Why Haven’t Trumpian Tariffs Done More Damage?

About half of US imports are exempt from the headline tariffs.

Factful Friday by Richard Baldwin, Professor of International Economics at IMD Business School, 5 September 2025.

Introduction: The confetti theory of tariff announcements.

The President uses tariff numbers like most people use confetti. They throw it up to get attention but then forget about it once it has hit the ground. Donald Trump throws up astounding tariff threats and forceful deadlines only to reel them back in and forget they were ever made.

But here’s the strangest thing. Whether tariff threats are going up or down, the President manages to sound like he is winning. He comes off as a bold leader striking back at the globalist elite who have been ripping off the American middle class for decades.

And the President knows that the media fall for it. Because they have to fall for it. Journalistic ethics require them to report the President pronouncements and treat them as if they were made in good faith. That they were the outcome of a thoughtful process. That the announcements had a serious chance of becoming policy.

That’s why so many people who follow the news think the US has very high tariffs.

But they are not that high. Not by historical standards. How can that be?

Here are the explanations that I use to organise my thinking:

1. Rug merchant illusion.

2. Exemptions.

Let me explain.

Rug merchant illusion.

I was in Mumbai last week and visited a shop that sells Kashmiri fabrics and rugs. An extremely nice and warm-hearted man started showing me rugs. He and his assistant unfurled gorgeous rugs and told me about how long it takes to make them. How they are hand-knotted in the Kashmir Valley. Photos of his ancestors were involved.

Now I didn’t need a rug – I was there for a Kashmir shawl. But I was enjoying the show and listening seemed like the polite thing to do. Until, that is, I asked him: “how much”. Upon hearing the price, my eyebrows made a decent attempt to leave my face in the upper direction. $1000.

That number, however, wasn’t a good faith request. It was the start of the rug merchant illusion. It was the start of a story, a mind trick. A thousand bucks shouts: “This is rare. This is valuable.” Before I even touched the weave – and way before I touched my wallet – my brain had swallowed a narrative. I was contemplating a thousand-dollar rug.

And then the theatre begins. You wince. The merchant sighs. Numbers fall in elegant steps: $1,000, $800, $400. Each concession feels like a little victory. It feels like you might get an extremely valuable rug for a reasonable sum. By the time you shake hands at $200, your brain is telling you: I just scored a $1000 rug for $200.

Notice the illusion. You didn’t buy a $200 rug; you bought a $1000-rug-for-$200. The opening price became an anchor and a quality signal rolled into one. It told you what to believe about the rug’s true value.

Tariff merchant illusion.

In the bazaar of Trumpian trade policy, the Tariff Merchant illusion works the same way. The President unfurls a giant price tag: 50%, 100%, 30%. The people are shocked, and that sells clicks, so the media reports the numbers as if they were in good faith policy proposals.

But these headline tariff numbers, which we read about a few times a week for months, were not made in good faith. They were story openers. They were mental anchors and a signal of strength rolled into one.

They screamed: the American middle class was victimised by globalist elite, and the President is striking back. He is the only President to really know how to treat these thieving foreigners.

The headlines bite. The base cheers. The global conversation anchors on shock-and-awe tariff levels. This is a Trumpian political victory. Regardless of what tariffs actually get put on, he has convinced the base that he is a strong leader and taking extraordinary steps to protect the American middle class. Foreigners tremble, complain, and fawn. All that is more winning. After all, if foreigners hate the tariffs, they must be good for America.

Then the theatre begins. After the gasps, the carve-outs and exemptions begin. The final duty lands way below the billboard rate. In technical terms, the effective tariff rate (that is to say the import weighted tariff) is far lower than the headline tariff. The purpose of lowering the actual tariff is to soften the cost-of-living impact of the tariffs.

Just like the rug buyers who walks away thinking they got a $1,000 rug for $200, voters think they got tough tariffs without the pain.

That’s the Tariff Merchant Illusion. So now you know. The big, bold tariff threats are not policy. They were the start of a storyline that much of the world bought into.

Enough of amateur pop-psych. I don’t have a degree for that.

Let’s look at the numbers.

Tariff exemptions: actual tariffs vs headline tariffs.

The chart shows the gap between headline and actual tariffs for America’s five largest import providers (together they account for about two-thirds of all US imports).

By headline tariff I mean the rate announced by the administration and enacted by executive order for a given partner (e.g., EU 15%, Mexico 25%, Canada 35%, China 34%, Japan 15%).

By actual rate, I mean the effective tariff rate, or ETR for short. This is a standard but crude import-weighted measure. Here’s how it is calculated. You get the tariff revenue collected by partner and by product from the US government figures (made public on a monthly basis by the Census Bureau). You divide that by the reported value of imports. The idea is simple: The total tariff take equals (the average tariff rate) times (the total imports). So, if you divide the revenue by imports, you get the average tariff rate, or ETR.

The bars showing “% exempt” is the share of that partner’s imports to which the headline rate does not apply. The numbers and underlying calculations are from Fitch Ratings (FitchRatings.com) with my elaboration.

