Tariff reality starts to emerge
Come 1 August, the average effective US import tariff rate, already at its highest level in almost a century, may rise further.
The 90-day pause on Liberation Day tariffs, initially set to come to an end on 8 July, has been extended, but only until 1 August.
During the pause, agreements with a few trading partners set tariffs lower than Liberation Day rates but significantly higher than in previous years. Letters sent to other trading partners threaten tariff rates that will be higher than the Liberation Day rates if agreements are not reached. At present the average effective US import tariff rate stands at 17.6%, its highest level in almost a century, and significantly higher than 2.4% at the end of 2024. It is becoming increasingly likely that once the pause comes to an end, the average US import tariff rate may rise further.
One key goal of the US administration’s tariff policy is to raise revenue and narrow the budget deficit. Tariff revenue has indeed surged. In the first half of 2025, revenues touched US$100 billion, more than double the average of US$40 billion in previous years. The US Treasury Secretary expects tariff revenue to rise to US$300 billion by the end of the year. Modelling by the Congressional Budget Office (CBO) indicates that tariffs could raise US$2.8 trillion in revenue over the next ten years. Achieving this estimate would require tariff revenue to exceed an annual average of US$250 billion over the next nine years. However, the current surge in tariff revenues may not persist. Instead, an increase in US import prices may, in part, over time lead to weaker demand for imports and a thinning of revenues.
Any narrowing of the budget deficit due to higher tariff revenues could be overshadowed by the impact of the One Big Beautiful Bill Act (OBBBA). The CBO estimates that the OBBBA will increase the budget deficit by US$1 trillion over the next two years, and by at least US$3 trillion over the next decade.
Perhaps most importantly, many argue that tariff revenues represent a tax on US businesses and consumers, rather than on foreign producers. A surge in tariff revenue would therefore be a fiscal drag that would cut across some of the economic stimulus from tax cuts elsewhere.
Data is beginning to show the inflationary impact of tariffs. In June, annual growth in consumer prices rose to 2.7%, accelerating from the previous month (+2.4%). Prices for typically imported goods, such as appliances, window and floor coverings, and nonelectric cookware, rose sharply– a sign that tariff pressures will impact US households (see chart 1).
The inflationary impact of tariffs in the US and the general uncertainty around tariff policy has kept major central banks from cutting interest rates. Earlier this month, Fed Chair Jerome Powell said, “In effect we went on hold when we saw the size of the tariffs.” The Reserve Bank of Australia (RBA) joined this list when it held the cash rate steady last week. While domestic factors played the major role in the RBA’s decision, Governor Michelle Bullock’s comment indicated that international developments, particularly around tariffs, are a key risk factor.
Despite the concerns of central bankers, fresh tariff threats have continued over the last few days. These include a 50% tariff on copper and a 200% tariff on pharmaceuticals (to be phased in over 12 to 18 months).
Australia is not immune to the effect of these tariffs. While only 4% of the country’s total goods exports go to the US, domestic pharmaceutical manufacturers rely heavily on the US market. Australia exported $2.1 billion worth of pharmaceutical products to the US in 2024, representing almost 40% of Australia’s total pharmaceutical exports over the year. Higher tariffs on pharmaceuticals destined for the US could impact Melbourne’s biotechnology manufacturing sector, which accounts for 60% of Australia’s pharmaceutical exports.
Just as new tariff proposals are being aired, those which have been implemented to date are starting to be seen in the economic and financial data in the US, with flow-on implications then likely to spread across the global economy.
This newsletter was distributed on 17th July 2025. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Lester Gunnion, Manager at Deloitte Access Economics
Click on the links below to read our previous Weekly Economic Briefings:
- State budgets edge towards repair (09 July)
- CFO Sentiment: Global uncertainty dents confidence (03 July)
- Deloitte Access Economics Business Outlook: Productivity promise (25 June)
- Tax in Australia: one more piece of sticky tape (16 June)
