Chief Global Strategist
A year ago this week, the President announced what he described as “reciprocal tariffs” on goods imported from all major U.S. trading partners. These tariffs, which were much broader and higher than expected, led to an immediate and sharp decline in stock prices.
Like many others at the time, we expected that these tariffs would cause more harm than good and, while the data are muddied by many other factors, we believe this view has been vindicated over the past year. Importantly, however, the passage of time has further eroded the popularity of tariffs and because of this, along with other economic and political pressures, we don’t expect that the administration will fully replace the recently struck-down IEEPA tariffs.
In short, it appears that the tariff tide is receding and, as it does, a lower level of tariffs should help reduce inflation later this year, potentially setting the stage for more substantial Fed easing in 2027.
The Trouble with Tariffs in Retrospect
Just over a year ago, in an article entitled “The Trouble with Tariffs”, we argued that tariffs raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions.
Evaluating the accuracy of these predictions isn’t easy since, over the past year, the economy has been impacted by a multitude of other factors including tax breaks in OBBBA, the onward march of AI, the immigration crackdown and, most recently, the war with Iran. Still, it is worth reviewing the list of the potentially damaging impacts of tariffs.
On prices: The evidence indicates that higher tariffs have increased U.S. prices. One analysis conducted by the Yale Budget Lab1, suggests that between 40% and 76% of tariff revenues have fed through to higher consumer prices, depending on the methodology used to assess this impact. A separate study from the New York Fed2 suggests that roughly 90% of the cost of tariffs is being shared by U.S. importing companies and U.S. consumers, rather than foreign producers.
Other data tend to support these findings. There are really only broad three groups that could absorb the cost of tariffs – the importers (who actually directly pay the import taxes), U.S. consumers, to whom the importers could pass on the cost, or foreign exporters, who could lower their prices to avoid losing business.
However, if foreign exporters had lowered their prices, this would show up in the government’s import price series for goods, which is calculated before tariffs are levied. In the year that ended in February 2026, U.S. goods import prices rose by 1.3% overall and 3.0% excluding food and fuels. This strongly suggests that the cost of higher tariffs has been shared, so far, between U.S. importers and U.S. consumers.
It could be noted that year-over-year overall CPI inflation was just 2.4% in February 2026, down from 2.8% a year earlier. However, this decline was entirely concentrated in services inflation, which fell from 4.1% to 3.1%. Goods inflation rose from 0.5% to 1.3% over the same period. The decline in services inflation, was largely due to lower shelter inflation and had nothing to do with tariffs. It is also worth noting that while falling services inflation masked the impact of tariffs in the year that ended in February, much higher energy prices in March and April should lead to a significant boost in measured inflation in the months ahead.
On economic growth, the impact of tariffs is harder to disentangle. Real GDP growth in the fourth quarter of 2025 was 2.0%, down from 2.4% a year earlier. Over the same period, real exports grew by 1.0% while imports fell by 2.0%, resulting in a $100 billion decline in the measured annualized real trade deficit. However, some of this may simply reflect stock-piling of imports earlier in 2025.
What is clearer is that tariffs did not boost economic growth in the way that their proponents advertised. In the year ended in February 2026, manufacturing employment fell by 98,000 jobs or 0.8%. This is hardly surprising – even if tariffs were expected to induce companies to relocate manufacturing to the United States, they could hardly be expected to do so given the continued uncertainty about the level or even the legality of the tariffs.
On profits, it appears that importing companies initially absorbed much of the cost of the tariffs before passing them on to consumers. However, of the $295 billion in tariff revenue collected by the federal government between March 2025 and February 2026, the striking down of the IEEPA tariffs will necessitate refunding $175 billion. Assuming that a good chunk of this cost had been passed on to consumers over the past year, corporate profits should have emerged from the first year of elevated tariffs relatively unscathed.
