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-Editorial
The Congressional Budget Office (CBO) estimates that sweeping increases in U.S. tariffs implemented this year could reduce federal deficits by $4 trillion over the next decade, though the nonpartisan agency cautioned that the policy shift is likely to slow economic growth and push consumer prices higher.
The updated forecast, released August 19, forms part of CBO’s upcoming short-term economic outlook covering 2025 through 2028, scheduled for publication on September 12. The analysis reflects tariffs that took effect between January 6 and August 19, 2025, across a wide range of imported goods.
According to the Congressional Budget Office, the effective tariff rate on imports rose by about 18 percentage points compared with 2024 trade levels. Key increases include a 30 percent tariff on imports from China and Hong Kong, a 25 percent tariff on certain goods from Mexico, and a 35 percent tariff on some Canadian imports. Selected European Union products now face a total tariff of 15 percent, while automobiles and auto parts are subject to tariffs of up to 25 percent. In addition, most steel, aluminum, and copper products are now taxed at 50 percent.
Most other imports now face at least a 10 percent tariff, with additional increases applied to shipments from many countries beginning August 7. In May, goods from China and Hong Kong also lost access to the de minimis exemption, which previously allowed packages valued under $800 to enter duty-free.
CBO projects that if the tariffs remain in place through 2035, they will lower primary deficits — which exclude federal interest payments — by $3.3 trillion. Additional reductions in borrowing would cut interest costs by $700 billion, producing a combined $4 trillion decline in deficits.
That figure is markedly higher than the $3 trillion reduction projected in June, when CBO analyzed tariffs in effect between January and mid-May. Officials attributed the revised estimates to expanded tariff coverage, higher rates, and changes to import rules.
Federal customs duties have surged in recent months. Through July, the Treasury Department reported $136 billion in collections, with $28 billion recorded in July alone. Earlier in the year, CBO projected only $80 billion in tariff revenue for all of fiscal year 2025, in line with the average of the previous five years.
If no further tariff changes occur, CBO now expects duties to reach $200 billion by year’s end. However, the agency cautioned that revenues often lag tariff implementation by several months, since goods already in transit are exempt from new rates and importers can defer payments under Customs and Border Protection’s Periodic Monthly Statement program.
While the budgetary impact appears significant, CBO emphasized that the broader economic consequences remain unclear. The short-term forecast due in September will reflect both the direct effect of higher tariffs on U.S. imports and retaliatory measures imposed by trading partners.
CBO expects the policies to shrink the size of the U.S. economy in the near term. Higher costs for consumer goods and capital equipment will reduce household purchasing power and increase expenses for businesses. The agency also anticipates temporary upward pressure on inflation as prices adjust to the new tariff structure.
At the same time, the additional revenues are projected to lower federal borrowing needs, potentially freeing private capital for investment and partially offsetting negative impacts. The longer-term forecast, covering 2026 through 2036, will incorporate those effects in greater detail.
In line with its standard methodology, CBO assumes that current tariff rates will remain permanently in place unless modified by future administrative or legislative action. The latest projections exclude several upcoming changes, including a scheduled August 27 increase in imports from India, a new joint tariff arrangement with the European Union announced August 21, and the suspension of duty-free entry for commercial shipments under $800 beginning August 29.
The 2025 reconciliation act, enacted as Public Law 119-21, also contains provisions that will further alter tariff rules in the coming years. Most notably, it will end duty-free treatment for many commercial shipments beginning July 1, 2027.
CBO officials stressed that the magnitude of the tariff increases is without precedent in recent decades, making long-term outcomes particularly difficult to predict. “There is little empirical evidence about how consumers and businesses will respond to tariff hikes of this scale,” the agency noted in its report. Variations in consumer demand, business supply chains, and potential exemptions could cause actual revenues to diverge significantly from projections.
Despite the uncertainty, the CBO said it will continue to update its estimates as more data becomes available. The next long-term budget outlook, due in early 2026, will reflect the combined effects of tariffs, trade responses, and broader provisions in the 2025 reconciliation act.