Terry DavidThe United States has implemented its most aggressive tariff regime since the 1930s, with the average effective tariff rate rising approximately 14 percentage points above the 2.5 percent level that prevailed a year ago. These sweeping trade measures are projected to reduce long-run GDP by 0.35 percent while generating between $2.5 trillion and $3 trillion in federal revenue over the next decade. Businesses and consumers are now adapting to a fundamentally altered trade landscape that affects everything from manufacturing supply chains to retail prices.
How High Have Tariffs Actually Risen?
The current statutory average tariff rate stands at its highest level since the early 1930s, marking a dramatic reversal of decades of trade liberalization. According to the Congressional Budget Office, the effective tariff rate for goods imported into the United States now sits approximately 14 percentage points higher than the roughly 2.5 percent baseline from a year ago.
The tariff structure varies significantly by trading partner. China faces the steepest levies at 30 percent, combining 20 percent “fentanyl” tariffs with 10 percent “reciprocal” tariffs. The European Union faces a proposed 30 percent rate set to take effect, while Canada and Mexico have received various exemptions under the USMCA trade agreement.
More than a third of imports remain unaffected by tariff rate increases, according to the CBO. Exempted categories include certain agricultural products, consumer electronics, pharmaceutical products, and semiconductors.
What Impact Are Tariffs Having on Consumer Prices?
Tariffs are exerting measurable upward pressure on consumer prices, though the full effects are still materializing. Research from the Federal Reserve Bank of St. Louis confirms that prices for durable goods such as vehicles, electronics, and furniture have increased noticeably since tariff implementation began.
Motor vehicle prices have risen approximately 10 percent in the short run, equivalent to roughly $5,000 added to the price of an average new car. Food prices have increased 1.9 percent, while metal-dependent consumer products including electronics show price effects between 16 and 18 percent.
The pass-through rate from tariffs to consumer prices has historically been high, often near 100 percent. This means the burden of tariffs typically falls on domestic consumers and businesses rather than foreign exporters.
Foreign-currency-denominated import prices rose quickly at the end of 2024 and have since returned to mid-2024 levels, suggesting foreign producers are not absorbing significant portions of the new tariffs.
How Are Businesses Responding to Trade Uncertainty?
More than 30 percent of surveyed firms now identify trade and tariffs as their most pressing business concern, according to the Federal Reserve Bank of Richmond’s CFO Survey. This represents a sharp increase from just 8.3 percent in the previous quarter.
Approximately 25 percent of survey respondents indicated plans to reduce hiring and capital spending in response to tariffs. Among manufacturing firms specifically, these figures rise to 32 percent and 29 percent respectively.
Companies are employing multiple strategies to offset tariff impacts. Recent commentary from S&P 500 firms reveals plans to use cost savings, supplier adjustments, and pricing changes to manage increased costs. Many goods-related companies entered 2025 with above-average inventory levels, providing a temporary buffer against supply disruptions.
The Tax Foundation estimates that tariffs amount to an average tax increase of $1,100 per US household in 2025, rising to $1,400 in 2026.
What Do Economic Models Project for Long-Term Effects?
Analysis from the Yale Budget Lab projects that all 2025 tariffs plus foreign retaliation will lower real GDP growth by approximately 0.5 percentage points in both 2025 and 2026. The unemployment rate is expected to end 2025 approximately 0.3 percentage points higher and 2026 approximately 0.7 percentage points higher than baseline projections.
Payroll employment is projected to be 490,000 lower by the end of 2025 compared to a scenario without tariffs. In the long run, the level of real GDP remains persistently 0.35 percent smaller, equivalent to approximately $105 billion annually in 2024 dollars.
The sectoral impacts present a complex trade-off. US manufacturing output is projected to expand by 3.2 percent as domestic production substitutes for imports. However, these gains are more than offset by contractions elsewhere in the economy. Construction output is projected to contract by 4.0 percent, agriculture by 0.7 percent, and mining and extraction by 2.1 percent.
Which Countries Are Winners and Losers from US Trade Policy?
The United Kingdom and Mexico emerge as relative beneficiaries from the 2025 tariff regime. Mexico’s economy is projected to be approximately 0.1 percent larger in the long run, while the UK economy benefits by nearly 0.2 percent due in part to the US-UK trade deal.
Canada’s economy faces a 0.1 percent contraction in real terms. China experiences more significant damage, with its economy projected to shrink by 0.3 percent, roughly two-thirds as large as the impact on the United States. The European Union’s economy is projected to be 0.05 percentage points larger in the long run.
Federal Reserve research from the San Francisco Fed indicates that tariff effects on the economy do not move in a single direction. On impact and early on, tariffs depress labor markets and inflation. Over time, these effects reverse course as supply factors begin to dominate.
The 2025 tariff environment represents a significant shift in American economic policy, with consequences that will continue unfolding over the coming years. Businesses, consumers, and policymakers are all adjusting to a trading system fundamentally different from the one that prevailed for decades.
