CMB Macro: What is the impact of tariffs on the U.S. economy?

Core View Trump's tariff policy has three main characteristics: 1) "threatening", the announced tariff rates often exceed market expectations, but the actual implementation rates are relatively moderate. 2) Tariffs are implemented in stages, starting with small-scale and limited-range tariffs, then gradually expanding the rates and scope of tariffs. 3) There are a large number of tariff exemptions and product exemptions, further slowing down the average tariff rate increase and giving companies and countries (regions) the opportunity to adjust and respond proactively. As of August 7, 2025, including the latest "reciprocal tariffs" plan, the average import tariff rate in the United States is 12.0%, with tariffs imposed through the IEEPA (International Emergency Economic Powers Act) at 7.9%, and tariffs implemented through the 232 and 301 investigations at only 4.1%. What are the current impacts of tariffs on the US economy: Overall economic cycle: The continuous moderate increase in the unemployment rate before Trump took office indicates that the US economy is already in the middle to late stage of this economic cycle. Trump's tariff policy should further exacerbate the downward economic risks and the upward unemployment risks, accelerating the transition of the US economy to a downturn stage. However, the enactment of the Big Beautiful Act boosted the mid-term outlook for economic performance, while the decline in labor force participation due to deportations helped alleviate the risks of rising unemployment, prolonging the current economic cycle. Inflation: The transmission of tariffs to US inflation has been slow in the first half of the year. This is due to several factors, including multiple rounds of tariff exemptions, US importers rushing to import goods, and the absorption of some tariff costs by exporting countries. However, the mitigating effects of these factors are gradually diminishing. Production: Tariffs have boosted domestic manufacturing capacity utilization through orders. Despite the impact of tariffs, the growth rate of US manufacturing production has not seen a significant decline. The increase in production speed is due to a significant rise in new orders and unfinished orders. Trump's Middle East trip and the resulting procurement clauses through tariff negotiations have driven domestic production. The improvement in domestic production capacity utilization in key industries under the background of rising import costs, tariffs have resulted in a noticeable increase in domestic production growth rate and capacity utilization in key industries such as steel, aluminum, and automotive (including some components). However, why is manufacturing employment low? In fact, since 2023, US manufacturing employment has been continuously declining, possibly due to the structural impact of artificial intelligence development on employment. The impact of tariffs is mainly for short-term disturbances. How will the subsequent tariffs affect the economy? 1) The transmission of rising tariffs to the economy will continue to be delayed. July PMI data also shows that domestic manufacturing capacity in the US is continuing to expand, and US companies have made preparations for the impact of the new round of tariffs. 2) After August, the US will face a significant increase in total tariffs, and the mitigating factors in the first half of the year may not be effective. It is still expected that the US economic growth rate will decline in the second half of the year, with inflation rising above 3%. In terms of economic growth, the space for domestic substitutes in the short term is limited, and the investment and commodity orders from other countries to the US still need to be observed, and the boosting effects may not appear until the end of the year. Capital spending and inventory cycles have already been slowing down, and the increase in tariffs will further pressure economic growth until the Big and Beautiful Act boost economic performance again in 2026. In terms of inflation, exporters and domestic producers in the US may have reached the limit in absorbing tariff costs, and the low base will to some extent constrain the downward space for year-on-year growth rates in oil prices. 3) Following the "rush to import," the US may once again perform the "rush to lower interest rates" drama, with the September FOMC becoming the best window for rate cuts. If inflation pressures emerge, it may be difficult to implement significant interest rate cuts in the fourth quarter. This article is from the WeChat public account "China Merchants Macro Reflection, edited by GMTEight: Wang Qiujia.