Why in news?

Six months after US President Donald Trump’s sweeping tariff hikes, the predicted economic collapse has not materialised.

The S&P 500 is about 10% higher since “Liberation Day,” and the dollar, after dipping, has recently strengthened. Despite tariffs on almost all major trading partners, consumer prices in the US have not spiked significantly. The muted inflation response raises the key question: will tariffs trigger only a one-time price jump, or lead to prolonged inflationary pressure?

This article examines the unexpectedly modest short-term economic impact of “Trumponomics,” specifically the aggressive tariff strategy implemented by President Trump.

What’s in Today’s Article?

• Tariff Magnitude and Global Reach
• US Economy’s Current Resilience Amid High Tariffs
• Signs of a Looming US Economic Slowdown
• Fiscal Concerns and Rising Treasury Yields
• High Tariffs Likely to Persist Beyond Trump

Tariff Magnitude and Global Reach

• The US has increased tariffs significantly on virtually all trading partners — 15% on economies like the EU, Japan, and South Korea, and 35–50% on countries such as Canada, Switzerland, Brazil, and India.
• With January’s average tariff at 3%, current rates could average 15–20%, a shift that is inherently inflationary even if importers or retailers absorb some of the costs.

US Economy’s Current Resilience Amid High Tariffs

• The US economy has retained stability despite higher import duties, largely because President Trump inherited a growing economy with over 2% GDP growth, near full employment, and low inflation.
• Stock markets have also been buoyed by the booming artificial intelligence sector, significantly boosting tech company earnings and market sentiment.
• Importers accelerated shipments ahead of tariff enforcement, meaning many goods currently on shelves are not yet affected by higher duties.
• Additionally, Trump’s repeated waivers and deadline extensions have delayed the full impact of tariffs.
• Warning Signs in the Labour Market
  • Despite overall resilience, labour market data shows weakness.
  • In July, non-farm payrolls rose by only 73,000, with significant downward revisions for May and June.
• Risks Ahead: Inflation and Job Losses
  • While inflation has not surged yet, higher import costs are expected to filter into prices, potentially denting consumer demand and slowing job creation.
  • The Fall-Winter/Christmas season could reveal these strains, influencing voter sentiment ahead of midterm elections.

Signs of a Looming US Economic Slowdown

• Inflationary effects are becoming evident, with major retailers like Costco and Walmart raising prices on appliances, furniture, tools, and children’s items.
• These increases indicate that higher import costs from tariffs are starting to filter through to consumers.
• US GDP grew at an annualised 3% in Q2 2025, rebounding from a 0.5% contraction in Q1.
• However, this surge was largely due to strong consumer spending on goods imported in advance of tariffs. This temporary boost raises concerns about a sharp slowdown in the coming quarters.

Fiscal Concerns and Rising Treasury Yields

• Trump’s tax bill has sparked worries about the US deficit.
• These concerns were reflected in the recent rise in Treasury yields following a weak $42 billion bond auction.
• The 10-year note yield rose to 4.22%, and the 30-year bond yield climbed to 4.813%, signalling investor apprehension.
• The US Federal Reserve faces a dual challenge: balancing the need to contain inflation without exacerbating weaknesses in the job market.
• Keeping interest rates high could stabilise prices but also risk further employment slowdown.
• With inflation expected to rise and job creation likely to taper, the Fed’s policy decisions are under intense scrutiny.

High Tariffs Likely to Persist Beyond Trump

• The latter half of 2025 is expected to be more volatile, with Trump’s unpredictable tariff policies beginning to influence long-term pricing decisions.
• In this new trade environment, companies will thrive not only through innovation or efficiency, but also by navigating the tariff framework skillfully and lobbying effectively for government concessions.
• The resulting heavy spending on lobbying will make it politically and economically challenging to dismantle these tariffs, even if a future administration desires to do so.
• Consequently, the US is likely to maintain a high-tariff trade stance well beyond Trump’s tenure.