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The Trump administration is placing the bricks in its tariff wall one announcement at a time and on multiple fronts. In the past few weeks alone, the US administration has announced various bilateral deals with several countries (the UK, South Korea, Japan, the EU), the imposition of higher “reciprocal” tariffs on certain countries unable to reach deals (Switzerland), a willingness to extend talks with others (China, Mexico), threats of sectoral tariffs that will take effect at some future date (semiconductors, pharmaceuticals), politically motivated tariffs (Brazil, India), and the actual implementation of sectoral tariffs (semi-finished and derivative copper products).

But the tariff wall being built by the administration also has many holes because of numerous product exemptions, carve outs, and delayed implementation dates. This means that the announced tariff rate on a country is quite a bit higher than the effective tariff rate. For example, Canada has a 35% tariff rate, up from 25%, but more than 90% of the goods are exempt because they comply with the US-Canada-Mexico (USMCA) free trade agreement. Likewise, Switzerland’s 39% tariff rate excludes pharmaceutical products, which represent 60% of its exports to the US.

Many countries have chosen to accept the deals and refrain from building their own tariff walls in retaliation. Perhaps trading partners assume the US Supreme Court will dismantle much of the tariff wall imposed under the International Emergency Economic Powers Act (IEEPA), following the Court of International Trade (CIT) decision in May that the tariffs are illegal (more below). Countries might also conclude that they would only be harming their own country’s consumers—in contrast to the Trump administration's beliefs.

So far the economic data have not spelled disaster for the US. The effective tariff rate is still only around 9%, based on actual imported goods coming through customs and the amount of duties collected on those goods. This makes sense: It takes several weeks for goods shipped to the US to arrive at ports and be subject to the higher tariffs, which for some, have only recently taken effect. We now expect the US effective tariff rate to remain in the high teens for the next several months, potentially into 2026, but we still think it will eventually settle back around 15% (see Fig. 1).

Figure 1: Tariffs climbing higher

Effective US tariff rate, in %

Tariffs will likely weigh on economic activity and increase inflation. But even in retrospect, there will be no way to say precisely what the impact was because we can never know for certain what would have happened in a world without the tariffs. The value of imported goods was around 11%of nominal GDP in 2024. Assuming that tariffs remain high, imports as a share of GDP may fall to around 10% in the future as tariffs discourage imports. At an effective tariff rate of 15%, the revenue raised would be equivalent to 1.5%of GDP, which would represent the biggest peacetime tax hike ever.

Three factors should help mitigate the economic fallout from higher tariffs:

1. For any given revenue target, broad-based tariffs at a uniform rate are more easily absorbed than more narrowly-based tariffs at higher rates. While some goods face tariffs of 50% or more, the majority will be in the 10- 20% range, a level that should not put too many importers out of business.
2. With US public finances on an unsustainable path, the revenue raised by tariffs should help keep the budget deficit/GDP ratio in its recent 6-7% range rather than rising further, which in turn could keep interest rates lower than they would be without the tariffs. We estimate that tariffs will ultimately reduce GDP growth by around 1ppt. Similarly, we expect the CPI to end around 1ppt higher than it would be without the tariffs.
3. Countries facing higher tariffs aren’t retaliating (at least for now and contrary to most expectations at the start of the trade war), which limits the harm to the global economy and lowers the potential for escalation.

Sectoral tariffs: The US Commerce Department has initiated investigations under Section 232 of the Trade Expansion Act of 1962 on a wide range of products including pharmaceuticals, semiconductors, lumber, aircraft, and light duty trucks. The recently concluded copper triggered a 50% tariff, but only on semi-finished and derivative copper products; it excluded raw and refined copper imports. Despite recent threats of 100% and 250% tariffs on semiconductors and pharmaceutical imports, respectively, we don't know how expansive they will be when they're put into force. Not only could the tariff rates be lower, they may also come with large carve outs to avoid risking even higher inflation and further hits to economic activity.

Deals unravel: The Trump administration has announced deals that include higher baseline tariffs on countries with larger goods trade surpluses together with purchase agreements for US capital goods (aircraft), energy products (liquefied natural gas) and agriculture (soybeans), as well as hundreds of billions of US dollars in investment commitments. If countries follow through with their reported purchase commitments and private company investments, it would help move the needle toward the administration’s goal of rebalancing trade and returning production to the US.

We expect more countries to agree to deals structured along similar lines rather than face high “reciprocal” tariffs for an extended period (e.g., India, Switzerland). However, there are risks that deals unravel if there are differing interpretations of what’s included in the tariff deals and what constitutes good faith adherence. Without signed memoranda of understanding or written agreements, there is a risk of misunderstanding, miscalculation, and renewed flareups.

China deal: China's successful leverage of its near monopoly on the processing of rare earth metals and magnets proved to be an effective negotiation tool during the recent trade standoff with the US and raises the likelihood of a further extension in the pause on higher tariffs beyond 12 August. President Trump has repeatedly expressed interest in holding a summit with Chinese President Xi in the fall, where he could announce a trade deal to relax tariff rates, investment rules, and export controls as part of a wider thawing of tensions between the two nations.

Court cases: The CIT ruled in late May that the IEEPA tariffs are illegal, but the administration won a stay pending appeal, leaving the tariff wall intact. The Federal Circuit Court of Appeals will likely rule on the case in August after hearing oral arguments in late July, but either way the losing side is likely to appeal the case to the Supreme Court. We think there is a high likelihood the Supreme Court will rule that the IEEPA tariffs are illegal, forcing the administration to rebuild its tariff wall with other tools that are both less flexible and more limited. To reiterate, countries may wait to retaliate against higher US tariffs until the IEEPA tariff court challenges are concluded. If the IEEPA tariff threat were removed, countries would likely hold better leverage in future negotiations.

Midterm elections: The health of the US economy and President Trump’s job approval ratings could force a temporary tariff truce in the middle of 2026 ahead of the critical midterm elections that will determine whether the Republicans retain unified control of the House and Senate. The Republicans have narrow majorities and can therefore only afford to lose a handful of seats in both chambers. President Trump and the Republicans may use this period to emphasize the "wins" rather than risk upsetting the economy and financial markets with further talk of rising protectionism.

In all, we expect the US effective tariff rate to settle near 15%, which corresponds to a 30-40% tariff range for China and 10-15% for other countries. However, in the near term, the current high-teens tariff rate could persist as countries work to negotiate deals and sectoral tariffs are announced. The near absence of retaliation limits the economic risk even at this high effective tariff rate. And while President Trump may be somewhat emboldened to take a tough stance on tariffs with stock markets near record highs and long-term bond yields having fallen, he will also not want to risk implementing such high tariffs that endanger financial markets, the economy, and the revenue stream now funding his tax cut package.

We believe that while trade policy still has the power to shock, the range of potential tariff outcomes has become narrower. Equally, with various agreements already in place, we also see it as unlikely that the overall US effective tariff rate will exceed 20%, which would constitute our downside scenario with high risk of a subsequent recession in the US (see table below).

US tariff scenarios