor Christopher Waller said it could reach 5%. Instead, inflation is running at roughly 3%.

Let that sink in for a moment. The government imposes a massive round of import levies and inflation barely budges.

The Harvard Business School tariff tracker, which has been monitoring price changes across affected sectors, estimates a “pass-through” rate of approximately 20%, meaning that only one-fifth of the tariff costs are actually showing up in consumer prices. Even that figure may be generous as it includes some one-off adjustments that are unlikely to persist.

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According to the Harvard’s Pricing Lab, prices of imported goods rose by 5.4% from March to September as tariffs were imposed, compared with 3% for domestic goods, so some of the tariffs were passed on but far from the full cost. In other words, the market has adjusted, just not in the way the textbooks predicted.

There is a second dynamic at work that is even more intriguing: government subsidies. When a tariff threatens access to a strategically important market, foreign governments often step in to cushion the blow. That may be especially true of China, where the ruling Communist Party views trade through an explicitly geopolitical lens.

Take the solar panel industry for example. The US government has imposed tariffs on panels for more than a decade in an attempt to safeguard its domestic industry, but that has done little to lower imports, in part because Chinese companies have shifted production to lower-tariff countries, but also because the government has absorbed the costs instead.

In reality, the Chinese government, through its state-owned banks and provincial development funds, extended cheap credit to manufacturers and offered export subsidies that effectively neutralized the tariff’s impact. Beijing wasn’t interested in maximizing short-term profits; it wanted to maintain market share and preserve its dominance in a strategic sector.

Likewise, the European Union, though it would never admit it publicly, has engaged in similar behavior. When American steel tariffs threatened major European producers, several governments quietly ramped up support through a range of industrial policy measures including research grants, favorable loans and export credit guarantees.

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We are already seeing a huge rise in investment in American manufacturing as European and Asian conglomerates realize that is the only way to circumvent US tariffs. The British-Swedish pharmaceutical giant AstraZeneca has announced a $50 billion investment to build plants in the US. Taiwanese semiconductor manufacturer TSMC has announced a $100 billion investment to start making chips in America. There have even been reports that Swiss chocolatier Lindt may shift production of its Easter Bunnies to America.

Over the next couple of years, we will see a wave of tariff-driven foreign investment, and that will both boost growth and lower the prices here at home.

The more interesting response, however, will be from American start-ups. If the Vietnamese or Polish exporter now faces significant tariffs, there is an opportunity for a new American company to step into the market instead. Sure, they will have to figure out ways to compete on cost. But with tariffs coming alongside advances in artificial intelligence and robotics, that might well be a lot easier than it has been for most of the last 20 years.

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But if the pass-through rate is genuinely around 20%, only about $72 billion is actually falling on American consumers. The remaining $288 billion? That’s being absorbed by foreign exporters and foreign governments.

Think of it this way: It’s a $288 billion annual wealth transfer from the Chinese Communist Party, the German exchequer and various other foreign entities to the American treasury. Money that would otherwise have gone to Beijing or Berlin is instead going to Washington.

The broader point here is about interests.

For decades, American trade policy was conducted with the primary goal of minimizing prices at any cost, even if it gutted communities, created dependence on potential adversaries and led to a massive trade deficit.

The operating assumption was that all economic actors would benefit more or less equally from open markets, and that any deviation from free trade orthodoxy was crazy.

Reality has proven slightly more complicated. Open markets, it turns out, benefit some sectors far more than others. And when foreign trading partners subsidize exports, manipulate currencies or operate under entirely different political and economic systems, the theoretical benefits of unfettered trade can evaporate very quickly.

Tariffs represent a different approach, one that explicitly prioritizes American interests over abstract economic theories. They’re a tool for rebalancing relationships, for rebuilding capabilities and for ensuring that competition occurs on something closer to fair terms.