Trump administration's tariff plan: Potential impact on the broader economy

Although newly imposed tariffs aren’t dominating headlines as they did early in the second Trump administration, increased tariffs remain in place. Some have been paused but could be reinstated soon. While uncertainty about President Donald Trump’s final tariff plans persists, there is little doubt that “tariffs, in some form, are here to stay,” according to Beth Ann Bovino, chief economist at U.S. Bank.

As of June 2025, these include a 30% broad tariff on all Chinese imports; a 25% tariff on Mexican and Canadian imports not covered under the U.S.-Mexico-Canada trade agreement; a 25% tariff on foreign-produced automobiles (excluding some vehicles made in the United Kingdom); and 50% tariffs on most steel and aluminum imports.

Broader-based tariffs affecting nearly all trading partners, announced on April 2, 2025, were put on hold but may again apply in early July. The Trump administration reports ongoing trade negotiations with numerous countries, but with the deadline looming, few agreements have been reached.

At one point, the U.S. had imposed tariffs on Chinese goods at 155%, and China countered with 125% tariffs; however, the two countries agreed to lower the tariffs while talks continue.

Improving the U.S. trade balance

President Trump has repeatedly stated that one aim of his new tariffs is to reduce America’s large trade deficit. “The President’s complaints about America’s trade deficit largely relate to goods trade,” says Bovino. “What’s often overlooked is that we have a huge trade surplus in services, particularly driven by our technology advantages.”

U.S. Trade Balance of Goods and Services ($ billions)

“The U.S. has the largest surplus in trade in services of any country,” says Bovino. This includes intellectual property like software, movies, and entertainment. “The risk I see if other countries retaliate to tariffs imposed by the U.S. is that they may target trade in services,” notes Bovino. Canada announced a tax on digital services recently with first payments to be collected on Monday, June 30. But rescinded the tax after President Trump cut off U.S. trade talks.

Economic impact of tariffs

The primary concern is whether a negative economic impact will result from a flood of new tariffs. In recent decades, conventional economic wisdom advised against steep tariffs. This view dates back to the Smoot-Hawley tariffs of the Great Depression era (through the 1930s), when efforts to support the economy by boosting tariffs resulted in other countries’ reciprocal actions, and a significant decline in global trade. That only appeared to worsen the economic crisis. Since then, tariffs have generally been considered a hindrance to economic advancement, though some form of tariffs has consistently been a part of U.S. policy. Since the 1940s, average U.S. tariffs diminished considerably, down to 2.5% in 2024. However, today’s effective tariff rate is approximately 15%. ¹

U.S. Import Duties as a % of U.S. imports

The primary economic concern centers around the risk of higher inflation. “Tariff plans being talked about would indicate that inflation will rise,” says Bovino, “but we haven’t seen that yet. That’s because the full impact of tariffs has not yet filtered into our economy.”

Awaiting clarity on additional tariff proposals

While tariff rates have traditionally been set through Congressional action, President Trump invoked the International Economic Emergency Powers Act (IEEPA). Although a successful court challenge to the President’s claim of such powers was mounted, it is currently on appeal, and for now, the administration’s tariff policies can proceed. Bovino doesn’t see court action as a likely obstacle to President Trump’s policies. “The court left the administration with other avenues to pursue its trade policies, regardless of its main ruling.”

The Trump administration announced that new tariff policies would take effect for most countries on July 9, 2025. Some exceptions may be made if negotiations are in process. It is unclear whether these tariff levels will rise to those outlined in the White House’s April 2 announcement.

Bovino says the level of uncertainty, due in part to still fuzzy tariff policies, is having an impact on businesses. “They are continuing with day-to-day operations, keeping the lights on for their factories and offices, but not planning big expansions,” says Bovino. “Animal spirits have died down in the current environment.”

Economic considerations of tariffs

While tariffs are designed to promote domestic industry and generate government revenues, questions revolve around the full economic consequences. Will new trade policies benefit or hinder economic growth? Will they prove to be inflationary? What industries are most susceptible?

Economic growth

Bovino says the potential negative economic results are marginal if the effective tariff rate approaches 16%. “There could be a detrimental impact, but perhaps not as severe as many might expect given overall domestic economic content that originates in the U.S.” says Bovino. She notes that approximately 75% of U.S. economic activity is domestically driven, with only 25% tied to trade. For a brief time, the U.S. maintained at least 145% tariffs on most Chinese goods and China applying 125% tariff rates to U.S. goods. “This effectively resulted in a trade embargo, with much more severe economic consequences,” says Bovino. For now, both countries have eased tariff on each other’s goods.

Inflation

One of the biggest concerns is how much tariffs will increase prices for businesses and consumers. Prices are likely to be pushed higher, with questions centered on whom the cost falls. “If importers try to absorb the costs, that squeezes profit margins,” says Bovino. “If they pass it on to households, that adds to inflation, which is already elevated.”contributing to the Fed’s hesitation to further cut interest rates, says Bovino.

Bovino said recent White House actions pausing or scaling back tariffs suggest that the economic impact may be lessened. “Yet recent pronouncements by Federal Reserve Chair Jerome Powell indicate that the Fed remains much more concerned about tariffs’ potential inflationary impacts.” That is contributing to the Fed’s hesitation to further cut interest rates, says Bovino.

Industries

High tariffs applied to Chinese-produced goods is dramatically impacting many importers. President Trump temporarily waived those tariffs for various electronics, including smartphones and computers. Given the integration of North American manufacturing processes, U.S. auto industry leaders have warned of a significant impact if tariffs with Canada and Mexico rise. Other notable Mexican imports likely affected are agricultural and electronic products. Prominent Canadian imports include energy products (mostly limited to a 10% tariff), aerospace products and parts, chemicals and food products. ²

A change in direction

In the post-World War II era, efforts were made to promote international trade. Economically linking countries was considered a way to avoid military engagements. This approach began to peak in the late 20th and early 21st century. U.S. policymakers created NAFTA, reducing trade barriers between the U.S., Canada, and Mexico. During the first Trump administration, this treaty was replaced by USMCA, which still maintained open trade but with some modifications. Trade with other partners, including previously off-limit countries such as China, flourished until the first Trump administration, when President Trump began to pursue more aggressive Chinese import tariffs. President Joe Biden retained most of those tariffs, and now Trump is again pursuing more restrictive trade barriers.

“These moves put what had been favorable trading relationships with other countries at risk,” says Bovino. “New tariffs raise some challenges in maintaining economic efficiencies that existed under a freer trade environment.”

Bracing for tariff impacts

Business owners relying on foreign products need to be prepared for cost increases should proposed tariff hikes be implemented. This may mean managing costs by considering other supplier resources not subject to new tariffs. Short of that, higher tariffs on goods will either reduce profit margins or will require that some or all of the costs be passed on to customers. Business owners should continue monitoring tariff developments, which appear subject to rapid change under the Trump administration.

Consumers also need to be prepared for the potential that rising tariffs could result in higher prices for a wide range of goods, from groceries to pharmaceuticals to durable goods such as automobiles and appliances. “It’s notable that tariffs are considered a transitory, one-time inflation push,” says Bovino. “Price levels may stay high, but inflation rates don’t keep going up assuming tariff rates remain level.”

To this point, the extent to which new trade policies could affect businesses and consumers is far from clear. Expect the story to continue evolving in the months and years ahead.