Candice Horbacz
When the United States imposes a tariff, the economic burden, often perceived to fall entirely on domestic consumers and businesses, is in fact shared across international borders. A groundbreaking new study by trade economist Caroline Freund on tariffs implemented around 2025 reveals that foreign exporters absorbed a significant 47 percent of the tariff burden, with US importers bearing the remaining 53 percent. This finding represents a notable divergence from several other recent studies, which have largely indicated a nearly complete pass-through of tariff costs to domestic importers, suggesting a more nuanced and complex distribution of economic impact.
Understanding Tariffs: Economic Principles and Incidence
Tariffs, essentially taxes levied by one country on goods imported from another, serve various purposes, including protecting domestic industries, generating government revenue, or influencing trade balances. While legally paid by the importer of record upon entry into the country, the economic incidence of a tariff – who ultimately bears its cost – is a more intricate question.
The fundamental economic principle at play is that tariffs raise the cost of imported goods, which, in turn, typically reduces demand for those products within the importing country. In response to this diminished demand, foreign sellers may opt to lower their pre-tariff prices to offset a portion of the tariff burden, thereby striving to maintain their market share and sales volumes. When foreign exporters reduce their prices, they effectively absorb part of the tariff’s economic cost. The degree to which this occurs is measured by "pass-through" rates – the percentage of the tariff burden borne by the importing country’s businesses and consumers. A low pass-through rate to importers suggests that foreign exporters are absorbing a larger share of the cost, while a high pass-through rate indicates that importers, and by extension domestic consumers, are bearing most of the expense.
Previous research, particularly on the US tariffs enacted in 2018 and 2019 under the Trump administration, often pointed to a near-complete pass-through, meaning that US importers and consumers were paying almost the full amount of the tariffs through higher prices. This led to a consensus among many economists that tariffs primarily act as a tax on domestic entities, with little to no cost borne by foreign producers. Freund’s study, however, challenges this prevailing view by introducing a critical methodological refinement that offers a different perspective on the distribution of this economic burden.
Methodological Innovation: Freund’s Approach
The distinctive contribution of Caroline Freund’s research lies in its meticulous methodology, specifically its approach to weighting trade data. The study analyzed detailed import data spanning from September 2023 through January 2026, encompassing trade with 50 key US partners responsible for 95 percent of US goods imports in 2024. Freund measured the 12-month change in prices before and after the imposition of tariffs.
Crucially, Freund weighted the data by actual, pre-trade war import volumes. This weighting technique is vital because it prevents the pass-through rate observed in a small, niche category of goods from skewing the overall average. For instance, a tariff on a product category accounting for only $100 in annual imports would not be given the same statistical weight as a category representing $100 billion in imports. By accounting for the relative significance of different product categories in overall trade, Freund’s methodology provides a more accurate and representative picture of the aggregate tariff burden.
Through this refined analysis, Freund demonstrated that the "unit value"—a measure of prices received by exporters, calculated by dividing customs value by quantity—had fallen following the tariffs. Concurrently, the "landed cost"—the price paid by importers, which includes the tariff—rose by less than the full amount of the tariff. If tariffs had been fully passed through to importers, the unit value would have remained constant, and the landed cost would have increased by precisely the tariff amount. The observed fall in unit value alongside a less-than-full increase in landed cost suggests that foreign exporters indeed absorbed a substantial portion of the tariff, approximately 47 percent on average throughout 2025. This empirical evidence lends support to the concept of a "terms-of-trade effect," where a large importing country can leverage its market power to compel foreign sellers to reduce their pre-tariff prices.
Contextualizing Recent US Tariff Regimes and the "2025 Tariffs"
While the article refers to "2025 tariffs," it’s important to understand this within the broader context of recent US trade policy. The United States has a history of utilizing tariffs, most notably during the Trump administration, which imposed tariffs under Section 232 of the Trade Expansion Act of 1962 (on steel and aluminum) and Section 301 of the Trade Act of 1974 (on various goods from China). These measures, often justified on grounds of national security or unfair trade practices, significantly altered global trade flows and sparked retaliatory tariffs from affected countries.
The "2025 tariffs" referenced in Freund’s study likely refer to a specific set of tariffs, or a continuation/expansion of existing ones, that were in effect or became fully measurable within the study’s timeframe (September 2023 to January 2026). This period falls within a continued era of strategic trade policy, where tariffs remain a tool for policymakers. The economic impact of these tariffs, as highlighted by Freund, becomes a crucial data point for understanding the efficacy and consequences of such policies.
The Broader Economic Debate: Welfare Implications
Despite the finding that foreign exporters are absorbing a substantial portion of the tariff burden, Freund’s research explicitly cautions against concluding that these tariffs automatically enhance US welfare. The paper carefully notes, "The finding that foreigners absorbed just over half the tariff does not imply the tariffs were successful on welfare grounds."
To adequately assess the overall welfare impact, a much broader array of economic factors must be considered. Tariffs inherently distort trade flows, leading to inefficiencies in global production and consumption. They can cause certain trades to cease entirely, resulting in lost economic activity. Furthermore, tariffs often invite retaliatory measures from trading partners, escalating trade tensions and creating a climate of uncertainty that can deter investment and growth. The cumulative effect of these distortions, often termed "deadweight loss," represents a net reduction in overall economic efficiency and welfare.
