Candice Horbacz
This finding challenges the prevailing view from numerous other studies, which have largely indicated a nearly complete pass-through of tariff costs to US importers. The research, which analyzed detailed import data from September 2023 through January 2026, offers a unique contribution to the economic literature by weighting data by pre-trade war import volumes, a methodological approach deemed crucial to its divergent results. However, the study is careful to note that while it sheds light on who pays the tariffs, it does not provide a definitive answer to the broader question of whether the United States is ultimately better off under the new tariff regime.
Understanding Tariff Mechanics: Who Really Pays?
Tariffs, fundamentally, are taxes imposed by one country on goods imported from another. While legally the importer of record is responsible for paying these taxes to the government, the economic burden, or "incidence," can be distributed among various parties within the supply chain. When the US imposes a tariff, the immediate effect is to increase the cost of the imported good. This price hike typically leads to a reduction in demand for those goods within the US market.
In response to this diminished demand and increased cost, foreign sellers often face a dilemma: either maintain their pre-tariff prices and risk losing market share due to the higher overall cost to US buyers, or lower their export prices to offset some or all of the tariff burden, thereby maintaining competitiveness. When foreign exporters choose the latter, they are effectively absorbing a portion of the tariff’s economic cost. The degree to which foreign exporters reduce their prices is known as the "pass-through" rate. A low pass-through rate to importers means foreigners are absorbing more of the cost, while a high pass-through rate means US importers are paying most of it.
Economists measure this pass-through by examining changes in "unit value" (the price received by exporters before tariffs, calculated as customs value divided by quantity) and "landed cost" (the total price paid by importers, including tariffs, freight, and insurance). If a tariff were fully passed onto importers, the unit value would remain stable, and the landed cost would increase by the exact amount of the tariff. Conversely, if foreign exporters absorb part of the tariff, the unit value would fall, and the landed cost would rise by less than the tariff amount. Freund’s study observed precisely this phenomenon: a decline in unit values, indicating that foreign exporters were indeed lowering their prices.
The Context of US Tariff Policy: A Recent History
The tariffs under review in Freund’s study, often broadly referred to as "2025 tariffs" within the academic context, refer to a suite of duties predominantly imposed by the US government in recent years, particularly under the previous administration, and whose effects were studied through early 2026. These tariffs, notably those under Section 232 of the Trade Expansion Act of 1962 (on steel and aluminum imports, citing national security concerns) and Section 301 of the Trade Act of 1974 (primarily targeting Chinese goods over alleged unfair trade practices and intellectual property theft), represented a significant shift in US trade policy.
The stated objectives behind these tariff impositions were multi-faceted: to protect domestic industries from foreign competition, to compel trading partners to negotiate more favorable trade terms, and to address perceived imbalances in global trade. For instance, the Section 232 tariffs, first implemented in March 2018, affected steel and aluminum imports from various countries, with rates of 25% and 10% respectively. The Section 301 tariffs on Chinese goods, which began in mid-2018 and escalated over subsequent years, eventually covered hundreds of billions of dollars worth of imports, with rates ranging from 7.5% to 25%.
The implementation of these tariffs sparked considerable debate among economists, policymakers, and industry stakeholders. Proponents argued that tariffs could force trading partners to the negotiating table and support American manufacturing jobs, while critics warned of higher consumer prices, retaliatory tariffs, and damage to global supply chains. It is within this highly charged economic and political landscape that studies like Freund’s seek to objectively quantify the real-world impact of these policies. The data period of September 2023 through January 2026 for Freund’s analysis indicates a focus on the ongoing effects and adjustments within the global trade system well after the initial imposition of many of these duties.
Freund’s Novel Approach and Findings
Caroline Freund’s research distinguishes itself primarily through its methodological innovation. Previous studies, while rigorous, often treated all tariff-affected product categories equally, regardless of their actual trade volume. Freund, however, weighted her data by actual, pre-trade war import volumes. This means that a tariff applied to a product category accounting for billions of dollars in imports would be given significantly more statistical weight than one applied to a category with only hundreds of dollars in trade. This granular approach avoids the potential for small, niche import categories to disproportionately influence overall pass-through estimates.
By employing this methodology, Freund’s study found that foreign exporters absorbed approximately 47 percent of the tariff burden throughout 2025, with US importers bearing the remaining 53 percent. This contrasts sharply with earlier prominent studies by economists such as Mary Amiti, Stephen Redding, and David Weinstein (2019), and Gita Gopinath, Emine Boz, Ceyhun Elgin, Gabriel Kamin, and Daniel Leig (2019), which generally concluded that nearly the entire cost of US tariffs on goods from countries like China was passed on to US domestic consumers and firms. For instance, Gopinath et al. found that US import prices for goods subject to tariffs rose by almost the full amount of the tariff, suggesting little to no absorption by foreign exporters.
