A New Reality: Tariffs, Trade, and the U.S. Economy in 2025

It has been nearly one year since the 2024 Presidential campaign ended, but the talk of tariffs that dominated Donald Trump’s rallies has not faded into history. In fact, a significant portion of his campaign rhetoric has become current U.S. trade policy. The new reality is that the United States has largely pivoted away from the previous half-century of free-trade agreements and is now firmly in an era of elevated tariffs.

During his rallies, President Trump frequently characterized his approach, stating in Flint, MI, during his campaign that “Tariffs are the greatest thing ever invented.” While the campaign promises of a flat 60% tariff on China and a universal 20% tariff on all other imports were not universally or immediately implemented at those rates, the administration has successfully moved the needle significantly.

A New Reality: Tariffs, Trade, and the U.S. Economy in 2025 US Tariffs Today: A Snapshot of October 2025

The tariffs of President Trump’s second term, primarily implemented using the authority of the International Emergency Economic Powers Act (IEEPA) and Section 232 of the Trade Expansion Act, have dramatically changed the cost of imported goods.

• Average Tariff Rate: The average effective U.S. tariff rate has soared to levels not seen in decades. While the rate has fluctuated due to negotiations and shifting import patterns, the overall average effective tariff rate for consumers was estimated at 17.9% as of September 2025, which is the highest level since 1934. Forecasters predict the effective rate could settle around 15% to 20% by mid-2026, depending on ongoing trade negotiations and whether certain high-tariff investigations on products like pharmaceuticals and semiconductors are finalized.
• China Tariffs: While the pledged 60% rate was not broadly applied, the current policy imposes a 20% tariff on all goods from China under an IEEPA declaration related to fentanyl and migration. Separately, a “reciprocal tariff” on China had been raised to as high as 125% before a temporary pause.
• Global Tariffs (The Universal Tax): The “universal” tariff has taken the form of “Reciprocal” tariffs, which apply to imports from global trading partners. While a minimum rate of 10% was put in place for most countries, country-specific rates range as high as 41%. Canada and Mexico, despite the United States-Mexico-Canada Agreements (USMCA), now face IEEPA-related tariffs on certain goods, with Canada’s rate on most goods at 35% (excluding USMCA-compliant products) and Mexico’s at 25% (excluding USMCA-compliant products).

The unprecedented increase in tariffs has generated significant revenue for the U.S. Treasury, with monthly tariff revenue exceeding $30 billion by September 2025, a substantial increase from less than $10 billion per month in 2024. The administration is now moving to put these funds toward various proposals, including debt reduction and an idea for a “$1,000 to $2,000 ‘tariff dividend'” rebate for Americans.

Who Pays Tariffs and What is the Cost?

If tariffs are “the greatest thing ever invented,” why do they remain so controversial? To answer the most fundamental questions, a tariff is simply a tax paid on imported goods. Historically, tariffs have been a core tool for the U.S. government, accounting for 80%–90% of all Federal revenue up until the 1860s. The first act of the First United States Congress, signed by President George Washington, was the Hamilton Tariff of 1789, which authorized duties on imported goods to raise revenue and protect newborn American industries like textiles and industrial machinery. Tariffs have been a reliable, though often contested, part of the U.S. economic toolkit ever since.

The most persistent confusion, however, is who actually pays the tax. President Trump has repeatedly claimed that foreign countries pay the tariffs, but the consensus among economists and trade experts is clear: U.S. importers and consumers bear the cost.

• The Mechanism: When a product is imported, the U.S. company importing the good pays the tariff to U.S. Customs and Border Protection. This money goes directly to the U.S. Treasury.
• The Pass-Through: Corporations are not absorbing this new cost. As stated by a former CEO of a major retailer during the earlier rounds of tariffs, “Any added costs on U.S. imports will be shared by our customers.” Economists find that these tariffs are overwhelmingly passed on to the American consumer in the form of higher prices.

The real-world costs are already being measured:

• Consumer Prices: By the end of 2025, consumers faced particularly high price increases for leather products (+36% in the short term) and apparel (+34% in the short term). Even motor vehicles saw prices rise by an estimated 12% in the short term. Forecasts for 2026 show these costs persisting, with new car prices remaining about $3,100 higher in the long term due to the new tariffs.
• Economic Impact: Economic models suggest that the tariffs enacted in 2025 could lower U.S. real GDP growth by 0.4 percentage points over 2026 and increase the unemployment rate by 0.7 percentage points by the end of 2026.

Trade Agreements and Legal Challenges

The new trade landscape has also been characterized by a complex mix of legal challenges and renegotiations.
The administration’s broad use of IEEPA to impose tariffs on nearly all global imports was immediately met with legal challenges. Federal courts have ruled that the President exceeded the scope of his authority in some of these actions, but the tariffs have largely remained in effect while the cases are appealed.

The Supreme Court is scheduled to consider the legality of the IEEPA tariffs in November 2025. Even with the possibility of an adverse ruling, the administration has been preparing contingency plans, including the expanded use of Section 232 authority—which is not being legally challenged—to impose new sectoral tariffs (such as on wood products, copper, and potentially pharmaceuticals) to maintain leverage and a high tariff wall.

While the administration has moved away from the multilateral framework, it has not universally abandoned trade agreements.

• USMCA Status: The United States–Mexico–Canada Agreement is still officially in effect, but it has been heavily strained. The imposition of new, IEEPA-based “fentanyl-related” tariffs on Canada (35%) and Mexico (25%) on non-USMCA-compliant goods has created a dual system where only products that fully meet the agreement’s rules can enter duty-free.
• Negotiation over Confrontation: Instead of a simple “rip it up” approach, the administration has used the threat of high tariffs as leverage to force numerous bilateral trade negotiations. This has led to new, controlled agreements with partners like South Korea and the European Union, which have capped the total tariff rate on most of their imports at a negotiated level, often around 15%.

The final verdict on President Trump’s promise of the “greatest thing ever invented” remains to be seen. While the new tariffs are generating massive revenue and have succeeded in forcing a fundamental shift in U.S. trade policy, they have also ushered in an era of higher consumer prices, significant economic disruption, and continuous legal and geopolitical uncertainty.

To learn more or to meet one-on-one with a member of our team, call us at 269) 323-7964. We can help you understand what’s needed so you can have a very successful retirement.

This blog is created and authored by Chuck Henrich (Content Creator) and is published and provided for informational and entertainment purposes only. The information in the Blog constitutes the Content Creators own opinions and it should not be regarded as a description of services provided by Southwest Michigan Financial, LLC. The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.

Nothing on this Blog constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. The Content Creator and Southwest Michigan Financial, LLC assumes no responsibility or liability for any consequences resulting directly or indirectly for any action or inaction you take based on or made in reliance of the information, services or materials provided within this blog.