As the deadline for US President Donald Trump’s tariffs on dozens of countries approaches, economists are warning of potential economic harm. Despite the US economy‘s strong performance so far, with low inflation and robust employment and consumer spending, analysts fear that the worst is yet to come. Trump’s tariffs have been imposed on countries including close allies such as South Korea and Japan, with rates ranging from 25% to 40% unless they seal trade deals with the US administration by August 1.
According to Joseph Foudy, an economics professor at the New York University Stern School of Business, the uncertainty around trade is as costly as the actual tariff rates. “When you start to see tariffs at 20 or more, you reach a point where firms may stop importing altogether,” Foudy said. “Firms simply postpone major decisions, delay hiring, and economic activity declines.” Even countries that are able to hammer out a deal in time are likely to face significantly higher duties. Trump’s preliminary agreements with Vietnam and China, announced in May and early July, respectively, stipulate minimum tariff rates of 20% and 30%.
Economists widely agree that the impact of tariffs implemented so far has not been fully felt, as many businesses built up their stockpiles of inventories in advance to mitigate rising costs. However, the effective average US tariff rate currently stands at 16.6%, with the rate set to rise to 20.6% from August 1. According to The Budget Lab at Yale Department of Economics, this could lead to higher prices and drag on growth. In an analysis published last month, BBVA Research estimated that even the current level of US tariffs could reduce global gross domestic product (GDP) by 0.5 of a percentage point in the short term, and by more than 2 percentage points over the medium term.
Steven Durlauf, a professor of economics at the University of Chicago, said that the few tariff agreements that have been reached represent nontrivial changes in US trade policy and will harm growth. “In my view, the few tariff agreements that have been reached represent nontrivial changes in US trade policy and so will harm growth, so even if much less extreme than threatened, will matter,” Durlauf said. Bernard Hoekman, director of Global Economics at the Robert Schuman Centre for Advanced Studies, noted that if the US raises average tariffs to the 20-30% level, there will be a much larger impact.
Trump and his allies have repeatedly dismissed economists’ warnings about his tariffs, pointing to the steady stream of positive data to make the case that the economic consensus is flawed. “The Fake News and the so-called ‘Experts’ were wrong again,” Trump wrote on Truth Social in response to a recent report from his Council of Economic Advisers (CEA) that found prices of imported goods fell by 0.1% from December to May. “Tariffs are making our Country ‘BOOM.'” However, some economists have criticized the CEA report’s methodology, saying it failed to take account of stockpiling by importers and covered a period that was “way too short to draw any definitive conclusions”.
Despite the strong headline figures on the US economy, economists have pointed to warning signs in the data. Wells Fargo economists Tim Quinlan and Shannon Grein noted that discretionary spending on services in the US fell 0.3% in the year up to May, indicating potential economic storm clouds ahead. “That is admittedly a modest decline, but what makes it scary is that in 60+ years, this measure has only declined either during or immediately after recessions,” Quinlan and Grein said.