Freund’s findings provide empirical support for the "terms-of-trade effect," a concept in international economics where a large importing country can use its market power to reduce the pre-tariff prices of imported goods when it imposes a tariff. Essentially, if a country is a sufficiently large buyer in the global market for a particular good, its demand can influence global prices. When it imposes a tariff, foreign sellers, fearing a significant loss of market access and sales volume, may be compelled to lower their prices to retain some of their market share. This effectively means that the importing country is extracting a price concession from its trading partners, thereby improving its "terms of trade" (the ratio of its export prices to its import prices). Freund’s calculation of nearly half the tariff burden being borne by foreign exporters suggests that the US, as a major global importer, did indeed exert some of this market power.
Contrasting Perspectives: Other Studies and Methodological Nuances
The debate surrounding tariff pass-through rates is complex, with various studies offering different insights based on their methodologies and the specific data analyzed. While Freund’s work suggests substantial foreign absorption, it is important to contextualize it within the broader body of research.
As mentioned, several initial studies on the US tariffs of 2018-2019, including those from the Federal Reserve Bank of New York, Harvard, and the IMF, indicated that the burden fell almost entirely on US importers and consumers. These studies often found that import prices rose nearly one-for-one with the tariffs, implying minimal price reductions by foreign exporters. This perspective fueled concerns about the tariffs acting as a tax on American businesses and households, increasing costs for everything from manufacturing inputs to consumer goods.
However, other research has introduced important nuances. A study by Ahn et al. (2025) on the same "2025 tariffs" period, for example, found that decreases in tariff-exclusive import prices could be attributed to importers substituting towards lower-quality and lower-priced products within similar product categories. This phenomenon, where importers respond to higher costs by seeking out cheaper alternatives, means that what might appear as foreign exporters lowering prices to remain competitive could, in part, be US importers actively changing their purchasing patterns. Such substitutions, while reducing the immediate landed cost, represent another type of economic cost imposed by tariffs, as they may lead to a reduction in the overall quality or variety of goods available. Freund’s study incorporates fixed effects to account for some of these adjustments, but it acknowledges that completely ruling out all such quality or variety-based substitutions is challenging.
Furthermore, research by Ganapati and Hottman (2025) on the 2018 and 2019 tariffs found that pass-through to importers fell from nearly complete to about 60 percent after accounting for reductions in scale economies among exporting firms. Their argument posits that when tariffs reduce demand for an exporter’s products, firms may have to ship smaller batches, which can raise their per-unit production and shipping costs. To maintain market share, these firms might cut their prices, effectively absorbing some of the tariff. This dynamic can mask the true extent of foreign absorption when simply looking at average unit values, as the cost reductions by exporters might be offset by inefficiencies from reduced scale. Freund’s study, by examining detailed price changes, aligns with the broader idea that foreign firms do make adjustments that shift the burden.
Another critical caveat, often overlooked in trade data analysis, concerns the nature of trade itself. Most studies rely on country-level trade data, which categorizes goods based on their country of origin. However, a significant portion of US goods trade is "intraparty" – transactions occurring between a US multinational corporation and its foreign affiliate. If a "foreign exporter" is, in fact, a subsidiary of a US-owned company, then any tariff burden absorbed by that foreign entity ultimately translates to a cost for the US parent company. This implies that US firms may bear a higher share of the tariffs than indicated by studies that do not disaggregate trade by ownership structure. According to the US Census Bureau, related-party trade accounts for a substantial share of US imports, particularly from countries like Mexico and Canada, suggesting that the true incidence on US-owned entities could be higher.
The Welfare Conundrum: Beyond Incidence
While Freund’s study provides compelling evidence that foreign exporters are absorbing a notable share of US tariffs, it explicitly states that this finding "does not imply the tariffs were successful on welfare grounds." This is a crucial distinction. Economic incidence (who pays the tax) is a separate concept from economic welfare (the overall well-being of a country).
To determine whether the US genuinely benefited from these tariffs, a much broader analysis is required, encompassing a multitude of factors beyond just the initial distribution of costs. These factors include:
- Distorted Trade Flows: Tariffs disrupt existing trade patterns, forcing businesses to seek new suppliers or markets, often at higher costs or lower efficiency. This misallocation of resources leads to economic inefficiency.
- Ceased Trade: Some trade transactions become entirely unprofitable due to tariffs, leading to a loss of mutually beneficial exchanges that would have otherwise occurred. This represents a "deadweight loss" to the economy.
- Retaliatory Measures: Tariffs frequently provoke retaliatory tariffs from affected trading partners. For example, China, the European Union, Canada, and Mexico all imposed their own tariffs on US goods in response to US actions, harming American exporters in sectors such as agriculture, manufacturing, and technology. These counter-tariffs can severely damage US export industries and reduce overall economic output.
- Uncertainty: The imposition of tariffs creates significant uncertainty for businesses regarding future trade policies, supply chain stability, and market access. This uncertainty can deter investment, delay business expansion, and stifle innovation.
