The numbers behind U.S. tariffs

By Joseph Wu, CFA

Mind the tariff gap

The weighted average applied U.S. tariff rate on imports stands at an estimated 17–19 percent – up sharply from two percent at the start of the year and the highest since the 1930s – according to the Budget Lab at Yale and the Tax Foundation.

Despite many high-profile announcements, however, the increase in tariff rates has been less severe than projected. Customs duty collections suggest that, as of August 2025, the average tariff rate was closer to 10.5 percent, well below the headline estimates (see exhibit). That difference has helped keep the economic fallout more contained than initially feared, with more muted effects on growth and inflation.

Estimated U.S. tariff rates

Treasury net customs receipts as a percentage of goods imports (monthly)

Two main dynamics help explain the gap between the headline tariff rate and actual collections.

Trade diversion and supply chain adjustments: High tariffs on certain countries and products incentivise companies to find alternatives. Steep tariffs on Chinese goods, for example, have pushed firms to reconfigure supply chains, rerouting through third-party countries with lighter duties and/or sourcing from alternative markets or substitute products where tariffs are lower. Trade diversion and substitution effects soften the bite of headline tariffs, since imports still flow but through lower-cost channels.

Exemptions: A large share of U.S. imports is exempt under existing free trade agreements. The United States-Mexico-Canada Agreement (USMCA), for instance, provides sweeping exemptions for Canadian and Mexican goods, with RBC Economics estimating nearly 90 percent of U.S. imports from Canada are duty free.

Together, these factors mean that while dutiable goods face historically high tariff rates, the real economic burden has so far been more modest than headline figures suggest.

Someone is paying

Even at below-estimated levels, the overall cost of tariffs (import tax) is still substantial. U.S. tariff revenues are now around $30 billion per month, putting collections on an annualised pace of $354 billion – roughly $275 billion more than in 2024.

U.S. tariff revenue

Treasury net customs receipts (monthly, USD billions)

The open question is who ultimately bears the cost. In principle, costs can be distributed amongst foreign exporters (through price cuts to remain competitive), U.S. companies (through squeezed profits by absorbing the duties), or consumers (through higher prices).

Evidence thus far leans toward U.S. businesses carrying a significant portion of the burden. The U.S. Import Price Index, which tracks pre-tariff costs of imports, has remained steady this year, while inflation has risen somewhat less than expected. These patterns suggest to us that companies have likely been absorbing a considerable share of tariff costs, at least for now, rather than fully passing them on.

But this outcome may not last indefinitely. Once pre-tariff inventories deplete and if tariff rates persist at high levels, the reluctance to raise prices could gradually fade as pressure to defend profitability ramps up. Over time, the burden of tariffs could shift more visibly to consumers.

An aura of unpredictability persists

The path ahead for U.S. trade policy appears far from settled, with more turns and twists likely to emerge. In November, the U.S. Supreme Court is expected to hear arguments on a case involving the legality of certain tariffs. If overturned, the Trump administration may be forced to reconfigure trade measures, potentially replacing some existing tariffs with new ones under different delivery frameworks. This legal uncertainty leaves businesses and markets having to contend with a wide range of possible outcomes, as replacement tariffs could come in higher or lower than the rates in force today.

The legal overhang adds to an already unsettled environment, with the second-order effects from global trade frictions still unfolding and the USMCA slated for review next year. Although U.S. trade policy has generally evolved favourably for markets and the economy, we would not rule out renewed concerns about growth and inflation in the months ahead as the effects of tariffs fully pass through the economy.

Despite policy risks, resilient corporate fundamentals, bolstered in part by ongoing strength in the artificial intelligence investment theme, have helped offset these headwinds. Bloomberg consensus estimates for the MSCI All-Country World Index show global profits remaining on track to increase by nine percent in 2025, with another 11 percent expected in 2026. Steady corporate performance amid what has been a challenging operating environment has allowed investors to look past tariff developments.

We believe that after balancing strong corporate fundamentals against optimistic valuations and lingering policy risks, aligning equity and risk allocations near their strategic targets, with a focus on quality businesses and diversifying across sectors and regions, remains a sensible basis for portfolio positioning.

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