On July 7, the White House made the following announcement:
“KEEPING AMERICA IN THE DRIVER’S SEAT: Today, President Donald J. Trump signed an Executive Order determining that certain tariff rates, which were initially set to expire on July 9, will expire on August 1, 2025. President Trump also sent tariff letters to many countries informing them of their new reciprocal tariff rates, which will take effect on August 1.”
In other words, Trump has unveiled a new round of tariffs. The response from all major news outlets was both swift and predictable. Their consensus is that this will be a bad thing for the U. S. economy. However, the effect of tariffs on our economy may be quite a bit lower than expected because of some economic realities.
After watching the evolvement of these tariffs over the last couple of months, it is safe to assume that they are more bargaining chips than engraved-in-stone policy. The final official tariffs may be quite different from those initially proposed.
The official tariff rate is not always the real rate levied. Nearly always, there are exclusions, exceptions, carve-outs, special agreements, and various other ways to get around the full impact of any given tariff.
Sooner or later, the economy will reach an equilibrium, when tariffs become stable and their influence less felt in the overall economy. In the meantime, it is worthwhile to look at what has happened and/or what is likely to happen because of these new tariffs regarding three areas of our economy, namely the stock market, inflation rates, and gross domestic product growth.
STOCK MARKET
Back in April, following the new tariff announcement, stocks took a heavy hit. In fact, at that time all three major stock indices registered year-to-date losses. We had a similar but less severe situation over the last few days, following the latest tariff announcement.
So far, the latest downturn has been rather mild. While it is difficult to predict what will happen in the next few days or weeks, as of July 11 the decline in stock values has been small.
The Dow Jones took the greatest hit at a loss of 1.02%. The Nasdaq loss was smaller at 0.58%. The S&P 500 was virtually unchanged.
While reporting on this, nearly all major news outlets chose to ignore the overall picture by neglecting to mention the year-to-date performances of these indices.
The S&P 500 and the NASDAQ are very close with growth rates of 6.67% and 6.77%, respectively. The Dow Jones is behind, but still in the positive range with a growth rate of 4.67. This tends to debunk the doom and gloom scenarios portrayed by the major networks.
INFLATION
Tariffs are taxes. They are targeted taxes, but taxes nevertheless. Taxes tend to raise the price of goods and services demanded by consumers, thereby putting upward pressure on inflation.
In 2025, the inflation rate decreased from 3.0 in January to 2.3 in April. But then it went up to 2.4 in May. Economic forecasters had predicted a higher May rate in response to Trump’s tariffs, so the 2.4 rate was welcomed. However, this shows that the downward trend may have been reversed and we are in for higher inflation in the months to come.
As of the time of this writing, the inflation numbers for June have not been released, but forecasters are predicting a 2.6 rate. Even if it comes out lower, like 2.5 or so, it will still be an increase and not a good sign.
GROSS DOMESTIC PRODUCT
In the early days of our Republic, tariffs were the main or only source of revenue to fund our federal government. However, these days their role is less a revenue enhancer and more a tool to influence markets.
By shifting the balance of trade toward a more favorable one for domestic products, tariffs tend to increase Gross Domestic Product (GDP).
This year, our GDP growth has been dismal. Initially, our first quarter GDP was set at a minus 0.3%. But generally, these figures are adjusted twice before they become final. The last and final adjustment set the first quarter GDP at a reduction of 0.5%, which is higher than the initial estimate.
The intention here is that by increasing tariffs our GDP will be in the positive range in the second quarter and beyond.
Economic forecasters are predicting that the annual rate in GDP growth for 2025 will be 1.4%. This is nothing to write home about, but better than the 0.5% reduction experienced in the first quarter. The numbers for the second quarter will not be available until late in July.
The main takeaway from all this is that the long-term effect of these new tariffs is very likely to be good for our economy, but there are no guarantees.