A recent analysis by Pantheon Macroeconomics showed that tariff revenue fell significantly short of the White House’s initial expectations, generating about $100 billion less than expected. Finance Minister Scott Bessant Expected in August Tariffs would add “well over $500 billion, and possibly even $100 billion,” but data compiled as of November 25 showed that annualized tariffs and excise taxes were only $400 billion.
The shortfall stems from the average effective tariff rate (AETR) being much lower than expected. The current AETR estimate is just 12%, well below the consensus estimate of nearly 20% earlier this spring. Not even Congressional Budget Office The Congressional Budget Office (CBO) was surprised, last month lowering its estimate of pre-replacement tariff rates to 16.5% from 20.5%. Samuel Tombs, chief U.S. economist at Pantheon Macro, and Oliver Allen, senior U.S. economist, pointed to three main factors that led to the lower-than-expected AETR. The first is the U.S. relationship with China. In short, new tariff revenue cannot make up for the plunge in trade activity with China.
1. China’s imports plummet and re-adjust their routes
The first major factor was a sharp decline in imports from China, which fell by 30%. China’s share of total U.S. imports has fallen from 13% in 2024 to just 9%. Pantheon found that companies are apparently rerouting trade through Vietnam. Imports from Vietnam have soared from 4% last year to 6% of total imports due to “significant increases in imports of game consoles, TVs and clothing.” All these products are subject to a 20% tariff, which is lower than the nearly 50% tariff on Chinese imports.
2. USMCA compliance exceeds expectations
The second is the result of Trump’s first-term policies: the much-anticipated renegotiation of NAFTA, the United States-Mexico-Canada Agreement (USMCA). It turns out that the proportion of goods entering the U.S. from Canada and Mexico duty-free under the U.S.-Mexico-Canada Agreement is much higher than initially estimated.
White House Expected in March USMCA covers 38% of Canadian imports and 50% of Mexican imports. After Trump took office Unexpected tariff hike This year, after downward negotiation for each country, goods that do not comply with USMCA rules are currently subject to a 35% tariff on goods from Canada and a 25% tariff on goods from Mexico, except for the 10% tariff on energy resources from Canada.
This suggests that the achieved AETRs in these countries should be approximately 18% and 13% respectively. However, data shows that Canada and Mexico achieved an AETR of only 5% in August. This means that the share of imports entering under the USMCA agreement will increase significantly.
Pantheon Macro said companies in Canada and Mexico may become more stringent in providing information to U.S. Customs to prove the origin of components in their products, but they had no incentive to follow this practice under the previous tariff structure. In other words, Canada and Mexico are securing USMCA tariff exemptions that would overturn the White House’s calculations, which were based on previously less than compliant cross-border trade.
3. The surge in tax-free artificial intelligence equipment
The third factor diluting the overall AETR is the surge in imports of duty-free goods this year. Specifically, imports of “automatic data processing machines” (mainly personal computers and advanced chips for artificial intelligence) surged. These imports currently account for 9% of total imports, a significant increase from 4% in 2024. The surge in high-tech imports actually concealed the fact that imports of other products fell by 10% year-on-year in August.
This appears to be a one-time or one-year exception. “We believe that U.S. businesses are currently depleting their inventories of imported goods,” Pantheon wrote, adding that the possibility that the Supreme Court would lift roughly 60% of the current tariff regime under the IEEPA law “temporarily incentivizes businesses to delay new import orders.”
If current tariffs remain in place, the one-year nature of this inventory depletion means tariff-applicable imports should resume next year, with Pantheon calculating imports at $36 billion per month and the AETR rising to 13%. “Even so, tariff revenue will be far lower than expected when the White House announced the rates.”
That said, the $400 billion annualized figure is even higher than some others previously considered “very important” By Torsten Sløk, Chief Economist Apollo Global Management. Schluck, a respected voice on Wall Street, wrote in September that even the $350 billion tariff revenue figure was an important line item in the U.S. budget. But each tariff cut offsets more and more deficit reductions, CBO slashes forecasts Roughly $1 trillion in savings were recently revealed that evaporated as Trump reduced taxes on goods from other countries.
Meanwhile, the remaining tariffs increasingly function like taxes because other countries and international companies don’t pay them, while U.S. companies and consumers do. LendingTree calculation Tariffs will cost U.S. shoppers an estimated $29 billion this holiday season, and investment bank UBS made it clear: “Tariffs are a huge tax increase“. The most direct impact of the trade system is reflected in price increases, which “lead to continued price increases.” UBS estimates the weighted average tariff rate at 13.6% and calculates that tariffs will increase core PCE inflation by 0.8 percentage points in 2026, erasing about a year of deflationary progress.