Fitch Ratings indicates that the United States’ new tariff measures may yield short-term revenue boosts and assist in reducing the federal budget deficit by 2025. The Effective Tariff Rate (ETR) is expected to rise to around 25%, potentially generating up to $800 billion.
However, Fitch warns that the long-term effects of these tariffs might outweigh immediate fiscal benefits. Increased import costs could reduce consumer spending and business investment, leading to slower economic growth and potentially exacerbating recession risks.
US Fiscal Challenges
The U.S. still grapples with persistent fiscal challenges, including rising public debt and a structural deficit. Fitch asserts that relying solely on tariffs will not address the need for comprehensive fiscal reforms.
What we’re seeing here, without any embellishment, is a straightforward cost-benefit shift disguised within a revenue spike. Fitch is making it plain: yes, the United States stands to collect a tidy sum in duties, potentially in the hundreds of billions over a limited window, but there’s more beneath the surface. An Effective Tariff Rate approaching 25% is not small potatoes; this is a marked jump compared to historical levels, and it’s forecasted to bring in roughly $800 billion — a sum that might make policymakers breathe easier, briefly.
But that relief is short-lived, according to Fitch. The idea being communicated is that this gain is temporary, not foundational. It isn’t reform. It doesn’t fix anything structurally broken. Rather, it’s akin to applying a bandage where surgical intervention is needed. The fiscal hole — with government debt climbing and deficits rooted in long-term obligations — remains deep, no matter how wide the tariff net is cast.
What comes next matters. These higher import costs don’t simply exist on paper or in budget spreadsheets. They’re passed on. To consumers, who may tighten their belts, and to companies, most of whom probably won’t think twice before cooling spending plans. That dampens activity. In short order, the growth engine slows. Then what was first hailed as extra federal revenue becomes undercut by a smaller tax base — lower earnings, slowed job growth, and perhaps thinner inflation-adjusted profits. We’re then back to weaker nominal tax receipts across the board.
Long Term Economic Impacts
These are not theoretical risks either. They have a track record. History offers more than one instance where tariffs delivered upfront but later cost more in missed growth than they earned in levy. Fitch isn’t expecting a fiscal collapse, but they’re not exactly optimistic about a perpetual uptrend either, especially if no other tools are employed.
From our perspective, this is a clear signal: defensive short-term positions may find renewed merit, particularly in instruments sensitive to declines in consumer demand or slowdowns in capital expenditure. Don’t ignore implied volatility moves in rate-sensitive markets either — there’s potential for dislocation if weaker economic prints start to show up in core indicators. Option strategies leaning on these probabilities might offer outsized returns when priced appropriately.
Using tariffs in this way resembles tightening a screw without fixing the frame — it holds things in place briefly, but doesn’t stop the structure from bowing under pressure. Strategies in place should therefore lean into the opportunity on rate repricings and sector adjustments most exposed to discretionary pullbacks. We would expect that the noise around deficit levels subsides for a while, only to return louder if growth stalls or if revenues come in lower than projected this autumn.
Be alert to any firm directional moves in medium-dated futures linked to consumer sectors and capital goods. Follow yield curves too — especially if flattening takes hold. A swift narrowing between short and long-dated government yields can’t be dismissed as noise in this environment. There’s inference there, and it often tells us what surveys can’t yet prove.
In the short run, yes, things might look better on balance sheets. In medium-to-long perspective though, without any structural repair, the deeper issues remain completely untouched. Keep eyes on sectors where growth hinges on discretionary inflows and subsidised trade inputs — they may be among the first to signal whether policy helped or just postponed pain.