- Lost Efficiency: Tariffs shield domestic industries from foreign competition, potentially reducing their incentive to innovate, improve efficiency, or lower prices. This can lead to a less competitive domestic market and higher costs for consumers in the long run.
- Supply Chain Reconfiguration Costs: Companies often incur substantial costs when they have to restructure their global supply chains to avoid tariffs, whether by shifting production to other countries, finding new suppliers, or investing in domestic manufacturing capabilities.
For US welfare to have improved on net, any revenue gains from tariffs (even if partly borne by foreign exporters) would have to significantly outweigh all these efficiency losses, deadweight losses, costs of retaliation, and the portion of the tariff burden that still falls on US importers and consumers. Many economic models and analyses suggest that the cumulative negative impacts of tariffs often outweigh the perceived benefits, particularly in the long run.
Legal Challenges and Unforeseen Consequences: The IEEPA Ruling
Complicating the welfare analysis further are the legal challenges some of these tariffs faced. A significant development was the Supreme Court’s decision to strike down certain tariffs imposed under the International Emergency Economic Powers Act (IEEPA). While the specific scope and impact of this ruling are complex and subject to ongoing litigation, it has led to the unprecedented situation where much of the revenue collected from these specific tariffs is now being refunded to US importers.
This legal outcome has profound implications. If US importers, who initially paid the tariffs at the border, are now receiving refunds, while foreign exporters had already absorbed a portion of the economic burden by lowering their prices, the situation transforms into an unintended transfer. Foreign exporters effectively paid a "tax" by reducing their prices, and that money is now being returned to US importers, leaving no net revenue gain for the US government. In some cases, the government might even incur revenue losses due to interest payments on these refunds. This scenario, as highlighted by Freund, means that the distortions and economic damage caused by the tariffs persist, but the intended fiscal benefit to the US government is nullified. The US government effectively imposed a tariff, suffered the economic costs and distortions, but received little to no financial benefit, while the economic transfer occurred between private parties.
Broader Implications for Global Trade and Policy
Freund’s research also touches upon the broader implications for the global trading system. She warns that countries attempting to extract terms-of-trade gains through tariffs can inadvertently trigger a "prisoner’s dilemma" scenario. In such a situation, multiple countries, each motivated to achieve price concessions from their trading partners, might simultaneously impose tariffs. While an individual country might see a short-term benefit, the collective action leads to a reduction in overall world welfare, as global trade shrinks, efficiencies are lost, and retaliatory cycles escalate.
This erosion of the rules-based international trade system, primarily overseen by the World Trade Organization (WTO), could prove to be one of the most significant long-run costs of such tariff episodes. The WTO framework, despite its imperfections, aims to provide a stable and predictable environment for global commerce by establishing rules and dispute resolution mechanisms. Unilateral tariff actions, especially those justified outside of traditional WTO exceptions, undermine this system, increasing uncertainty and the likelihood of trade wars.
The impact of recent US tariffs extended beyond direct trade figures, affecting global supply chains. Many companies responded by diversifying their sourcing away from tariff-hit countries or by "reshoring" production closer to home. While this might be seen as achieving a policy goal of increasing domestic production, it often comes with significant capital investment, higher labor costs, and reduced economies of scale, ultimately impacting consumer prices and business competitiveness. These adjustments, though sometimes necessary, represent additional costs imposed by the tariff regime.
Finally, the caveat regarding intraparty trade bears repeating. If a substantial portion of the "foreign exporter" absorption identified in studies like Freund’s is actually borne by foreign affiliates of US multinational corporations, then the economic burden on the broader US economy is higher than what a simple foreign vs. domestic split would suggest. This structural aspect of global trade adds another layer of complexity to accurately assessing the true national incidence of tariffs.
Conclusion
Caroline Freund’s study marks a significant contribution to the ongoing economic debate about the true cost and incidence of recent US tariffs. By employing a robust methodology that weights import data by trade volume, she presents compelling evidence that foreign exporters absorbed a larger share – nearly half – of the tariff burden than many previous studies had indicated. This suggests that the US did, to some extent, extract terms-of-trade gains from its trading partners, leveraging its market power as a major importer.
However, the findings are accompanied by crucial caveats. The distinction between who pays the tariff and whether the US economy benefits overall remains paramount. The complex interplay of distorted trade flows, retaliatory measures, legal challenges leading to tariff refunds, and the potential for a global "prisoner’s dilemma" means that the net welfare effect for the United States is far from clear and likely negative when all costs are considered. Furthermore, the nuances of quality substitution and intraparty trade suggest that the true economic burden might be even more intricate than initial pass-through rates indicate.
Ultimately, while Freund’s research enriches our understanding of tariff incidence, it reinforces the broader consensus among economists that tariffs are a blunt instrument with widespread and often unintended consequences. They impose significant economic costs, disrupt global trade, and can undermine the very international rules-based system designed to facilitate prosperity. A comprehensive evaluation of trade policy requires moving beyond simple calculations of who pays the initial tax to a holistic assessment of all direct and indirect impacts on national and global welfare.
