Trade War's Impact on U.S. Economy Less Severe Than Feared, Tariff Rate at 10%

Despite widespread market concerns, the actual impact of the trade war initiated by the on the American economy has been significantly less than initially projected. The effective tariff rate in the U.S. stands at around 9-10%, far below the theoretical rate of approximately 18%. This discrepancy suggests that the negative impacts of tariffs on inflation and corporate profits have been overstated.

The primary reason for this disparity is the implementation of policy exemptions and exceptions, rather than the commonly assumed practice of transshipment. This indicates that the lower tariff impact could be a deliberate policy choice, which is a positive signal for future market expectations. However, investors should be cautious of two potential risks: the depletion of inventory stockpiled by companies to avoid tariffs, which could drive up commodity inflation in the next one to two months, and the possibility of new tariff measures against countries like Vietnam and Thailand if transshipment trade continues to rise.

The current situation, where the trade war has had a limited impact, is favorable for risk assets and provides the Federal Reserve with room to lower interest rates in the event of a weak labor market. The actual tariff rate is only about half of what was declared, with the theoretical effective tariff rate estimated to be around 17-18%, the highest since the Smoot-Hawley Tariff Act. However, based on actual tariff collection data from the U.S. Treasury, the realized effective tariff rate is only around 10%. This significant gap indicates that the actual impact of the trade war is far less severe than its theoretical implications.

The main reasons for this gap are policy exemptions and limited transshipment effects. Exemptions and exceptions are likely the primary cause of the tariff discrepancy. If the minimal impact of tariffs is a deliberate policy decision through extensive exemptions, this mild impact could be more sustainable, providing reassurance to the market. Historical data supports this, as 957 companies submitted 163,522 tariff exemption applications between 2019 and 2021, with an approval rate of 61%. A notable exemption case is the semiconductor industry.

Transshipment, while present, has a limited effect on overall tariffs. Analysis of micro-trade data between the U.S. and China, as well as seven other Asian countries, revealed that approximately 450 billion USD worth of goods were transshipped between February and July 2025, primarily through Vietnam and Thailand. However, this scale of transshipment only reduces the effective tariff rate by about 1 percentage point, making it insufficient to explain the entire tariff gap.

The anticipated "tariff inflation" has also not materialized as expected. The price of goods in the "tariff basket" showed a modest 2% year-on-year growth rate in August. The report identified two additional reasons for the slow transmission of tariff impacts: the depletion of inventory buffers and limited evidence of corporate profit absorption.

Before the tariffs took effect, U.S. companies engaged in large-scale import stockpiling, equivalent to 5-6 months of normal import volumes. With the earliest tariffs implemented in February 2025, this inventory buffer is nearing depletion, posing a risk of sudden commodity inflation in the coming months. Market speculation that companies might absorb tariff costs by reducing profits to avoid passing them on to consumers lacks substantial evidence. Data shows that the profit margins of the S&P 500 index remain robust, with the equal-weighted S&P index profit margins also stable, indicating that the core issue is not companies absorbing high tariffs through reduced profits, but rather that the actual tariff impact is smaller than anticipated.