What, when, where – a brief synopsis of US tariffs

A perplexing number of announcements

Trump’s ‘Liberation Day’ proclamation, a little over three months ago, imposed an additional baseline tariff of 10% on the majority of imported goods to the US, with the intention of this being superseded by a separate reciprocal tariff regime.

Individual tariffs were to vary from country to country with (broadly speaking) higher tariffs for economies running larger trade surpluses with the US. The range of charges was from 10%, imposed on countries such as the UK (and therefore unchanged from the baseline tariff), to 50% for Lesotho and 49% for Cambodia.

The reciprocal tariffs were to apply a week later, on 9 April. This did in fact happen, but only for a total of 13 hours. A bout of severe financial market volatility, plus public criticism of the President’s polices from key allies, resulted in Trump rescheduling the imposition of reciprocal tariffs until 9 July. During the intervening period countries would be ‘encouraged’ to negotiate with the administration’s team and grant the US trading (and other) concessions.

There were a number of other changes. The US levied 25% tariffs on car imports, plus the same levy on steel and aluminium (this has since been doubled to 50%). Various other commodities are zero rated, at least subject to the findings of official reviews. These include pharmaceuticals, semiconductors and lumber (a more recent decision has been to reverse copper’s zero rating and impose a 50% levy).

Several spats also broke out, the most significant was a tit-for-tat action between the US and China, resulting in American tariffs on Chinese imports rising to 145% for a period, before negotiations resulted in a lower, though still significant, 30% tariff. China has a deadline of 12 August to reach a deal that averts higher tariffs.

To date, the US has achieved settlements with just two countries (we hesitate to label them full trade ‘deals’). One is with the UK, where Britain faces an overall tariff of 10% on the first 100k of cars exported to the US, rather than 25% as the rest of the world (an agreement to zero rate steel exports has yet to be implemented).

The second is with Vietnam. Its tariff is set at 20% in exchange for tariff free imports from the US. Trans-shipments through Vietnam into the US (ostensibly mainly from China) will attract a 40% levy.

Meanwhile in May, Trump expressed displeasure with what he termed the EU’s negative attitude in negotiations and threatened to raise the EU’s reciprocal tariff to 50% from the 20% announced on ‘Liberation Day’. Subsequent talks appeared to improve the prospects for a framework deal for a while, but the latest threat is for a 30% tariff on EU goods.

This brings us to an announcement on 7 July. The re-introduction of the reciprocal tariff schedule has been delayed to 1 August, giving negotiators just over three additional weeks to strike a deal, while Trump wrote to 14 countries informing them of the reciprocal tariff regime they would face, which in some cases contained minor changes from previous levels.

In addition, a further eight more letters were sent out on 9 July, including the announcement of a 50% reciprocal tariff on Brazil due to the supposed unfair treatment of former President Bolsonaro (notably, the US runs a trade surplus with Brazil).

From three shocks to one or two

Relative to ‘Liberation Day’, the current situation differs in a key dimension. Immediately following on from 2 April, in essence, there were three overlapping shocks:

• The adverse financial market reaction.
• Uncertainty around where tariffs would settle and when.
• The tariffs themselves.

1. The adverse financial market shock, has unwound, at least for the time being: share prices are well above their pre-Liberation Day levels.

Granted, the US dollar is still considerably weaker (by 5% on our calculations). But between 4 July, just before the latest tariff rates were announced, and 9 July, the USD strengthened slightly in trade-weighted terms. This is different from the situation in the three trading days after 1 April, when the USD fell by 0.5%.

2. Uncertainty on where tariffs will settle. The jury is still out. President Trump flagged explicitly that the tariff rates currently pre-announced for 1 August could yet be altered. This is not the craved-for ‘certainty’ on applicable tariffs that businesses can plan pricing, production, investment and hiring around.

But Trump has at least indicated that this deadline would not be shifted. How much faith to have in that promise is an open question. And perhaps, by showing himself to be willing to back down if the market reaction is painful, the uncertainty is now less than it was in April.

Certainly, we believe it is this thinking, encapsulated in the ‘Taco’ trade – Trump Aways Chickens Out – that has prompted the recovery in markets. Whether the reduction in uncertainty is enough to unfreeze business activity rather than just market sentiment remains to be seen.

3. Tariffs themselves. Taco might rein in the President’s most extreme ambitions, but a Donut (Donald Orders Nullifying U-Turn) on tariffs does not look to be on the menu during his remaining time in office.

Tariffs are a tax rise, the burden of which will necessarily fall on one or several parties. Which party will have a crucial bearing on the economic outlook.

There are several steps between the foreign producer of a good and its US final consumer. In principle:

• Foreign producers might cut their selling price to absorb the tariff cost.
• Wholesale importers might reduce their selling price to retailers.
• Distributors could absorb it in their margins.
• The final retailer could cut its margin to offset the tariff – or it may not, and raise the final price charged to US consumers.

