What Pythagoras’ theorem can teach us about the Fed

During the spring of 2025, the Trump Administration launched what amounts to a fundamental change in US trade policy. The government announced sweeping tariff increases on imports from China, Europe, Mexico, and many other trading partners.

The scale of the measures initially stunned observers.¹ Double-digit duties on a range of manufactured products suggested a sharp departure from the post-war tradition of open trade. Several factors appear to have played a role. The Administration has presented the policy as an effort to rebalance trade and make it fairer. It has also highlighted the revenue generated by the tariffs, which provides a source of funding at a time when the federal deficit remains large. Finally, the measures are intended to encourage domestic production and reduce dependence on foreign suppliers, particularly in strategic sectors such as semiconductors, automobiles, and green technologies.

Yet the picture soon proved more complicated than the initial announcements suggested. Negotiations with trading partners led to a series of exemptions, phased introductions, delayed implementation dates, and reductions in tariff rates. The result is that the tariff schedule on paper looks far more restrictive than the one currently applied in practice.

This gap between announced and actual tariffs raises an obvious question: how high are US tariffs in reality? One way to answer that is to look not at the legal tariff rates themselves but at the ratio of total customs revenue to the value of total goods imports, which provides a straightforward measure of what importers actually pay.

This effective tariff rate automatically incorporates the actual rates applied and also reflects changes in the composition of imports - if duties are concentrated on goods that are no longer imported, the effective rate will fall even when statutory rates rise. Because it captures both policy and behaviour, the effective rate gives a more accurate picture of the burden tariffs place on trade and prices than the official schedules alone.

Figure 1. Effective tariff rate

Sources: Tariff data from the Congressional Research Service and the White House; import data from FRED and BEA, data as of 15 October 2025.

The long-term data provide useful historical perspective. The effective tariff rate can be computed back to 1867, when customs duties were the federal government’s main source of revenue. In the late 1860s, the rate approached 50%, reflecting the fiscal demands that followed the Civil War. It then declined gradually to around 5% by 1919 as the US economy industrialised and alternative sources of revenue—particularly income taxes—emerged. Tariffs rose again in the 1920s and spiked during the Great Depression, both because of the Smoot–Hawley Tariff Act and the collapse in imports.

After the Second World War, the picture changed completely. The United States assumed leadership of global trade liberalisation under the GATT (General Agreement on Tariffs and Trade), where successive negotiation rounds steadily reduced barriers. By the mid-1970s, the effective rate had fallen to about 3%. Thereafter, protection increasingly took the form of non-tariff measures such as quotas, voluntary export restraints, and anti-dumping actions. The effective rate continued to decline, reaching an average of only 1.5% during the 2010s,the lowest level in modern history.

That long trend reversed abruptly under President Trump. Beginning in 2018, tariffs on steel, aluminium, and a wide range of Chinese products were increased. Customs revenues rose with them, pushing the effective tariff rate from 1.6% in early 2018 to roughly 12% by the second quarter of 2025. While still well below the Depression-era peaks, this is the highest level recorded in nearly a century.

The United States has entered a new era in which tariffs have again become a central instrument of economic policy, but the new regime is still evolving. Both firms and consumers have yet to fully adjust to the new price structure. Several legal challenges are pending before the US Supreme Court, which could reshape aspects of the current framework and the scope of presidential authority over trade policy.

Looking ahead, there is still considerable uncertainty about the direction of US trade policy. The Administration continues to negotiate bilateral exemptions and sector-specific arrangements, and future revisions cannot be ruled out. This makes it difficult to identify which industries and firms will ultimately benefit, and which will lose from the new tariff landscape. It also complicates the assessment of the broader macroeconomic effects. The impact on growth, inflation, and supply chains will depend on how firms adapt and how trading partners respond. For the Federal Reserve, this adds another layer of uncertainty to an already complex policy environment.

¹ For an overview of trade policy changes, see Chad P. Bown, Trump's trade war timeline 2.0: An up-to-date guide, PIIE, September 29, 2025