Tariffs' Impact on US Economy Less Than Feared: An In-Depth Analysis

When then-President Donald Trump announced sweeping tariffs in April, economists predicted inflation would surge and recession risks would rise. Businesses and consumers rushed to stockpile goods in anticipation of price increases. Now, those fears appear to have been overblown.

While the inflation rate remains above target, it's lower than initially projected. And despite the imposition of the most stringent tariff policies in nearly a century, the US economy has continued to grow.

"I'm not sure the impact of the tariffs is as large as people think," said Kelly Kowalski, head of investment strategy at MassMutual.

Meanwhile, the benefits of tariffs have largely failed to materialize: the fiscal revenue generated by Trump's tariffs has fallen far short of US Treasury projections, and there are few signs of a domestic manufacturing boom.

In September, US inflation rose 3% year-on-year, above the Federal Reserve's 2% target, but the impact of tariffs was relatively mild, mainly pushing up prices for goods like furniture and clothing.

Reasons for the Discrepancy

One reason is that companies are actually paying lower tariffs than the headline rates. This is evidenced by the fact that US Treasury customs and excise tax revenues have fallen short of expectations.

According to an analysis of customs data by Pantheon Macroeconomics, US Treasury customs revenue is expected to reach $34 billion in October. If this growth rate is maintained, annual tariff revenue would reach $400 billion, far below Treasury Secretary Bessant's August forecast of $500 billion to $1 trillion.

Pantheon Macroeconomics points out that these tariff revenues indicate that the actual average tax rate for companies is around 12.5%, well below the estimated 17% headline rate.

Tariff Avoidance and Supply Chain Diversification

Tariff loopholes and exemption policies have allowed many goods to avoid high taxes. Meanwhile, companies are shifting production lines from high-tariff countries to countries such as Vietnam, Mexico, and Turkey, which levy lower tariffs on most goods, thereby lowering the actual tax rate.

"Companies aren't so much avoiding overseas production as they are diversifying," said Randy Altschuler, CEO of Xometry, a global online marketplace for manufacturers and suppliers.

Companies have also avoided costs by stockpiling inventory ahead of tariffs taking effect. Signet Jewelers, which imports about half of its finished jewelry from India, revealed on an earnings call in September that it plans to use bonded warehouses (which can temporarily store duty-free goods) and shift production capacity to other countries to minimize tariff costs, according to Chief Operating and Financial Officer Joan Hilson.

Patrick Kelleher, CEO of logistics firm GXO, said demand for free trade zones is increasing across the US. He added that companies are also planning their imports more carefully, avoiding paying tariffs on inventory stuck in warehouses.

Corporate Absorption of Costs

Even if US companies have to pay tariffs in full, they are only passing on some, not all, of the cost to consumers. Bank of America estimates that consumers are currently bearing 50%-70% of tariff costs, with companies absorbing the rest. A key reason is that corporate profit margins are significantly higher post-pandemic than pre-pandemic, making them better able to absorb tariff costs without raising prices.

Pantheon Macroeconomics estimates that even if retailers bear 30% of tariff costs, they can still maintain profit margins at the average levels of the 2010s.

For example, in the auto sector, according to data from JP Morgan, the average price of a car in September, seasonally adjusted, was only 1.1% higher than in March, despite cars imported from multiple countries facing tariffs of over 15%.

JP Morgan estimates that this means automakers are bearing about 80% of tariff costs, passing on only 20% to consumers. Car prices have risen sharply since 2020, and manufacturers fear consumers would be unable to absorb further price increases. Post-pandemic inflation has both pushed up prices and widened profit margins, making it easier for automakers to absorb tariff costs today.

Apparel brand Aritzia faces double-digit tariffs on goods imported from Vietnam and Cambodia, and the "de minimis threshold" loophole for small online orders has been closed, meaning many products can no longer avoid taxes. Nevertheless, the company remains profitable enough to handle the shock.

On a recent earnings call, executives revealed that if there were no tariff impact, adjusted EBITDA margin for the fiscal year could reach 18%-19%. But current forecasts expect profit margins to remain in the comfortable range of 15.5%-16.5%. CEO Jennifer Wong said on the call that the company's pricing strategy is "not tariff-based."