America cannot dodge the consequences of rising tariffs for ever

Three month ago a tariff announcement by Donald Trump caused a market meltdown. More recently his words have mostly elicited a shrug. On July 7th America’s president published letters he had sent to 14 countries threatening “reciprocal” tariffs to be introduced by August 1st, including levies of 25% on Japan and South Korea. The next day he said he would impose a 50% charge on copper and, after a possible year and a half’s notice, up to 200% on pharmaceuticals. The day after that, he escalated a political row with Brazil by threatening it with tariffs of 50%. Yet although the copper price soared and Brazilian markets shivered, global equity and bond markets seem unaffected. Panic has given way to placidity.

Everyone has a pet theory for this. One is that Mr Trump is not serious: most of the “Liberation Day” tariffs that caused the crash in April were postponed; the threat to impose similar tariffs in August seems empty. What the president really wants is deals. Another is that lots of tariffs have been levied, but their impact has not been as bad as feared. A third is that Mr Trump will back off if the markets or the economy take fright, so pessimism does not pay.

These arguments are inconsistent. They are also flawed. Take the policies that have gone into effect. Although Mr Trump tempered his Liberation Day barrage, tariffs have been relentlessly creeping up. The average rate has reached around 10%, compared with just 2.5% last year. The threatened August 1st and sectoral tariffs would raise that to 16-17%, ie, most of the way to the roughly 20% that loomed over the economy in the spring. Even the deals that have been struck, with Britain and Vietnam, have left in place much higher trade barriers than existed at the start of the year. Besides, the federal government increasingly needs the money raised by high tariffs to help pay for Mr Trump’s One Big Beautiful Bill.

Contrary to received wisdom, these tariffs are hurting the economy. Consumption and retail sales have been weak. America is on course to grow only about half as fast this year as it did in 2024. Inflation remains relatively low—but import prices show that American companies, not foreigners, are sparing consumers from the full burden of tariffs. Many are probably trying to avoid raising prices in the hope of a reprieve. They can do so because they stockpiled imports at the start of the year. Eventually, though, higher costs will tell and prices will rise. Inflation is likely to end the year above 3%.

Relying on Mr Trump to chicken out is paradoxical. If markets do not react to announcements of damaging policies, then nothing is forcing him to back off. It is also complacent. When Mr Trump avoids cliff-edges as big as Liberation Day, by raising tariffs gradually, the feedback from markets and the real economy is subtler. Yet America will surely grow more slowly than it would have—like Britain since Brexit.