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February 06, 2026 | 13:18
U.S. Tariffs: One Year After
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U.S. Tariffs: One Year AfterThe past year with Trump Administration tariffs was full of drama, and the year ahead is poised to have its own share of theatre. |
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A year ago, on February 1, 2025, the Trump Administration introduced its first set of tariffs, a dozen days after inauguration and the signing of the America First Trade Policy Memorandum. In it, the President’s primary directive to his Administration was to: “investigate the causes of our country’s large and persistent annual trade deficits in goods, as well as the economic and national security implications and risks resulting from such deficits, and recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits.” There was going to be a push for broad-based tariffs from the get-go. Among the many other directives was the charge to “assess the unlawful migration and fentanyl flows from Canada, Mexico, the PRC, and any other relevant jurisdictions and recommend appropriate trade and national security measures to resolve that emergency.” The assessment and recommendation did not take long. After declaring fentanyl flows an internationally rooted national emergency, the Administration invoked the International Emergency Economic Powers Act (IEEPA). Since enacted in 1977, this was the first time the law was used to institute tariffs. Unlike other existing tariff authorities, potential IEEPA duties would not require formal investigations and reports or be constrained by time limits or congressional oversight. However, unlike other tariff authorities, IEEPA does not specifically mention the power to apply tariffs (the Administration argues it is implied). The controversial action is currently being adjudicated by the Supreme Court, with a ruling expected soon. So, effective February 3, 2025, a 25% tariff was to be applied on all goods imports from Mexico and Canada and 10% on those from China [1]. A selection of Canadian natural resources was also set at 10%. Such duties on Mexico and Canada, given their economic exposures to U.S. trade and some highly integrated industries, would have likely caused recessions in both countries and major damage to the U.S. economy. They were postponed for a month as the 10% tax on Chinese goods kicked in. A month later, the 25% tariff was reinstated but lasted about three days before being rolled back. The ‘fentanyl tariff’ was now being applied to only goods not compliant with the USMCA [2]. In the meantime, China’s levy was lifted to 20%. Later, in August, Canada’s levy was lifted to 35%, partly due to Canada’s retaliation to the fentanyl tariffs (these specific duties on U.S. goods were eventually largely removed in September). In November, China’s fentanyl tariff was lowered to 10% as part of broader trade negotiations. IEEPA repeat-aIEEPA was activated again on April 2, with the announcement of broad-based tariffs on so-called ‘Liberation Day’. After declaring the chronic trade deficit an internationally rooted national emergency, “reciprocal tariffs” were announced for nearly all nations. Canada and Mexico were exempt from these new measures. So too was any nation facing U.S. trade sanctions, e.g., Russia, Belarus, North Korea, and Cuba. Few other regions were spared; even the inhabited-by-penguins-only Heard and McDonald Islands were given an official tariff. There was a country-specific duty along with a minimum base tariff of 10%, even for countries for which the U.S. sported a trade surplus. The country-specific tariff was set at half the tariff rate that would, theoretically, eliminate the bilateral trade deficit given overly simplistic assumptions concerning the price elasticity of U.S. imports and the tariff elasticity of U.S. import prices. The first round of reciprocal tariffs ranged from 10% to 50%. Exempted were specific goods already covered, or expected to be covered soon, by ‘Section 232’ tariffs (see below), regardless of their country of origin. The reciprocal tariffs were introduced after U.S. markets closed. When they reopened next day, fears of U.S. and global recessions ignited a massive equity market sell-off and bond market rally. Within a few hours, the reciprocal tariffs were postponed until (eventually) August 7, affording time for deals to be negotiated in the interim. All reciprocal tariff rates were temporarily reduced to (or remained at) 10% (at the base)—except for China’s, which remained at 34%. This triggered a tit-for-tat tariff war once China retaliated in kind, with the bilateral rate being upped to 50%, then 84%, and finally 125%. The reciprocal rate hung around there for about a month before being lowered to 10% as part of bilateral trade negotiations. When reciprocal tariffs were reactivated, the rates ranged from 10% to 41%. Reflecting the various trade deals, key trade partners previously with higher rates were now in the 15%-to-20% range. For other countries, negotiations to lower their ‘number’ continue. For example, Switzerland went from a reactivated 39% to 15% with India’s reciprocal levy moving from 25% to 18% [3]. Second comingSandwiched between the two rounds of IEEPA tariffs were two rounds of Section 232 or ‘national security’ duties. Section 232 of the Trade Expansion Act of 1962 gives authority to impose tariffs once it is determined that imports of certain goods are occurring “in such quantities” or “under such circumstances” that they “threaten to impair the national security”. In the required investigation by the Commerce Department, the term national security is interpreted broadly to include “the general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements, which are critical to the minimum operations of the economy and government”. The Administration was going to apply the broadest of interpretations. Commerce has up to 270 days to complete its investigation and