Citigroup said that the actual effective tariff rate in the United States is only about 9%-10%, which is far lower than the theoretical tax rate of about 18%. This means that the negative impact of tariffs on inflation and corporate earnings is currently significantly exaggerated. The core reason behind this is the policy "exemption", rather than re-export trade as generally believed by the market.

Although concerns about the trade war are rampant in the market, its actual impact on the U.S. economy is far smaller than claimed.

According to Zhuifeng Trading Desk, Citigroup stated in its latest research report that the actual effective tariff rate in the United States is only about 9%-10%, which is far lower than the theoretical tax rate of about 18%. This means that the negative impact of tariffs on inflation and corporate earnings is currently significantly exaggerated.

According to the report, the core reason behind this is policy-based "exemptions and exceptions (Carveouts)" rather than transshipment as generally believed by the market. This suggests that the impact of lower tariffs may be a policy choice rather than an accident, which is a positive signal for future market expectations. However, investors need to be wary of two major risks: First, the inventories built by companies to avoid tariffs are approaching depletion, which may push up commodity inflation in the next month or two; second, if transshipment trade continues to increase, it may lead to a new round of tariffs on countries such as Vietnam and Thailand in the future.

The report believes that the current situation of "big thunder but little rain" in the trade war is good for risk assets and leaves room for the Federal Reserve to cut interest rates when the labor market weakens.

False name: Actual tariff rates are only half of declared levels

The report points out a startling discrepancy: Based on the announced tariff list, Citi economists estimate that the theoretical effective tariff rate (that is, the weighted average of all imported goods) is as high as 17%-18%, reaching the highest level since the "Smoot-Hawley Tariff Act".

However, based on calculations based on tariff data actually collected by the U.S. Treasury Department, the effective tariff rate achieved is only about 10%. There is a huge gulf between the two, which means that the actual impact of the trade war is far less dire than its “theoretical level” might seem.

Decryption gap: policy exemption is the main reason, and the impact of transshipment is limited

The report delves into two main reasons for the huge gap between theory and reality and concludes that "exemptions" are the more critical factor.

Exemptions and exceptions (Carveouts): The report believes that this is most likely the main reason for the tariff gap. If the actual smaller impact of tariffs is intentional on the part of policymakers (through large exemptions) rather than an accident, then this modest impact will be more persistent, which is reassuring for markets. Historical data also supports this: Between 2019 and 2021 after the 2018 Sino-US trade war, 957 companies submitted 163,522 applications for tariff exemptions, with an approval rate as high as 61%. Taiwan Semiconductor Manufacturing Company (TSMC) chips are an important exemption case.

Transshipments: The report analyzed micro-trade data between the United States and China and seven Asia-Pacific countries (Vietnam, Thailand, Malaysia, India, Indonesia, Singapore, and the Philippines) and found that transshipments do exist. Research estimates that about $45 billion in cargo was transshipped between February and July 2025, mainly through Vietnam and Thailand. However, transshipment of this scale has a limited effect on reducing overall tariffs, and can only reduce the effective tariff rate by about 1 percentage point. Therefore, transshipment is not sufficient to explain the entire tariff gap.

Where did the inflation go? Tariff shocks are “absorbed” by multiple factors

Corresponding to the lower-than-expected impact of tariffs, the much-discussed “tariff-flation” has not materialized as expected. Reported "tariff basket" commodity prices rebounded in August, and their three-month moving average annualized growth rate was only a modest 2%. The report analyzes two other reasons for poor tariff transmission:

Inventory buffers running out: Report finds U.S. businesses engaged in massive import stockpiling before tariffs took effect. After excluding gold and pharmaceuticals, this excess import is approximately equivalent to 5-6 months of normal imports. Since the earliest tariffs were due to take effect in February 2025, months have passed, which means the inventory buffer is about to be exhausted. This is a risk point that requires close attention. If commodity inflation suddenly jumps in the next month or two, it is likely to be related to inventory depletion.

Limited evidence on corporate profit absorption: Market speculation is that companies may absorb tariff costs by compressing their own profits, thereby avoiding passing prices on to consumers. But the report found evidence to support this view was "relatively limited". Data show that the profit margin of the S&P 500 index remains strong, and even the profit margin of the equal-weighted S&P index has remained stable and has not declined significantly. This further confirms the core point: It is not that companies sacrifice profits to absorb high tariffs, but that the actual impact of tariffs on companies is smaller than imagined.