Brent Schowe
Since the tariff announcements earlier this year, the U.S. economy, businesses, and consumers have been adjusting to an evolving landscape and navigating a period marked by uneven momentum.
A new era of tariff policy
The Trump administration has taken a markedly different approach to trade, using trade and tariffs as a
policy tool. In his first term, President Trump introduced tariffs that primarily targeted specific products and
regions. He also renegotiated the North American Free Trade Agreement (NAFTA) into the United States-
Mexico-Canada Agreement (USMCA) in 2020. Tariffs were also a key issue on which the president
campaigned during the 2024 election.
Some economists view tariffs as taxes on the global economy, diverting capital away from private enterprise
and into government coffers. Supporters of tariff policy see them as a means of leveling the global playing field for U.S. workers and a strong incentive for companies both here and abroad to direct more capital investment into the United States.
Our North American neighbors are our largest trading partners, both from an import and export perspective.
The largest importer of goods into the U.S. is Mexico, holding the lead with $506 billion in U.S. imports in
2024. Canada is the top destination for U.S. exports, with $349 billion in U.S goods making their way to
Canada in 2024.
A trade deficit happens when a country imports more than it exports. China rivals both Canada and Mexico on
imports but maintains the largest trade deficit with the U.S. at nearly $300 billion, which represents a major source of consternation for the administration. China’s dominance in rare earth minerals, the U.S.’s longstanding sentiment of unfair trade practices, and intellectual property theft serve only to heighten the focus on China.
Comparatively, the U.S.’s trade with the USSR during the Cold War was virtually nonexistent.
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Globalization and Trade Globalization has been a defining force post-World War II. The United States consumer became an engine of global growth. Despite its dominant position in global trade, the U.S. economy remains remarkably self-sufficient. As a percentage of Gross Domestic Product (GDP), our combined import and export activity ranks near the bottom globally1, due to our abundant natural resources and workforce mobility. China’s 2001 entry into the World Trade Organization was a watershed moment in the push toward globalization. The availability of ever-cheaper overseas goods transformed the U.S. economy into one that was much more service-oriented, with jobs following suit. Manufacturing moved overseas, while the information age ushered in new jobs in the technology space. |
North American Neighbors and a Geopolitical Rival: Top Trading Partners
Year-to-date Goods Top Trading Partners
Source: Treasury.gov, Census Bureau.
Liberation Day roiled financial markets, but not for long
President Trump’s announcement on April 2 introduced a 10% baseline tariff on effectively every country in the world, along with a reciprocal tariff in proportion to the relative size of the country’s trade surplus with the U.S., ranging from 10-50%. The breadth of the policy and magnitude of the tariff rates shocked markets, triggering a stock market selloff with the S&P 500 Index dropping 12% in less than a week, injecting tremendous volatility into bond and currency markets worldwide.
However, the initial market shock was short-lived, as country-by-country negotiations promptly ensued, and markets appeared to interpret that the announced tariff rates represented a ceiling and not a floor. By the end of June 2025, the S&P 500 had regained its record highs, and the U.S. market has returned over 10% through September 2025. Treasury bond yields also stabilized, with 10-year rates currently hovering around 4.25%. Lower yields on shorter maturities anticipate the U.S. Federal Reserve (Fed) will combat recent labor market softness with another rate cut later this fall.
The U.S. dollar has declined almost 10% against a basket of global currencies. While tariffs have certainly played a role, other factors such as interest rate differentials, GDP growth trajectories, and inflation are also at play.
Overall, the initial April shock appears to have given way to tariff fatigue, or even complacence, as volatility in both stock and bond markets has become subdued amid a broad risk-on rally as investors have re-embraced risk taking, pushing equity prices higher. Announcements regarding trade deals do not seem to have the impact they once did. Markets appear to be much more focused on the Fed cutting interest rates than on the finer points of ongoing trade negotiations.
Tariff negotiations remain tenuous
As negotiations continue, the administration remains committed to tariffs. And while trade deals have been
announced with many key trading partners, they mostly serve as frameworks for future discussions where the
line-by-line details will get hammered out. After a contentious series of tit-for-tat tariff increases with China in April that were later walked back, most goods from China now carry a 30% tariff. However, tariffs imposed on China are set to increase effective November 10 as the 90-day pause expires and progress toward a final, comprehensive trade agreement with China remains tenuous.
Proposed Tariff Rates Not Seen in a Century
U.S. Average Effective Tariff Rate
Source: Commerce Trust.