On unemployment, the unemployment rate in February 2026 was 4.44%, up from 4.17% a year earlier so the imposition of higher tariffs did coincide with a moderate increase in unemployment. This, in itself, of course doesn’t prove causation, although the decline in manufacturing jobs, combined with very sluggish growth in exports does suggest some employment drag from tariffs. That being said, the most dominant theme in the labor market over the past year has been a very sharp drop in net immigration that has seen the foreign- born labor force fall by 530,000 and the overall labor force rise by just 42,000. This likely has been more responsible for slow job growth than any tariff effects.
On inequality, in 2023, the top 10% of households in income devoted only 13% of their pre-tax income to buying goods while the rest of the population spent 28% of their pre-tax income on goods. Since tariffs are a flat tax on goods imports, they tend to fall much more heavily on poorer and middle-income households than their richer counterparts. Nothing in the actual implementation of tariffs over the past year has changed this reality.
On productivity, U.S. productivity growth has been quite strong over the past year with a 2.5% increase in output per hour in the non-farm business sector, compared to 2.0% annual average productivity growth over the past 25 years. These productivity gains, however, likely reflect the impact of very tight labor supply with, perhaps, some mild AI impacts, rather than anything to do with trade policy. The theory that tariffs inhibit productivity growth is based on the idea that domestic industries, protected from foreign competition, are less innovative than they would be under free trade. While we still believe this theory to be correct, this effect would only materialize over a long period of time.
On global tensions, it is a mixed story, with many trading partners showing restraint in retaliating against U.S. tariffs but with animosity towards the United States increasing around the world.
According to recent research published by the Brookings Institution3, between the end of 2024 and the end of 2025, the average effective tariff rate imposed by the United States on its trading partners rose from 2.4% to 9.6%. However, over the same year, our trading partners increased their average tariff rate on U.S. goods exports by less than one percentage point, from 3.5% to 4.4%.
This lack of retaliation has been a positive for the United States. However, the trade war, among other things, has clearly increased animosity towards the United States among citizens of other countries. According to the Pew Research Center, favorable opinions of the United States fell in 17 out of 23 countries surveyed between the spring of 2024 and the spring of 2025, with the biggest declines coming in Mexico, Canada, Japan, South Korea and Europe4. While it is nice to be liked, falling popularity has direct economic consequences. The number of non-immigrant visas, which are mostly tourist and student visas, fell by 13% in the six months ended in September 2025 compared to a year earlier, hurting the revenues of U.S. hotels and colleges.
Prospects for Lower Tariffs and Investment Implications
While tariffs have generally been a negative for the U.S. economy over the past year, there are signs that the tariff tide is receding.
First, even before the Supreme Court ruling, U.S. tariffs were considerably lower than in the immediate aftermath of the tariff rollout of a year ago. This reflects an uneasy trade truce with China and partial agreements between the United States and major trading partners including the UK, the European Union, Japan and India.
Second, political pressure is increasing on the administration to avoid fully replacing the struck-down IEEPA tariffs. Tariffs remain unpopular, with 60% of respondents to a Pew Research Center poll disapproving of the administration’s tariffs in January 2026 compared to 59% in April of 2025. While this does not represent a significant change in opinion, voters will likely be even more sensitive to tariff-related inflation as the Iran war increases energy prices and Republicans will presumably be more sensitive to the attitude of voters as the November election approaches.
And third, at this stage, it appears likely that Democrats will at least win a majority in the House of Representatives this November. If this happens, they may be able to push back much more aggressively against all executive actions, including those related to tariffs.
For investors, this has some important implications.
First, if tariff rates are lower going forward, then inflation, which was always going to fall once the data fully reflected increased tariff levels could fall some more as tariff rates decline. If energy prices also back off later in the year, assuming some stabilization in the U.S./Iran conflict, then CPI inflation could well decline to below 2% entering 2027.
Second, if inflation is truly slowing entering 2027, the Federal Reserve, under new leadership, may feel justified in delivering a few rate cuts in 2027, supporting asset prices in general, and,
Third, the dismal track record of tariffs may encourage politicians of both the left and the right to work towards dismantling rather than increasing trade barriers going forward. There is a tide to economic nationalism, like other political ideas and it is possible that, after experimenting with policies designed to reduce trade and immigration, the public will swing in the other direction going forward, a change that should benefit both the economy and financial markets.