The end of the “reciprocal” tariff pause
Global risk radar
Key takeaways
US President Donald Trump’s "reciprocal" tariff pause ends on 9 July. We expect the administration to announce several country-specific deals and further extensions for countries negotiating in good faith, as well as bilateral escalations aimed at strengthening US negotiating leverage.- By year-end, we expect the US effective tariff rate to remain roughly where it is today: near 15%.
- The next major milestone in tariff negotiations following the end of the "reciprocal" tariff pause is likely to be the announcement of sector-specific tariffs under Section 232, which we expect to be announced later this year.
- Legal challenges to the administration’s tariffs are working their way through the appeals courts and will likely reach the Supreme Court later this year. If they are deemed illegal, Trump can use Section 232 and Section 301 to rebuild the tariff wall.
In this note we provide an update of the latest developments in US trade policy, including the end of the "reciprocal" tariff pause, the anticipated sectoral product tariff announcements, and the legal challenges to President Donald Trump's second-term tariff wall.
We believe the Trump administration will maintain an aggressive tariff stance even as it negotiates bilateral trade deals and fights legal challenges to its use of the International Emergency Economic Powers Act (IEEPA), which formed the basis for much of tariffs enacted this year. The US effective tariff rate has risen to 15% in just a few short months—six times greater than it was at the start of the year—and we think this rate will hold through the end of the year, even as there will likely be further headline risk, tough-sounding rhetoric, and shifts in tariff rates during the second half of 2025 (see Fig. 1).
Figure 1: The Trump administration's highly volatile tariffs
We see three important tariff developments as the second half unfolds:
- The pause on "reciprocal" tariffs ends in early July and will likely be accompanied by country-specific deals and arrangements,
- Forthcoming sectoral tariff announcements are likely in the third quarter, and
- The appeals challenge to the Court of International Trade’s ruling that the IEEPA tariffs are illegal continues.
In our view, the tariffs enacted so far will slow, but not derail, US economic activity while placing some upward pressure on inflation later this year and in 2026 (see Fig. 2). We think the administration will ultimately prioritize economic activity over a disruptive rise in tariffs, especially since a recession would likely worsen the prospects for Republicans in the midterm elections next November. Trump has also been pressuring the Fed to cut interest rates, but further tariff hikes could push up both prices and inflation expectations even more, making it more difficult for the Fed to agree to rate cuts.
Figure 2: Inflation rises as activity slows
End of 90-day "reciprocal" tariff pause
End of 90-day "reciprocal" tariff pause
The 90-day "reciprocal" tariff pause ends on 9 July, and the administration has created full optionality in its toolkit to maintain leverage in its negotiations. We see the following three potential outcomes for the "reciprocal" tariffs:
- First, the administration can reach bilateral deals, as it did with the UK. The UK deal affirmed a 10% baseline tariff UK exports to the US, while creating quota carve-outs for cars, a lowered 25% tariff on steel and aluminum, and exemptions for civil aerospace exports. A minimum 10% baseline tariff will likely remain in future deals. Selective quotas or exemptions from sectoral tariffs are possible as well in exchange for purchase commitments or US investment pledges. The draft Vietnam deal announced on 2 July is interesting because it indicates that countries with sustained high trade surpluses with the US (unlike the UK which didn’t face a "reciprocal" tariff because it imports more goods from the US than it exports) and that act as a transshipment hub for Chinese products could face both a higher baseline tariff and tariffs on goods that have been rerouted to circumvent tariffs.1
- Second, the administration could offer further extensions to countries negotiating in good faith and delay the implementation of sectoral tariffs as these talks are ongoing. This group would face the 10% baseline tariff, but not the additional reciprocal rate. Countries still in negotiation will be able to refer back to the terms of any announced bilateral deals as a blueprint for their talks. Purchase agreements have proven popular with the US administration, and digital services taxes are still a thorny issue, as we saw with Canada over the past week.
- Third, we could very well see "reciprocal" tariff rates take effect for those countries or regions where talks have hit an impasse. Trump will set reciprocal rates higher where he wants to gain negotiating leverage but is unlikely to maintain them at a high level for a sustained period, especially with larger trading partners. The imperative for avoiding a policy-induced recession is higher with Republicans facing potential losses in the midterm elections.
We are also encouraged by developments across a number of separate but related fronts on military spending and international taxation that could give the administration a reason to look for opportunities to deescalate its tariff war. First, NATO countries, and European ones in particular, have broadly agreed to spend 5% of GDP on their military readiness. Second, Treasury Secretary Bessent announced a G7-endorsed agreement that would exempt US businesses from a global minimum tax framework. Both of these steps would help address some of Trump’s chief concerns about global burden sharing and policy alignment.
Expansion of sectoral tariffs
Expansion of sectoral tariffs
The sectoral tariffs on specific product categories under Section 232 of the Trade Expansion Act of 1962 will likely arrive sometime later in the second half of 2025 and likely at a rate of 25%. The product categories that are already the subject of Section 232 investigations include pharmaceuticals, semiconductors, lumber, copper, trucks, critical minerals, and aircraft. If the sectoral tariff announcements are delayed until later in the year, it may be because the administration wants to keep its options open or is considering quotas and other exclusions as part of the ongoing bilateral trade negotiations.
IEEPA legal challenges
IEEPA legal challenges
On the lawsuits challenging the legality of the IEEPA tariffs, the appeals process is underway and will likely not finish until the lawsuit travels all the way to the Supreme Court later this year. Recall that the Court of International Trade ruled on 28 May that Trump’s use of IEEPA to levy tariffs on trading partners was illegal. The administration immediately sought and received a stay pending appeal, allowing his tariffs to remain in effect. Oral arguments are scheduled to begin on 31 July in the Federal Court of Appeals. Irrespective of the outcome of the Federal Court of Appeals decision, this case will likely be appealed to the Supreme Court where a decision would likely arrive later in 2025 or early 2026. Even if these tariffs are declared illegal, the president has plenty of tools to rebuild the tariffs using other legal pathways (see Fig. 3). Please see entitled, "Tariffs likely to remain high despite legal challenges" for more background information.
Figure 3: The administration’s options to replace IEEPA tariffs
Trump administration's second-term tariffs
IEEPA: International Emergency
"Trafficking"
"Worldwide"
"Reciprocal"
Section 232: National Security
Section 301: Unfair trade
If CIT decision is upheld
Section 122: Balance of payments
Section 301: Unfair trade
Section 232: National security
Section 338: Discriminatory trade
Aggressive tariffs to remain
Aggressive tariffs to remain
We expect the effective tariff rate to end the year around where it stands now at roughly 15%, up from 2.5% at the start of the year (see Fig. 4 and Fig. 5 for a full overview of our tariff scenarios). Tariffs will likely remain high, as will the headline risk, but possible sudden changes in tariff negotiations and threats are becoming normalized the longer this trade war lasts.
Figure 4: CIO scenarios for US tariffs
Figure 5: Summary of CIO scenarios for US tariffs
Scenario | Scenario | Probability | Probability | Outcome: Tariffs in place as of December 2025 | Outcome: Tariffs in place as of December 2025 |
|---|---|---|---|---|---|
Scenario | Aggressive (Base case) | Probability | 60% | Outcome: Tariffs in place as of December 2025 |
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Scenario | Highly aggressive (Downside) | Probability | 25% | Outcome: Tariffs in place as of December 2025 |
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Scenario | Limited (Upside) | Probability | 15% | Outcome: Tariffs in place as of December 2025 |
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