ExplainSpeaking: How Trump’s tariffs are hurting the US economy

For the uninitiated, tariffs are essentially a tax imposed by a government on goods imported from outside the country. The burden of this tax falls on the domestic consumer importing the goods. In short, tariffs increase prices for the end-consumer without any increase in productivity.

At present, there is a raging debate about the desirability of Trump’s tariff policy. His cabinet members as well as his key economic advisors have doubled down on the efficacy of tariffs even when there has been a unanimous view outside of the White House that these tariffs are detrimental not just to the US interests but also for the global economy. This previous edition of ExplainSpeaking explains the two sides of the view in detail.

The key question then is: Seven months since Trump too charge — and more precisely, four and half months since he announced “reciprocal” tariffs on the rest of the world — what has been the impact on the US economy? This edition of ExplainSpeaking lays out what “reciprocal” tariffs exactly are and how they are different from the tariff regime regulated by the World Trade Organization.

Trump and his supporters have claimed that — far from the apocalyptic collapse, as many mainstream economists foresaw — the US economy has remained robust.

This edition of ExplainSpeaking will evaluate this claim over key macroeconomic variables and assess if, and how far, have Trump’s tariffs hurt the US economy.

Current state of tariffs: Muddying analysis

Over the course of the past seven months, readers would have heard about all kinds of tariff rates being levied against different countries, followed closely by a pause or partial roll-back. The start-stop nature of Trump’s tariff pronouncements — because all these decisions are being taken through executive diktats instead of legislative changes — means that at any one point in time, there is considerable confusion about the exact level of tariffs in play.

The exact or the effective level matters because it is that which will determine the economic impact more than the levels announced and paused.

When Trump took office on January 20 this year, the US tariffs were around 2.5%. Since then, even if one takes into account all the pauses and rollbacks, the effective tariff rates have gone up to 18.6%. In other words, seven months ago, if an American consumer purchased a basket of goods from the rest of the world priced at $100, he or she would have had to pay $102.5 for it. Thanks to Trump’s tariffs, the same basket of goods would now cost $118.6 to import.
However, the 18.6% has been calculated — by the Yale Budget Lab — based on the announcements. The Financial Times has calculated that the actual tariff rate — which is determined by what is actually imported — is much lower at 9.1%.

Further complicating this situation is the possibility that while an importer has to pay $9.1 on every $100 worth of imports, he or she may not pass on the additional price — $6.6, the difference between 9.1 and 2.5 — fully onto the consumer for the fear the the consumer may not buy the product from that importer.

There are three key implications of these all numbers.

One, the tariff rate that is actually being levied is substantially lower than what the headlines may suggest. Two, the final consumers may, at least in the very short term, be facing a tariff rate even lower than what the importer faces. Lastly, and regardless of actual tariff rates being lower than what the headlines may suggest, there is no doubt that tariffs have gone up more than three times from the level at the start of 2025.

Impact on stock markets

The robust performance of the benchmark US stock indices is given as the first, and often the clinching, argument for the health of the economy. It is another matter that stock market indices effectively only tell about the state of the companies in that index; using stock market index performance to judge the state of the broader economy is fraught with challenges.

But even if one looks at the stock market indices closely, one can start to understand why merely looking at some broader benchmark to assess the impact of tariffs may not be a good idea.

Look at CHART 1. It maps the performance of the different benchmark indices in the US and shows how the reading of the state of the US economy can change dramatically if one shifts from one index to another.

For instance, the NASDAQ 100, which only includes 100 largest non-financial companies in the US, has gone up by 10.65% since the start of 2025. Nasdaq 100 is dominated by some of the biggest tech firms such as Nvidia, Microsoft, Apple, Alphabet (Google), Meta (Facebook), and Amazon.

But over the same period, the S&P500, the 500 biggest companies by market capitalisation, across different sectors, has gone up by significantly lower rate.

Worse still, the Dow Jones Industrial Average, which predates the NASDAQ 100 by a full century, has grown at only half the rate.  The Dow Jones Transportation Average, which is the only index that predates (founded 1884) even the Dow Jones Industrial Average (1885),  has actually fallen by almost 2%.

Lastly the Russell 2000, which maps the fortunes of the 2000 small-cap stocks, has grown by just 2% year to date.

Similarly, if one looks at just the S&P 500 Consumer Discretionary index (not included in the Chart), which maps the performance of those companies that provide non-essential goods and services, and thus serve as a key indicator of consumer’s purchasing power and the overall health of the US economy, has contracted by 0.36%.

The upshot being if NASDAQ 100 can be quoted to show how tariffs have not impacted the US economy, other key indices can show a completely different picture. The key reason for this variation is that US stock markets have been pulled by just a handful of technology stocks while the rest of the economy struggles to grow just as fast.

Impact on inflation

The first economic impact of tariffs is that they raise prices. This can happen in two broad ways. One, the direct impact of higher tariffs is that consumers have to pay more to buy (import) the same goods. Two, the indirect impact is that, more often than not, the prices of all domestic substitutes of the imported goods also go up.

