By Ashok N Ayers
NEW YORK: When President Donald Trump unveiled his most aggressive tariff regime in nearly a century last April, targeting more than 150 countries with levies that hit major trading partners particularly hard, Wall Street braced for economic catastrophe. Economists scrambled to revise their forecasts upward for inflation and downward for growth. Some predicted a recession was all but inevitable.
Eight months later, the apocalypse hasn’t arrived—but neither has the manufacturing renaissance Trump promised.
The U.S. economy continues to expand, defying the gloomiest predictions. Yet the tariffs’ intended benefits remain largely theoretical, while their costs are becoming increasingly apparent in government revenue shortfalls, a cooling labour market, and strained relationships with America’s closest allies.
Annual inflation stood at 3% in September, stubbornly above the Federal Reserve’s 2% target but well below the surge many economists anticipated. The tariffs have nudged prices higher for furniture, apparel, and other consumer goods, but the impact has been surprisingly muted.
The explanation lies in a gap between headline tariff rates and what companies actually pay. Treasury Department data analysed by Pantheon Macroeconomics reveals an effective average tariff rate of approximately 12.5%—far below the headline figures that average over 17% by some estimates.
Companies have deployed an arsenal of strategies to minimize their tariff burden. Many have shifted production from China, which faces some of the steepest levies alongside Canada, Mexico, and India, to countries like Vietnam, Turkey, and other nations with more favourable duty structures. This supply chain reshuffling has accelerated dramatically since spring, according to Randy Altschuler, chief executive of Xometry, an online manufacturing marketplace.
“They’re saying: I’m not avoiding offshore, but I’m diversifying,” Altschuler explained, describing how manufacturers are maintaining global production while strategically relocating operations.
Retailers had also rushed to build inventory ahead of tariff implementation, using bonded warehouses where goods can be stored duty-free temporarily. Signet Jewelers, which imports roughly half its finished jewellery from India—a country facing particularly steep tariffs—is leveraging these facilities while simultaneously relocating production to minimize costs, according to Chief Operating and Financial Officer Joan Hilson.
Even when companies must pay full tariffs, they’re absorbing much of the cost rather than passing it entirely to consumers. Bank of America estimates that consumers are bearing 50% to 70% of tariff expenses, with corporations shouldering the remainder. This reflects a crucial reality: corporate profit margins expanded significantly during the pandemic and remain elevated, providing cushion to absorb new costs without alienating price-sensitive customers.
The automotive sector illustrates this dynamic starkly. Despite facing tariffs of 15% or more on imports from many countries, average car prices rose only 1.1% between March and September on a seasonally adjusted basis, according to JPMorgan analysis. The investment bank estimates carmakers are absorbing roughly 80% of tariff costs, passing along just 20% to buyers who are already stretched thin by years of vehicle price increases.
The Treasury Department’s tariff revenue collection tells another story of underwhelming results. The government is projected to collect approximately $34 billion in customs duties for October, putting it on pace for roughly $400 billion annually—a significant shortfall from Treasury Secretary Scott Bessent’s August projection of $500 billion to $1 trillion yearly.
This revenue gap underscores how extensively companies have exploited loopholes, secured exemptions, and restructured supply chains to avoid the highest levies. The de minimis exemption for small online orders, though recently closed for some countries, allowed billions in goods to enter duty-free for months. Meanwhile, rules-of-origin requirements and other trade agreement provisions continue to provide workarounds for sophisticated importers.
The shortfall has implications beyond simple budget arithmetic. Trump administration officials had touted tariff revenues as a means to fund tax cuts and reduce reliance on income taxes. With collections running below projections, those plans face renewed scrutiny.
While the economy continues growing and unemployment remains relatively low, economists increasingly believe tariff-related uncertainty is making companies more cautious about hiring. The labor market has shown signs of softening in recent months, with job growth decelerating from the robust pace seen earlier in the year.
Companies facing tariff costs and uncertain about future trade policy are taking a wait-and-see approach to expansion plans. This hesitancy ripples through the economy, potentially setting the stage for more significant weakness ahead even if outright recession has been avoided so far.
Consumer confidence, which plummeted to its lowest level since 2022 in April following the tariff announcements, has partially recovered as Americans buoyed by record-high stock markets and decent job prospects continue spending. Yet confidence remains fragile, and any renewed shock could tip sentiment decisively negative.
The tariffs’ diplomatic fallout has been severe, particularly with America’s closest trading partners. Canada and Mexico, which face some of the stiffest levies despite the recently renegotiated United States-Mexico-Canada Agreement, have responded with retaliatory measures targeting politically sensitive U.S. exports. Agricultural products, bourbon, and manufactured goods from swing states have all faced countermeasures.
Relations with India and China, already strained before the tariffs escalated, have deteriorated further. Both countries have filed complaints with the World Trade Organization and implemented their own retaliatory tariffs, creating a complex web of trade barriers that raises costs for businesses on all sides.
European response has been more measured but no less concerned. While the European Union has so far avoided the very highest tariff rates, officials in Brussels are closely monitoring the situation and have prepared their own retaliatory measures should U.S. policy shift further against European interests. Some European companies are reportedly exploring ways to reduce their reliance on the U.S. market, though transatlantic trade flows remain substantial.
Economists caution against premature celebration. Many companies are raising prices gradually, meaning the tariffs’ full inflationary impact may not materialize until well into next year. Kelly Kowalski, head of investment strategies at MassMutual, noted that while tariffs haven’t mattered as much as initially feared, their long-term effects remain uncertain.
“I’m not sure they’ve mattered as much as people thought they would,” Kowalski said, while acknowledging significant questions remain unanswered.
The promised manufacturing renaissance has yet to materialize in any meaningful way. While some production has returned from China, much of it has simply relocated to other foreign countries rather than to U.S. factories. Domestic manufacturing employment has shown little growth, and capital investment in new American production capacity remains modest.
As the trade war enters its second year, the U.S. economy finds itself in an uncomfortable middle ground—having avoided the worst-case scenarios but failing to achieve the transformative benefits tariff proponents envisioned. Whether this equilibrium can hold, or whether delayed effects will eventually force a reckoning, remains one of the central economic questions heading into 2026. (IPA Service)
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