Tariffs Are In Effect—and Not Going Away. What That Means.

Semiconductor chips for export at a factory in Shandong, China. (AFP / Getty Images)

As tariffs on a slew of trading partners go into effect Aug. 7, a new normal is settling in: Higher tariffs are here to stay—and their effects on the economy are just beginning.

After numerous on-and-off again tariff threats since the Trump administration unveiled sweeping levies on almost 200 countries on April 2, tariffs on dozens of countries—ranging from 10% to 41%— are finally going into effect. Large trading partners like Japan, the European Union and South Korea that were able to reach a preliminary deal—typically with pledges to buy and invest in the U.S.—are in for 15% tariffs. Other countries, at least initially, could face higher levies.

The playing field keeps changing. Trump announced 100% tariffs on all semiconductor imports late Wednesday, adding that any chip maker building production in the U.S. or preparing to do so could avoid the tariffs. At the same announcement, Apple vowed to invest an additional $100 billion in U.S. operations.

It’s too early to assess whether President Donald Trump’s tariffs will rebalance trade. But some of the initial panic following the April tariff announcement has eased as the U.S. and China have de-escalated the tit-for-tat that paralyzed trade for weeks, and other countries haven’t retaliated aggressively.

The average effective tariff rate has climbed to more than 18%, six times where it started the year, according to the Yale Budget Lab. And before this latest batch of tariffs are imposed, the U.S. has collected about $127 billion in tariff revenue, up 132% from the year-ago period, according to the Penn Wharton Budget Model.

So far, companies have mostly managed the additional costs and disruption by drawing on inventories they have built up during the run-up to tariffs, or eating the costs until they see where things settle.

That has reduced the risk of recession economists initially worried about. Also helpful: Trade talks with three of America’s most important trading partners—China, Canada and Mexico—remain in flux. The U.S. and China are working on an extension of a looming Aug. 12 tariff deadline; Mexico was granted a 90-day extension, and talks with Canada have been up and down. But a large chunk of imports from Mexico and Canada fall under the U.S.-Mexico-Canada trade agreement, making them exempt from some of the latest tariff threats.

While tariffs may not tip the U.S. into a recession, economists stress the impact is likely coming this fall. Suppose the average effective tariff rate settles at 15%—with Canada and Mexico ultimately getting lower rates than other major trading partners, and China’s tariff rates averaging out around 25% to 30%. Joseph Gagnon, senior fellow at the Peterson Institute for International Economics who previously worked at the Federal Reserve, says the economy will see a one-percentage point hit to economic growth this year and half a point over the long term.

That is a manageable hit, allowing the broader economy to escape recession, but Gagnon says it won’t go unnoticed by the average voter. The 50% tariffs on steel and aluminum, for example, may add some steelworker jobs but will likely lead to bigger cuts among companies who now face higher costs for those metals. “And everyone is going to have to see more inflation. I don’t see how the average Trump voter possibly benefits,” Gagnon says, adding that higher prices will likely hit by late fall. “By Thanksgiving people will be talking about it.”

Trade veterans stress that the tariff threat isn’t fading. The stock market’s apathy to tariffs and still-resilient economy has emboldened the Trump administration as it turns to tariffs for a host of non-trade reasons. That includes attacking Brazil for its case against ally and former President Jair Bolsonaro, taking issue with Canada supporting Palestinian statehood, and hitting India with an additional 25% levy for its purchase of Russian oil.

The fallout will be more nuanced, with the headline rate not reflecting the goods being exempted. For example, the 50% tariffs Trump imposed on Brazil don’t apply to household staples like orange juice.

The next biggest risk: long-awaited sectoral tariffs, such as those Trump unveiled on semiconductors and still expected sectoral levies on pharmaceuticals.

Trump could use the threat of higher sectoral tariffs as leverage to push pharmaceutical executives for the most-favored-nation drug pricing he advocated for in a letter to industry chieftains last week, says Ulrike Hoffmann-Burchardi, global head of equities for UBS Global Wealth Management. With pharma stocks trading at a significant discount to historical averages, she sees the market pricing in much of the policy risks.

The impact of sectoral tariffs on semiconductors will depend on how they are applied. Since most semiconductors are imported into the U.S. as part of a system or hardware—think smartphones or servers—Hoffman-Burchardi expects a mostly manageable earnings hit of three to four percentage points.

Sectoral tariffs on semiconductors could also disturb the fragile detente between the U.S. and China—and affect whether the two can extend the Aug. 12 deadline into the fall**.**

One other thing to keep an eye on: What happens to the legal challenges to the Trump administration’s use of International Emergency Economic Powers Act for many of its country-specific tariffs?

Analysts expect a ruling by a Federal Circuit Court in a couple of weeks and then expect the Supreme Court to take it on. In the event the courts strip the White House of its authority to impose tariffs in this way, Veda Partners’ Henrietta Treyz notes that the administration is teeing up various other ways to keep tariffs in place.

Write to Reshma Kapadia at reshma.kapadia@barrons.com