Only in the very first case does no US party pay any of the extra tax revenue generated. The historical experience from past tariff hikes, which is reflected in various model estimates, has been for substantial passthrough along the supply chain, with consumers bearing the majority of the cost.

A paper by the American Economic Association, for instance, estimates a short-run response in import volumes of 0.76 – in other words, a 1 percentage point tariff rise typically leads to a 0.76 percentage point fall in imports.

This can only happen if consumer prices increase substantially (or if importers cut back orders in anticipation of weaker demand); otherwise there is no reason for import demand to change.

We note that typically, tariff rate changes have been smaller in the past and the larger the rise, the less plausible it is that foreign producers have enough of a margin to absorb the extra tariff, even if they wish to.

Therefore, we think there is no getting round some negative economic impact of tariffs in the US. No doubt, the fact that tariff rates do vary between countries will lead to some switching of suppliers by US importers, towards those with relatively lower tariffs. Therefore, the actual tariff rate paid will be less than the calculated tariff rate rises in Chart 1.

To account for that in our forecasts, we assume eventual pass-through to consumer prices of ‘just’ two thirds of the tariff rise.

What are the potential impacts?

An experience we can draw on is that of the higher tariffs on washing machines during President Trump’s first presidential term. These took effect in February 2018 but a price rise was only visible in CPI data from April onwards. The rise in laundry equipment prices between January 2018 and June 2018 – their peak – was substantial though, at over 12%

Moreover, the import surge into the US ahead of ‘Liberation Day’ suggests that there was a substantial amount of stockpiling by importers pre-tariffs (Chart 2). This inventory, bought at pre-tariff prices, will be drawn down first before further imports at post-tariff prices take place. The more stockpiling, therefore, the later the price impact can be expected to show up.

To an economist, there is a difference between a one-off price level change and an inflation impact: the latter is more persistent, whereas the former can be considered transitory.

However, the Federal Reserve has learnt from its Covid experience that a series of transitory shocks can lead to prolonged inflation that imperils its policy targets. The tariff increases are being announced and implemented in stages - with various goods affected at various times - is also far from a one-off step change which therefore must raise the chances price rises are more than simply transitory.

The FOMC is clearly minded not to repeat past mistakes and is therefore taking a cautious route, describing itself as being in a ‘good place’ to await evidence of how the burden of tariffs is shared and how that impacts the economy. That is easier to justify as economic activity, and crucially the jobs market, are seemingly holding up well for now.

There is therefore no clear signal that the economy is struggling under the current level of rates, and so no hurry for the Fed to cut them – notwithstanding calls for ever-larger rate reductions by the White House. This is all the more so as the passage of the One Big Beautiful Bill removes the fiscal tightening that would otherwise have acted as a brake on the economy.

We continue to predict just one 25 basis point Fed rate cut this year.

Elsewhere, the lesson of the past few months is that other countries are not as minded to retaliate to higher US tariffs. The European Union is, reportedly, minded to accept the 10% baseline tariff, if it was to remain without upping tariffs on imports from the US. (Higher tariff rates though could be difficult to swallow without at least some, carefully calibrated and targeted, countermeasures, some of which are ready to roll out without further ado.) Foreign currencies are also now noticeably stronger against the dollar.

Both factors mean less inflationary pressure, and therefore less of an uncomfortable balancing act between prospects of lower growth and higher inflation for central banks (other than the Fed).

Yet the ECB also faces the implications of a substantial step up in defence spending and, in the case of Germany, an imminent sharp boost to planned infrastructure investment. We remain comfortable for now with our forecast of the ECB stopping its easing cycle at current levels of rates. Without the new fiscal picture though, the arguments for additional ECB rate cuts from here may have looked stronger, especially bearing in mind the gains in the euro. In the UK, meanwhile, the picture might look similar, at first glance: even if to a lesser extent, the U-turns by the UK government on previously planned welfare spending cuts point in the same direction.

However, the need to stick to fiscal rules is so strong that other offsetting forms of balancing the books will have to be found. We feel, if anything, more strongly that the BoE will cut rates further next year than the market is pricing in, to 3.00%.

In summary, we remain on a watching brief. Tariffs are, at the time of writing, no longer the troubling financial market shock that they were. It is precisely this though that could embolden the US administration to go harder in the now prolonged trade negotiations.

The economic impact of higher tariffs looks, however, to be unavoidable, once stockpiles built pre-tariffs are drawn down. Dramatic turns in this tale cannot be ruled out. For now we anticipate gradual but clear signs of tariff impacts to build over the remainder of the year.

We need to remain nimble though should tariffs or other factors prove highly taxing for the US economy after all.