Why Trump's tariffs had limited bite
"Tariff" is famously Donald Trump's favorite word, and the U.S. president's continued use of it unleashed fear across markets last year as his administration unilaterally
"Tariff" is famously Donald Trump's favorite word, and the U.S. president's continued use of it unleashed fear across markets last year as his administration unilaterally imposed the most protectionist set of trade policies since the 1930s. But the bark was far worse than the bite. It's been just over a year since Trump's "Liberation Day," and the average U.S. tariff rate is lower than many feared in April 2025. But at just under 10%, the daily effective pre-substitution rate is still four times its level at the end of 2024 and, excluding last year, the highest since the early 1940s. Yet tariffs barely register in financial markets today.Also read: Trump's tariffs aren't saving jobs at Whirlpool's Iowa refrigerator plantThat's partly because real wars have replaced trade wars on investors' worry list. But the economic impact of Trump's tariffs has also been nowhere near as severe as many feared, potentially because the trade war coincided with an unprecedented technological boom. But perhaps that's too simplistic? The full economic impact of redrawing the world's trade map and geopolitical alliances remains unknown and may not become clear for years. Negative shocks and surprises could still be in store. STATISTICALLY INSIGNIFICANTTariffs' muted economic impact over the past year can partly be explained by one simple fact: actual levies applied have been lower than statutory rates. That's a key argument in an April Brookings Institution paper by Pablo D.
Fajgelbaum of the University of California and Amit Khandelwal of Yale University. The authors find that by December last year, around 57% of U.S. imports were still entering duty-free. That includes most goods from Canada and Mexico under the United States-Mexico-Canada Agreement, or USMCA. The Trump administration is expected to officially declare on Wednesday that it will not extend the 32-year-old North American free trade zone, but that just starts the clock on another review process, with the pact not set to expire until July 1, 2036. Tariffs applied at the border are usually lower than the stated headline rates for other reasons, such as legal loopholes and special agreements. Meanwhile, retaliation against Trump's tariffs has mostly been modest or short-lived, with China the only major trading partner to offer a sustained firm response. The AI boom has also helped, as hyperscalers have invested hundreds of billions of dollars to secure chips and other infrastructure, boosting global trade. As a result, the net impact of tariffs on economic activity has only been between 0.1% and minus 0.1% of GDP up to December, according to the Brookings paper. These findings chime with analysis produced by The Budget Lab at Yale. It estimates that the U.S. economy will be 0.1% smaller in the long run because of tariffs, the equivalent of about $30 billion annually in 2025 dollars.
The BriefWire