Many facets of the U.S. economy have felt the effects of changing tariff policy over the past year. In Iowa, those impacts can reach especially far, with so many businesses and communities tied directly or indirectly to agriculture and an industry heavily dependent on both global trade and export markets.
Economists with the Federal Reserve Bank of Minneapolis say the trade environment has now become more stable, while the U.S. economy has proven more resilient than many initially expected.
Michael Waugh says one of the biggest changes came when the Supreme Court struck down tariffs imposed under the International Emergency Economic Powers Act. Other tariff authorities have since been used, leaving the current effective U.S. tariff rate at about seven percent.
While tariffs have remained in place, the broader U.S. economy has held up better than some economists anticipated.
Doireann Fitzgerald says one reason is that imports account for a relatively small share of the U.S. economy compared with some other countries. At the same time, she says another major economic force has been working in the opposite direction: the rapid expansion of artificial intelligence investment.
Another concern when U.S. tariffs increased was the possibility of retaliation from trading partners. That was particularly important for export-dependent sectors such as agriculture, where retaliatory tariffs can quickly affect demand and commodity markets.
Waugh says economists expected considerably more retaliation following the announcement of the Liberation Day tariffs. Instead, with China as the major exception, many U.S. trading partners chose to negotiate rather than immediately respond with tariffs of their own.
The absence of widespread retaliation helped avoid some of the economic damage economists had anticipated. Waugh says retaliation could have reduced demand for U.S. exports, weakened labor demand among exporters and eventually spilled over into the broader labor market.
However, researchers are beginning to see another effect of tariffs more clearly.
Earlier inflation data showed relatively little evidence that tariffs were being passed through to consumers. Waugh says several additional months of data now show prices rising more noticeably in categories that have greater exposure to tariffs.
Waugh estimates tariffs may currently account for roughly 50 basis points, or half a percentage point, of inflation.
However, he cautions against attributing the broader inflation picture entirely to tariffs. Other economic forces are also pushing prices higher, including some areas tied to the artificial intelligence boom.
For an Iowa economy with deep ties to agriculture, both sides of the tariff equation matter. Higher costs can work their way through businesses and consumers, while retaliation can threaten the export markets farmers and agribusinesses rely on.
So far, the widespread retaliation economists initially feared has largely failed to materialize. Minneapolis Federal Reserve economists say tariffs are now contributing to inflation, but they remain only one part of a much broader economic picture.