The left panel presents the headline and actual tariffs by partner (as of August 2025). For most partners, ETR is much lower than the headline rate. China is the exception since its headline rate was stacked on top of the tariffs it got under Trump I administration.

The right panel goes a long way to explain the gap. The first and most important fact:

• About half if US imports are exempt from the Trumpian tariffs imposed in 2025 (leftmost bars in the left panel).

Drilling down by partner, EU in actual fact pays ‘only’ 12% ETR with 50% of its exports exempted from the headline 15%. The ETR is high because a lot of EU exports to the US are tariffed under a different authority. The US steel, aluminium and auto tariffs were not part of the ‘liberation day’ tariffs and the Tariff Merchant Illusion that the President unfolded since April. The metal tariffs are up at 50%; the car tariffs were at 25%. Those are applied under other authorities.

Why the gap?

So why the headline vs actual gaps? Two mechanics dominate.

1. Exemptions: big slices of trade are formally outside the new headline rates.

2. Legacy duties: China’s case stacks earlier tariffs on top of the new ones.

For North America, the opposite holds. Most goods that are compliant with USMCA rules of origin are exempt, so Mexico’s and Canada’s ETRs collapse toward single digits despite the eye-catching headline rates they received.

Actual tariffs & exemptions by sector, June 2025.

The next chart shows the actual tariff rates by sector. Note that this data was from June 2025 and thus before the tariff hikes in July and August. That is why the “all goods” ETR is about 9% rather than 17% as in the previous charts.

The bars in the left panel show actual tariff rates by sector. The dispersion is wide. Consumer categories with high China exposure, things like textiles & leather, or toys, games & sports equipment, face hefty ETRs in the high teens. At the other extreme, energy products are essentially zero.

In between sit sectors clustered in the high single digits (e.g., machinery & electricals, packaged food) and a second group in the low-to-mid teens (e.g., autos/transport, metals, stone & glass). Because those later increases were broad-based but came with large exemptions, the pattern of wide sectoral variation almost certainly persists beyond June.

In the right panel, the orange bars are each sector’s share of total US goods imports (hence “all goods” is 100%). Sectors are ordered from smaller to larger shares. Machinery & Electricals account for just over a quarter of imports, followed by autos/parts & other transport equipment, then pharma & chemicals, base & precious metals, and oil & gas.

Crucially, the sectors that dominate the import bill also show large exemption shares (blue bars), which helps keep their average ETRs relatively low. Much of this trade originates in Mexico and Canada and qualifies under USMCA rules of origin, and the EU rate in June was only 10%. These factor dampens the bite of the headline rate.

Evolution of the actual rates.

The last chart for today shows the monthly progression by partner. Specifically, the the monthly series that tracks the effective tariff rate (ETR) by partner.

Beginning with an ETR of approximately 10% in 2024, the average tariff on China increased sharply before declining to around 41%. In contrast, the global average tariff rose from about 2% in 2024 to roughly 7% by April 2025, and then more than doubled to 16% by August 2025. Please note that figures may not align exactly across charts due to rounding differences.

The chart shows that tariffs increased, but not to levels that would destabilize the US economy. While a 17% tariff rate is notably higher than in 2024, many economies historically have operated with similar or higher rates. Overall, higher tariffs negatively affect the US economy, but the impact is not catastrophic.

Summary and closing remarks.

While headline tariff percentages such as 15%, 25%, or 50% capture attention, it is the effective tariff rate that matters for the broad economic impact.

By August 2025, the US actual tariffs (effective tariff rate) stood at approximately 16%. There is one good reason why the headline rates are so much higher. Exemptions. Almost half (46%) of US imports are exempt from these headline duties. Much of the half stems from the exemption granted to USMCA-compliant goods.

Examining the breakdown by sector reveals a wide disparity in tariff exposure. Consumer goods with high reliance on Chinese imports, such as textiles, leather products, toys, and sporting equipment, are subject to higher effective rates. Energy products, by contrast, are virtually untouched.

Looking at the broader picture, the monthly data for 2025 show a marked increase in tariffs. The global average effective rate rose from roughly 2% in 2024 to about 7% by April and then doubled to 16% by August. Yet, these increases have not reached levels that would threaten the stability of the US economy. The costs are tangible, and the middle class is seeing rises in the cost of living, but they aren’t something that really hurts the US stock market.

Concluding remarks.

The past few months have been a masterclass in the Tariff Merchant Illusion. President Trump set the anchor for his hero narrative with shock-and-awe tariffs on 2 April. Then he backfilled with exemptions that keep the actual, trade-weighted average far lower and thus far less damaging to the US economy. The truly amazing thing is that he sounded like he was winning both when the tariff-rate threats went up and when they went down.

Tariffs at the actual level won’t crater the US economy. That’s the good news. And they handed the President a political victory. But they will soon enough push up the cost-of-living for his political base. The question now is whether voters will keep believing the rise in their cost-of-living is worth it. That they are getting a $1000-rug-for-$200 when the monthly pay cheque runs out before the month does.

And that’s it for today’s Factful Friday.