For instance, if imported washing machines have become costlier, the domestic firms will soon raise the prices of their own washing machine because they can do so now, while, of course, maintaining a slight price advantage. Often enough, even prices of related goods — say dryers in this case — can go up because companies making those products realise that they can get away by charging more.

Trump and his supporters have argued that the inflation in consumer prices has been well-contained.

For one, the fact is that the key variable for mapping retail inflation — personal consumption expenditures (PCE) — have started to inch in the wrong direction since April when Trump announced his reciprocal tariffs. Look at the red line in CHART 2.

The US central bank targets aligning the red line to the 2% level. That means retail inflation goes up by 2% each year — or in other words, the general price level goes up by 2% every 12 months. Between February and April, this line had started trending towards the 2% mark but since then it has turned around and, by the end of June, it was closer to the 3% level than 2%.

Higher inflation would force the central bank to keep interest rates  steady, if not actually raising them. Higher interest rates dampen economic activity and growth.

The worst news in this regard came last week (August 14) when the Bureau of Labor Statistics showed that the wholesale inflation (based on the Producer Price Index) had grown by 3.3% in July. This is the highest rate of increase since February. A higher PPI inflation is now likely to lead to higher consumer or retain inflation because producers will not endlessly protect consumers, and are quite likely to pass on the higher costs due to higher tariffs to the end-consumers.

Impact on Monetary Policy

At the start of 2025, the Fed was expected to cut interest rates 2 to 4 times in the year. However, thanks to the turnaround in inflation, it has dithered from doing so despite tremendous pressure and abuse from the US President.

Ironically, it is Trump’s tariffs that have spiked inflation and spooked the Fed from cutting rates too soon. Lower interest rates would have boosted economic growth. The absence of these cuts, along with the drag effect of tariffs, are bringing down US GDP growth rate, and this is one of the less appreciated, but acutely significant, adverse impacts of tariffs on the US economy.

The latest minutes of the US Fed’s policy deliberations, released on August 20, show how concerned the US central bankers are about the tariff impact. “Participants noted that tariff effects were becoming more apparent in the data, as indicated by recent increases in goods price inflation…A couple of participants suggested that tariff effects were masking the underlying trend of inflation and, setting aside the tariff effects, inflation was close to target,” state the minutes.

The minutes also explain why the Fed believes the tariff impact is as yet less than originally anticipated: “In terms of timing, many participants noted that it could take some time for the full effects of higher tariffs to be felt in consumer goods and services prices. Participants cited several contributors to this likely lag. These included the stockpiling of inventories in anticipation of higher tariffs; slow pass-through of input cost increases into final goods and services prices; gradual updating of contract prices; maintenance of firm–customer relationships; issues related to tariff collection; and still-ongoing trade negotiations.”

Impact on GDP growth rate

For decades, the US economy has managed to grow fast notwithstanding financial, economic, political or geopolitical crises, giving rise to the notion of American Exceptionalism.

According to the International Monetary Fund’s latest update, after growing its GDP by 2.9% in 2023 and 2.8% in 2024, the US economy is losing its growth momentum thanks to tariffs. GDP growth is on its way to grow by just 1.9% in 2025 and just 1.2% in 2026.

Taken together — rising inflation and decelerating GDP growth rate — have the potential to create the perfect storm of stagflation: a point where economic growth stagnates while inflation remains high and persistent.

Impact on employment

Such was the state of economic recovery post-Covid in the US economy that in the past 2-3 years, there were two vacancies for each unemployed American. As the US Fed started raising interest rates in a bid to contain historically high inflation, the unemployment rate started inching up ever so slowly.

However, earlier in August, the Bureau of Labor Statistics came out with data that not only showed a very small increase in employment in July but also substantially revised the job creation in May and June. The shock of bad employment numbers was so stark that Trump even fired the head of BLS.

However, if the economy is slowing, and inflation inching up, its reflection in employment is hardly surprising.

Impact on US dollar’s dominance in the world

Possibly the biggest symbol of US’economic dominance is its strong currency. According to reports, around 90% of all foreign exchange transactions on the planet are denominated in US dollars while half the world’s goods trade is conducted in dollars.

Lastly, 60% of all foreign currencies held in central banks across the world are dollar denominated. This massive demand for dollars pushes up its exchange rate across the world. A strong dollar is in fact one the key reasons why Americans find it cheaper to import goods from across the world instead of producing it themselves.

Ironically, maintaining a strong dollar is also one of Trump’s key business decisions.

Even more ironically, Trump’s tariffs have led to a fall in dollar’s strength vis a vis its main competitors. Look at CHART 3; it shows how the USD has lost value against the euro, the Japanese yen, the British pound, and even the Swiss franc and the Canadian dollar. A weaker dollar essentially erodes an average American’s purchasing power.

Upshot 

While it is true that Trump’s tariffs will bring in, as he says “trillions of dollars” in revenues, the fact is, as shown by the data above, that the US economy is starting to suffer progressively more with each passing month. With time, more and more of the increased costs due to tariffs are being passed on to the end-consumers in the US, resulting in higher inflation, weaker dollar, reduced purchasing power, lower demand, weaker GDP growth and lower employment.

Should Trump stop using tariffs as a policy tool to solve all problems? Share your views at udit.misra@expressindia.com

Take care,
Udit