Tariffs: Is the Worst Behind or Ahead of Us?

Exports to the U.S. are a small part of many countries' economies

The United States is the largest economy in the world. However, for many countries, exports to the U.S. are a small percentage of their overall gross domestic product (GDP). For example, China's exports to the U.S. consisted of only 2.3% of its GDP in 2024. There are only seven countries whose goods exports to the U.S. are more than 10% of their respective GDP.

Export exposure varies across countries

The country with the largest goods export exposure to the U.S. market is Vietnam. For Vietnam, a trade deal with the U.S. for a 20% tariff on its goods may feel like a relative win. Even with a 20% tariff, manufacturing in Vietnam may still be cost-effective versus the headache of moving manufacturing and developing supply chains in the U.S. The transshipment of goods from China through Vietnam—or re-routing of goods made in China through Vietnam before heading to the U.S.—will receive a higher 40% tariff. Goods from China that undergo additional manufacturing in Vietnam before heading to the U.S. would avert the higher 40% rate. While the risk is that Vietnam may lose some business and experience a slowdown in growth due to these higher rates, it is likely to avoid a recession.

Lower growth is expected in 2025, with improvement in 2026

Mexico and Canada also have high export exposures to the U.S. So far, many goods are exempt from tariffs if they are covered under the United States-Mexico-Canada Agreement (USMCA). U.S. tariffs on Mexico and Canada were implemented in March, prior to the "Liberation Day" tariff announcement, and both countries are expected to have contracted in the second quarter. However, economic activity is expected to improve in future quarters, according to the Bloomberg consensus of economists. Stock markets in Mexico and Canada are up more than 20% this year in dollar terms, as markets look toward the future.

Global growth, in aggregate, is expected to slow in 2025 before reaccelerating in 2026. Global growth in 2026 could be revitalized if trade and tariff uncertainty recedes, as businesses would be better able to make hiring and investment decisions. However, the impacts at the individual industry and company levels could vary.

Economic hit now, while future growth could improve

There have been mitigating factors—so far

The current in-place tariffs have yet to show a big impact on inflation, global economic growth or corporate earnings. Mitigating factors include early buying by businesses to keep the cost basis of inventories at lower levels and consumers spending ahead of anticipated price increases. Companies also may be absorbing some input price increases due to a lack of ability to pass through price increases and/or attempts to avoid multiple price increases while awaiting more certainty about where tariffs will end up. It is unclear whether consumers and businesses have shifted purchases to lower-cost finished goods and/or inputs to production.

Price pressures may just be starting to be felt. The effective U.S. tariff rate at the end of May was just 8.8% according to the U.S. International Trade Commission, and it takes time for tariffs to flow through to inflation. By definition, tariffs are paid by the importer of the good—U.S. companies in the case of tariffs levied by the U.S.—who either decide to absorb the higher costs in the form of reduced profit margins or pass along the price increase to customers.

The impact is being borne by non-U.S. companies and consumers in some cases. This is because some multi-national companies are spreading cost increases across the globe, rather than just raising U.S. prices and Japanese car manufacturers have lowered the price of cars shipped worldwide. However, a majority of the increased prices from higher tariffs is falling on U.S. companies and consumers based on the 131% rise in customs duties collected through July 24 this year compared to the same period a year ago, as reported by the U.S. Customs and Border Protection. If more countries retaliate by introducing tariffs of their own, those tariffs would likely be mostly felt by the country originating the tariff.

Tariffs are still trending higher

Trump's original April 2nd announcement had implementation dates of April 5th for the 10% across-the-board duties, and April 9th for the reciprocal tariffs. Tariff announcements for Chinese goods ratcheted even higher from April 2nd to April 10th. This short lead time was an immediate shock, giving companies, consumers, and markets almost no time to prepare.

The pauses in the higher reciprocal tariffs—first to July 9th and then to August 1st for all countries except China, and to August 12th for China—have given some time for companies to adjust purchasing and supply chain strategies. The effective U.S. tariff rate at the end of May was just 8.8% according to the U.S. International Trade Commission. We don't know where tariff rates will settle, but it is likely higher than levels implemented through the end of the second quarter.

The full effect of tariffs is yet to come

Countries are seeking to diversify away from the U.S.

Outside of the U.S., other countries are pursuing more trade with each other. This year, the U.K. and India made a historic free-trade deal in May. Canada and the 10 countries that make up the Association of Southeast Asian Nations (ASEAN) are pursuing a free-trade deal. Mexico and Brazil also are working to deepen their trade agreement. China signed dozens of cooperation agreements with Vietnam and Malaysia in April, signed a deal for zero-tariff access for 53 countries in Africa in June and is looking to strengthen its free-trade agreement with ASEAN countries by October. The EU is working toward closer trade relationships with India, South Africa and countries across Asia, including a possible free-trade agreement with Indonesia by September.

Shifting exports originally destined for the U.S. to other countries may be helping to reduce the impact of U.S. tariffs. Chinese exports to ASEAN rose 17% in June, while exports to the U.S. reportedly fell 16.1% in the same month. Should a rush of goods diverted from the U.S. to smaller markets arrive all at once, the extra competition could put downward pressure on prices received by exporters and on inflation in the end markets. However, due to the size of the U.S. market, more trade between countries outside of the U.S. is unlikely to provide a perfect offset.

Potential investment implications

It is likely that the economic impact of higher tariffs is delayed, not averted. Prices in the U.S. could rise; they may fall overseas if other countries don't retaliate with tariffs of their own. Global growth is likely to slow in coming quarters, but we don't believe a global recession is likely. Markets are forward-looking and investors are likely to start looking out to 2026 when uncertainty over tariffs eases and growth may begin to improve. Investors may want to take a longer-term view rather than try to trade based on tariff announcements.

Heather O'Leary, Senior Global Investment Research Analyst, contributed to this report.

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