Regardless of how and when individual country trade agreements are ultimately finalized, the consensus is clear among market participants that, absent intervention from the courts, higher tariffs are here to stay. With a 10% minimum expected to be levied on virtually every good the U.S. imports, we currently expect the average tariffs paid at the U.S. border will be around 18.5%, approaching levels not seen since the Depression-era Smoot-Hawley tariffs.
Tariffs raise revenue, but restrict growth
Tariffs can be compared to taxes, which Americans are accustomed to paying on most purchases, except they are levied by the federal government and assessed when a product clears customs at a U.S. port. Prior to 2025, tariff rates had been historically low. Tariffs were generating revenue for the federal government at around $100 billion annually, but in the second quarter of 2025, tariffs generated an annualized rate of over $250 billion of revenue. As delays expire and other tariffs begin to go into effect, we estimate this figure could grow to over $500 billion annually.
The Trump administration has touted tariffs as a means of shrinking the federal budget deficit, which stands at nearly $2 trillion on a budget of roughly $7 trillion in fiscal year 2025. The increased tariff revenue could reduce the deficit. However, the imposition of higher tariffs is expected to lead to slower overall growth that could then lead to reduced revenues from other sources like income taxes. Nonetheless, Standard & Poor’s cited “meaningful tariff revenue” as a factor in its August 18 affirmation of its AA+ rating on the United States.
Inflationary effects of tariffs hard to predict
The inflationary effects of tariffs are complex and quite difficult to forecast. While the tariff is paid by the importer at the U.S. dock, the cost can be distributed across the entire supply chain, from foreign exporters to U.S. importers and ultimately to consumers. The extent to which tariffs translate into consumer price inflation depends largely on the price elasticity of demand. Exporters and importers must decide how much margin compression they are willing to accept to maintain competitiveness in the U.S. market. In cases where domestic substitutes are scarce, such as advanced semiconductors or specialty chemicals, firms may be able to pass most of the tariff burden onto consumers. Conversely, for goods with readily available domestic alternatives, such as basic steel products or many agricultural products, competitive pressures may force foreign suppliers and importers to absorb more of the cost.
Because so much of the tariff story has yet to play out, estimating the ultimate impact of tariffs on inflation metrics like the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) index remains challenging. Some studies of tariff increases during President Trump’s first term suggest that as much as half of the imposed costs were eventually reflected in consumer prices. Using that as a baseline, and assuming average tariff rates stabilize around 18%, we project that Core CPI could rise from 3.1% in July to as high as 4% by year end before the one-time shock is fully absorbed and inflation resumes a downward trajectory in 2026.
Inflation Shock Absorbed into 2026
Projected Tariff Impact (Current Core CPI: 3.1%)
Source: Bureau of Economic Analysis; Bloomberg.
Businesses’ and consumers’ cautious stance contributes to slower growth
Like other forms of taxation, tariffs introduce friction into the gears of commerce, influencing business and consumer behavior. Firms must reassess supply chains, reevaluate pricing strategies, and reconsider capital investment plans. The uncertainty and added costs associated with tariffs can lead to lower margins, postponed expansion, reduced hiring, and, in some cases, layoffs, particularly in sectors heavily reliant on imported inputs.
As companies navigate these disruptions, overall economic momentum tends to slow. The reconfiguration of supply chains takes time and resources, and the hesitation to invest amid policy uncertainty can dampen productivity and output. While not necessarily recessionary, this environment fosters a more cautious stance across the economy, contributing to slower but still positive growth.
Conclusion and outlook
As businesses and consumers adjust to the evolving tariff landscape, we anticipate subdued but still positive
economic growth through year end. The U.S. economy is currently navigating a period marked by uneven momentum and cautious spending as companies respond to changing cost structures and supply chain pressures created by tariff and policy changes. Financial markets have largely stabilized since the initial April 2 Rose Garden shock, with equity indices recovering and bond yields reflecting expectations for monetary easing. In particular, lower yields on shorter maturities pointed to the Fed responding to recent labor market weakness with rate cuts, offering a cushion to economic growth. While growth may decelerate, we expect enough momentum to avoid a full stall and sidestep a hard landing or recession. Much will depend on how effectively companies adapt and how quickly consumer confidence stabilizes.
Meanwhile, the inflationary effects of tariffs could continue to ripple through supply chains. Although inflation
measures may temporarily rise as businesses adjust pricing strategies, we expect this one-time tariff shock to fade as cost pressures normalize and demand elasticity plays out. If policy clarity improves and global trade tensions ease, the current headwinds could give way to a more stable growth trajectory in 2026.
1 https://ourworldindata.org/grapher/trade-as-share-of-gdp
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Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of September 30, 2025. This summary is
intended to provide general information only and is reflective of the opinions of Commerce Trust. This material is not a recommendation of any particular security,
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