report on its findings with recommendations. To get the ball rolling quickly, the Administration dusted off a pair of reports from 2017, one on steel and aluminum and another on automobiles and parts. Back then, the following tariff levels were recommended: steel 24%, aluminum 7.7%, and autos and parts 25%. Steel and aluminum were rounded up to 25% and 10%, respectively. The Administration opted not to tariff autos and parts ahead of the USMCA’s new higher (and rising) regional value content requirement. On February 10, the President announced that tariffs on steel and aluminum would be re-imposed effective March 12. On March 26, he announced new tariffs on autos effective April 3 (parts followed within a month). This time, aluminum was set at 25%, the same as steel, and both were later boosted to 50%. Autos and parts were set at the original 25%, excluding USMCA-compliant parts and the U.S. content in USMCA-compliant vehicles. Interestingly, in the USMCA, future Section 232 tariffs on autos and parts would exclude Canada and Mexico under certain conditions (which applied in both cases). And both countries would get time to negotiate tariff-rate quotas for future 232s. The current Administration has not honoured these parts of the USMCA. As the year unfolded, new investigations began on 12 industries. The President has acknowledged receiving three of the reports, and has announced their tariffs. These included: Up to 50% on certain intermediate and finished copper products; 10% on softwood lumber and 25% on certain wood products (the latter’s climb to as high as 50% has been postponed); 25% on medium- and heavy-duty trucks and parts with the same USMCA-compliant carve outs as autos and parts, along with 10% on buses. The 270-day report deadline has passed for a number of the remaining investigations, so expect a flurry of Section 232 tariff announcements at some point (Table 1). Tariffs’ take |
At the peak of the trade war with China, America’s average tariff rate was around 26%, the highest in over a century (Chart 1). After China’s 125% levy was rolled back to 10%, the country-specific reciprocal rates were reactivated and adjusted, fentanyl tariffs were tweaked, and several Section 232 tariffs were introduced, the average tariff rate currently sits above 16%. The 16%-plus figure is the ‘posted’ average tariff rate. However, the U.S. Customs and Border Protection (CBP) collects less owing to the various legal maneuvers companies employ to skirt tariffs. For example, tariff engineering involves modifying a product (preferably minimally) so that it incurs a lower duty, and firms can shift global supply chains to lower tariffed nations. In November, CBP collected $30.8 billion on $264.1 billion worth of goods imports (not seasonally adjusted) resulting in an 11.6% ‘collected’ average tariff rate (Chart 2). In December $27.9 billion was collected, likely reflecting seasonal weakness in imports along with the reduction in tariffs on certain food products. The noticeable gap between the collected tariff rate and the posted rate (and the reasons for it) partly explains why the inflation impact of tariffs has been much less than expected. Other reasons include profit margins absorbing some of the cost increases and global firms raising their global prices to limit U.S.-specific price hikes. Since new tariffs started in February 2025, the monthly tariff total has been rising. The December figure translates to almost $32 billion on a seasonally adjusted basis, or above $383 billion at an annual rate—a record high for the monthly data that date back to 1982 (Chart 3). However, this amount is not all new tariffs. In the year ended January 2025, nearly $80 billion was collected (for a 2.4% average rate) reflecting the legacy tariffs from the first Trump and subsequent Biden Administrations, along with the hundreds of antidumping and countervailing duties orders maintained by the Commerce Department. In consequence, net new tariffs were bringing in a bit above $300 billion annualized as of December, much of which are IEEPA duties ($133 billion through mid-December and now higher). Should the Supreme Court rule that IEEPA tariffs are unlawful, these duties would end and what has been collected so far may have to be refunded. But there are still several other authorities in the President’s tariff arsenal (Table 2). One mentioned often is Section 122 of the Trade Act of 1974, which gives the President power to institute tariffs of up to 15% for as long as five months (and Congress can extend them) to address balance of payments problems. We reckon the Administration will argue that large and persistent trade deficits constitute such a problem (which is debatable). And there is still a flurry of Section 232 tariff announcements looming. So, as we begin Year 2 of Trump Administration tariffs, we are waiting to see what comes next—much like where we were this time last year. [1] China was still facing legacy tariffs from Trump 1.0 that were continued and selectively expanded by the Biden Administration. The Peterson Institute for International Economics (PIIE) pegged the average tariff rate on China from these legacy levies at 20.7% at 2024-end. [^][2] Initially, for Canadian goods, the compliance rate was lower than it could technically have been. Non-compliant goods from Canada faced a most favoured nation (MFN) tariff rate of around 2%. Some firms opted to absorb the duty rather than incur the costs of proving compliance. The fentanyl tariffs radically altered this arithmetic. Currently, the Bank Canada estimates the compliance rate for Canadian goods exports to the U.S. at above 95%. Other older estimates by the BoC and others were lower. [^][3] IEEPA was also separately employed on two other occasions to augment the reciprocal tariff on India because of their importation of Russian oil and to augment Brazil’s base tariff in part due to the prosecution of former president Bolsonaro. [^] |
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