The focus of the trade war this year has been on the reciprocal tariffs that President Trump launched on April 2, and which were modified on Aug. 7.
Countries that did not run bilateral trade surpluses with the U.S. are now subject to a universal 10 percent rate. In comparison, most countries with trade surpluses were assigned reciprocal tariff rates of 15-20 percent, and some that were deemed to be less cooperative received tariff rates of 30 to 50 percent.
These tariffs were implemented under the authority of International Emergency Economic Powers Act, which a federal court has ruled was an overstep of federal authority. The Supreme Court will hear oral arguments Nov. 5, and a ruling could come before the end of this year.
Meanwhile, President Trump is turning to other statutes that provide authority to impose tariffs on products, sectors and individual countries.
The statute the Trump administration is using the most is Section 232 of the U.S. Trade Act, which allows the Commerce secretary to investigate the effects of a specific import on U.S. national security. President Trump has used it to impose duties on products such as steel, aluminum, copper and auto parts.
Trump recently announced additional sectoral tariffs on pharmaceuticals (100 percent), furniture (30-50 percent) and trucks (25 percent), as well. He also indicated investigations are being launched on robotics and equipment used in doctors’ offices and hospitals.
As Trump proceeds down this path, one issue to consider is what the effective U.S. tariff rate will be with both the reciprocal tariffs and sectoral tariffs in effect.
J.P. Morgan economists estimate that the average effective U.S. tariff rate currently is just under 16 percent, up from 2.3 percent at the end of 2024. Based on expectations that sectoral tariffs will be imposed later this year, they calculate that the combined effective tariff rate will approach 18-20 percent.
One question that the latest sectoral duties have raised is whether countries that struck trade deals with the U.S. in the summer would be subject to them. This is particularly germane for pharmaceuticals due to the very high tariff rate for branded products and countries that do not have manufacturing capability in the U.S.
A White House official reportedly said the administration would honor 15 percent caps on tariffs for pharmaceuticals where trade deals specified such reductions.
Another issue is whether the 100 percent duties on branded drugs would only apply to producers that had not broken ground on U.S. manufacturing plants or announced plans to do so.
Reuters reports that global drugmakers are scrambling to shore up their U.S. manufacturing capacity. Companies based in the European Union, South Korea and Japan are well positioned, as they have secured favorable agreements that cap tariffs at about 15 percent.
Beyond this, there is an array of opinions about how impactful the pharmaceutical tariffs will be.
Researchers at the American Enterprise Institute view the threat of tariffs on pharmaceuticals as putting nearly $250 billion in trade at risk. They conclude tariffs can raise prices on pharmaceuticals and insurance premiums, heighten the potential for drug shortages, increase prices for producers using foreign software systems and “reduce the competitiveness of U.S. exports of finished drugs.”
Others argue that the impact of tariffs on pharmaceuticals will be limited, because generic drugs and foreign manufactures building in the U.S. are exempt from them.
Financial markets have largely shrugged off the impact of the growing number of sectoral tariffs, mainly because the U.S. economy has proved to be fairly resilient thus far. Yet, uncertainty about tariffs remains high, because many countries still are engaged in trade talks with the U.S.
Meanwhile, businesses worldwide are hedging their decisions pending further clarity on final tariff rates.
In a report to clients, Andy Lapierre of Piper Sandler estimates that at the pace Trump is going, roughly half of U.S. imports could be subject to 232 tariffs. He also argues that tariff uncertainty is here to stay whatever the outcome of the Supreme Court ruling on the International Emergency Economic Powers Act.
If Trump wins, Lapierre claims it is not clear how he will treat industries now under investigation under Section 232. He points out there are different ways in which steel, autos, pharmaceuticals and semiconductors are treated currently.
Conversely, if the Supreme Court rules that the International Emergency Economic Powers Act does not give the president unlimited authority to impose tariffs, Trump would not have the authority to impose universal or reciprocal tariffs. In that case, the average effective tariff rate would be considerably lower than today.
However, the economic impact would be very different if sectoral tariffs replaced reciprocal tariffs, as the winners and losers would depend on the type of tariff. In this respect, trade instability could be here to stay for a long time.
Nicholas Sargen, Ph.D., is an economic consultant for Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books including “Investing in the Trump Era: How Economic Policies Impact Financial Market.”
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