Why Have Tariffs Had so Little Impact on the Economy
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EmailRecent US tariffs have caused inflation rather than broad economic harm. This muted impact occurs because the US is largely a service-based economy, global supply chains adapt, many goods enter duty-free, and retaliation is limited.
Despite the fact that tariffs on imports to the United States are at their highest levels in 80 years, the impact on the U.S. economy has been relatively minor. Economic growth remains comparatively strong, and unemployment has remained low. Perhaps the biggest impact tariffs have had has been on inflation; prices have risen as a result of higher tariffs.
This blog outlines some of the reasons why the impacts of tariffs have been muted. Some estimates are that the most recent round of tariffs will change output from a decline of 0.6 percent to an increase of 0.1 percent in the long run (Pomerleau, Fajgelbaum and Khandelwal). Established global supply chains, uncertainty over tariff rates, the fact that the U.S. is a service based economy not a manufacturing based economy, the fact that actual tariffs rates are often lower than those reported, in the press, and the fact that many countries have not retaliated against U.S. tariffs have contributed to the relatively small impact on output.
A tariff is a tax on goods imported into a country. It is paid by the firm importing the product. The net effect on the consumer is dependent on the responsiveness of consumers and firms to changes in price. In the case of recent tariffs, it appears that 90 percent of the tariffs are passed on to consumers in the form of higher prices (Eberly et al, Pomerleau). The primary impact of the tariffs on the U.S. are higher rates of inflation.
To a great extent most imports are still entering in the U.S. duty free or at a low tariff rate (Eberly et al). The only major trading partner that has retaliated in a major way to U.S. tariffs is China (Fajgelbaum and Khandelwal). Tariff revenue has increased from 1.6 percent of federal revenues in the 1990s to 4.9 percent in 2025 (Fajgelbaum and Khandelwal), but tariff revenue has had a minimal impact on reducing the size of the budget deficit. Imports from China have declined from 23 percent of imports in 2017 to 7 percent in 2025 (Fajgelbaum and Khandelwal), but some of this is offset by products originally produced in China but shipped to another country such as Vietnam before being shipped to the U.S. The market share of imports from East Asian countries other than China has increased from 18.5 percent in 2017 to 34.1 percent at the end of 2025 (Fjagelbaum and Khandelwal).
Most of the goods imported to the U.S. are not subject to a tariff (Fajgelbaum and Khandelwal). Critically, energy and minerals are imported duty free (Fajgelbaum and Khandelwal). To summarize, actual tariff rates are not as high as the public might believe and fewer products are covered by tariffs that many believe, the reduces the impacts tariffs have on the economy.
Throughout the post World War II era, supply chains slowly became globalized. As long as the tariff does not raise costs beyond the next best alternative there will be no movement of manufacturing back to the U.S. or another country (Fajgelbaum and Khandelwal). Compounding this is the potential of some firms to work around the tariff by shipping products to a third country and then shipping them to the U.S. as a product from the country with no or a reduced tariff. The Trump administration has accused Chinese companies of following this policy (Swai). Once established, global supply chains are unlikely to be significantly altered by tariffs. Other than raising prices, the impact on the U.S. economy is small.
Perhaps the most important reason tariffs have had a relatively small impact on the economy is the fact that the U.S. is a service based economy compared to the past. According to data provided by the Federal Reserve Bank of St. Louis, from January of 2005 to January 2026, manufacturing as a percentage of GDP declined from 13.1 percent to 9.4 percent. Manufacturing is undergoing the same transformation as agriculture did in the 1950s through the 1970s. While manufacturing remains important, it no longer the driver of the U.S. economy. As a result, tariffs will not have a major impact on the general economy.
The final point is that many countries response to higher tariffs has been muted. The European Union, Canada, and Mexico have negotiated new trade agreements. There has been some consumer push back to U.S. trade policy such as the reduction of alcoholic beverage exports to Canada due to consumer boycotts. China is the major trading partner that has retaliated against U.S. trade policy. This overall measured response to U.S. tariffs by other countries has also limited the impact of tariffs on the U.S. economy.
References
Eberyl, J.C., P. Fajgelbaum, K. Heerman, A. Khandelwal, and J. Steinsson (2026). Why haven’t tariffs significantly damaged the economy? https://brookings.edu
Fajgelbaum, P. And A. Khandelwal (2026). Tariffs in 2025: Short-Run Impacts on the U.S. Economy, National Bureau of Economic Research.
Pomerleau, K. (2026). Fiscal and Economic Effects of Tariffs, American Enterprise Institute.
Swai, F. (2026). “White House accuses mor than 40 countries of helping China avoid US tariffs,” The Hill, August 13, 2026.