For US welfare to improve on net, the revenue gains derived from foreign exporters absorbing part of the tariff burden would need to significantly outweigh all these efficiency losses, as well as the portion of the tariff burden that still falls on US importers and consumers. This complex calculation involves weighing the potential benefits of terms-of-trade gains against the multifaceted costs of trade friction and economic distortion. Many economists argue that the long-term costs associated with disrupted supply chains, reduced competition, and a less predictable global trading environment often outweigh any short-term gains from tariff revenue or shifts in the burden.
Challenging the Narrative: Alternative Explanations and Caveats
Freund’s study is not the only one to present a more nuanced view of tariff incidence, nor is it without its own set of considerations. Other researchers have explored alternative explanations for observed price changes following tariff imposition.
A separate study on the 2025 tariffs by Ahn et al. (2025), for instance, proposed that decreases in tariff-exclusive import prices might be attributable to importers substituting towards lower-quality and lower-priced products within similar product categories. In this scenario, rather than foreign exporters willingly lowering their prices to remain competitive, importers might be actively seeking cheaper, albeit potentially inferior, alternatives to offset the tariff cost. This "quality substitution" represents another type of cost imposed by tariffs, as businesses and consumers may end up with lower-quality goods. While Freund’s study incorporates fixed effects to mitigate some of these adjustments, it does not entirely rule out the possibility that some observed price reductions could be due to such quality or product mix changes.
Moreover, prior research by Ganapati and Hottman (2025) on the 2018 and 2019 tariffs imposed by President Trump also indicated a deviation from complete pass-through, finding it fell to about 60 percent after accounting for reductions in scale economies among exporting firms. Their work suggests that when tariffs reduce demand, foreign exporters may be forced to ship smaller batches of goods, which can increase the per-unit cost of production and export. To maintain market share, these firms might then cut their prices, absorbing some of the tariff cost. These offsetting effects can make measured unit values appear flat, masking the exporter’s absorption of the tariff burden.
Another significant caveat pertains to the structure of global trade itself. Much of the trade data utilized in these studies is organized by country of origin, rather than by ownership. A substantial portion of US goods trade, however, is "intraparty"—occurring between a US multinational corporation and its foreign affiliate. In such cases, a "foreign exporter" might, in fact, be a subsidiary of a US-owned company. This implies that if the foreign affiliate absorbs part of the tariff, the ultimate economic burden could still fall on the US parent company, rather than genuinely foreign-owned entities. This complex web of international corporate ownership could mean that US firms bear a higher share of the tariffs than indicated by studies relying solely on country-level trade data.
Legal and Fiscal Ramifications: The IEEPA Ruling
Further complicating the analysis of the 2025 tariffs is the significant legal development concerning tariffs imposed under the International Emergency Economic Powers Act (IEEPA). The Supreme Court’s decision to strike down tariffs levied under this act has led to a situation where much of the revenue collected from these specific tariffs is now being refunded to US importers.
This legal ruling transforms the economic calculus. For the portion of tariffs subject to refunds, the situation effectively becomes a transfer: foreign exporters, who absorbed part of the economic burden by lowering their prices, are effectively subsidizing US importers, who are now receiving refunds for their tariff payments. Critically, this scenario leaves no net revenue gain for the US government from these "illegal" tariffs; in some instances, the government may even incur revenue losses due to interest payments on the refunds. Moreover, while the direct financial burden on importers is nullified by the refunds, the underlying distortions to trade flows, the economic damage to supply chains, and the uncertainty created by the tariffs remain. This highlights how legal and policy decisions can profoundly alter the intended and actual outcomes of trade measures.
The Geopolitical Dimension: Terms-of-Trade and the Prisoner’s Dilemma
Freund’s research also delves into the broader geopolitical implications of countries attempting to extract terms-of-trade gains through tariffs. She posits that such actions can lead to a "prisoner’s dilemma" scenario in international trade. In this classic game theory concept, individual countries may be motivated to impose tariffs to secure price concessions from trading partners. However, if multiple countries pursue this strategy simultaneously, the collective outcome can be a reduction in overall world welfare.
Freund warns that such competitive tariff imposition erodes the foundation of the rules-based international trading system, making any weakening of this framework far more costly than it might initially appear. She emphasizes, "Retaliation by trading partners and the erosion of the rules-based system may prove to be the most important long-run costs of the episode." This perspective underscores that beyond the immediate economic calculations of who pays what, tariffs carry significant long-term risks to global cooperation and economic stability.
Expert Perspectives and Future Outlook
The findings from Freund’s study, alongside other recent research, contribute to an evolving understanding of tariff incidence. While initial analyses often pointed to a near-complete pass-through to domestic consumers, the latest studies suggest a more complex picture where foreign exporters may bear a more substantial share than previously thought, particularly when sophisticated methodologies are employed.
Erica York, Senior Economist with Tax Foundation’s Center for Federal Tax Policy, and Alex Durante, Senior Economist at the Tax Foundation, whose analysis often focuses on federal tax policy, frequently highlight the multifaceted economic impacts of such policies. Their work and others like it underscore the importance of nuanced research to inform public debate and policymaking.
Ultimately, while evidence suggests that the US did extract some terms-of-trade gains from the 2025 tariffs by compelling foreign exporters to absorb a portion of the cost, this does not automatically translate into an improved welfare outcome for the United States. The myriad indirect costs—including trade distortions, potential retaliation, reduced efficiency, and uncertainty—must be carefully weighed against any direct financial benefits. As global trade dynamics continue to shift and countries explore various policy tools, a thorough, evidence-based understanding of the full economic and geopolitical implications of tariffs remains paramount for sound decision-making. The ongoing debate emphasizes that trade policy is rarely a zero-sum game, and its consequences ripple far beyond initial estimates of who pays the direct tax.
