Featured Insights

Importantly, U.S. tariffs this year were established with four key objectives:

• Make foreign exporters pay.

• Narrow the U.S. trade deficit.

• Revitalize U.S. manufacturing.

• Reduce the U.S. government deficit.

While it’s still early, evidence so far is consistent with the view that tariffs are unlikely to accomplish these goals. That, coupled with slowing U.S. growth, underpins our expectation that current tariff rates are unsustainable and will start to be reduced as we approach 2026.

U.S. buyers, not foreign exporters, are paying the tariffs

Similar to what happened during the first Trump administration, once again we are seeing that U.S. buyers have absorbed the majority of increased U.S. tariff costs this year.

Of course, mechanically, U.S. importers always pay import tariffs. But foreign exporters to the U.S. can effectively share part of this cost by reducing the sticker prices they charge to U.S. buyers.

However, this hasn’t been the case so far. The clearest indicator is the U.S. import price index (which excludes custom duties) has persistently increased this year when petroleum is excluded. This indicates U.S. buyers are continuing to pay higher prices, and there has been minimal tariff-sharing from foreign sellers.

Consumer price data suggests to-date, those tariff costs have not been passed along to households but that leaves U.S. businesses to absorb the costs, putting jobs at risk.

Isolated examples of price concessions exist ─ import prices for household goods including furniture have declined over 3% year-to-date. But, these reductions remain modest compared to the average U.S. tariff of 10% to 15%, or even higher rates imposed on some countries. China, for example, faces a ~30% increase in effective U.S. tariff rate since January, but has seen just a 2% decline in import price index.

---

---

Tariffs are not revitalizing U.S. manufacturing

The U.S. manufacturing sector has struggled for much of the past decade. And there is little evidence that tariffs this year have turned things around.

Though production and capacity utilization have marginally improved, they remains essentially unchanged from 2013-2014 levels. Meanwhile manufacturing employment has continued to decline, falling by more than 100,000 in July from a year ago. Future hiring intentions also appear weak, with the ISM Manufacturing Employment Index reaching its lowest level since the global financial crisis (excluding the 2020 pandemic lockdowns).

---

---

The reality is that the scale of capital investment required to significantly re-shore manufacturing activity is too large for businesses to justify when the future of U.S. tariff policy remains highly uncertain. Even if factories could be re-shored, staffing them would remain a challenge with an aging population structurally limiting the availability of workers.

Moreover, reshoring forced by tariffs may prove counterproductive. For example, Section 232 tariffs during the first Trump administration temporarily increased domestic steel and aluminum production by approximately US$2.3 billion in 2021, according to U.S. International Trade Commission estimates, but at the cost of a US$3.5 billion production loss across downstream industries affected by higher input costs.

The impact extends beyond U.S. borders as well. Increased tariffs on steel and aluminum will likely raise costs for both Canadian and Mexican manufacturers, undermining the competitiveness of the North American industrial complex relative to European and Asian production chains.

U.S. goods trade deficit remains large…

June’s U.S. goods trade deficit appeared narrower than a year ago, but this overlooks substantially larger deficits earlier this spring when importers rushed to build inventories ahead of expected tariff increases.

On a year-to-date basis (January to June), the average trade deficit was 28% wider in 2025 than in 2024.

It’s unclear how long it will take businesses to deplete their inventories and until then, imports will remain weaker than usual. Still, without a structural change in U.S. overspending/borrowing from abroad, we expect the trade deficit will eventually return to levels not significantly narrower than before.

As we’ve argued before, the substantial U.S. trade deficit fundamentally reflects large-scale U.S. borrowing from abroad, primarily driven by a large federal government budget deficit. That spending stimulates U.S. growth but has also kept inflation elevated and interest rates higher than they would otherwise be.

Meaningful progress on reducing the trade deficit remains unlikely while U.S. fiscal deficits remain exceptionally large. Moreover, provisions in recent U.S. trade deals that incentivize foreign investment are also working against trade deficit reduction – increased foreign capital inflows are essentially just another form of foreign borrowing, and typically correlated with a wider, not narrower, trade deficit.

…and so will the federal deficit

The last main objective for tariffs is raising government revenue and tariffs have been successful for this. But, its contribution relative to the federal deficit is minimal.

Since April, U.S. Customs and Border Protection have collected approximately US$65 billion more in duties than the same period last year. Extrapolating these gains and accounting for announcements in early August, we expect total annual duty revenue in the U.S. could reach about US$350 billion.

That’s substantial, but a drop in the bucket when compared with the federal deficit that is projected to grow from US$1.8 trillion in the current fiscal year, to US$3 trillion in 2034 after accounting for impact from the passage of the One Big Beautiful Bill Act.

---

---

Furthermore, revenues will likely fall over time as businesses continue to implement strategies to minimize tariff exposure. We noted in our last Monthly Forecast Update that import substitution from high-tariff jurisdictions have already reduced the tariff bill for U.S. purchasers by 10% this year. Any progress toward goals of reshoring and deficit reduction will lower imports and diminish tariff revenues further.

---

About the Author

Claire Fan is a Senior Economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.

---