Candice Horbacz
A groundbreaking new study by trade economist Caroline Freund on the tariffs implemented in the United States, particularly those under analysis for the 2023-2026 period, reveals a more nuanced distribution of the economic burden than previously understood. Contrary to earlier research suggesting that nearly all tariff costs were absorbed by American importers, Freund’s findings indicate that foreign exporters bore approximately 47 percent of the tariff burden, with US importers covering the remaining 53 percent. This significant divergence from prior estimates, which often found a nearly complete pass-through to domestic businesses and consumers, has sparked renewed debate among policymakers and economists regarding the true impact and efficacy of protectionist trade measures.
Understanding Tariffs and Their Economic Incidence
Tariffs are essentially taxes levied by a country on goods imported from another nation. While legally paid by the "importer of record" upon entry into the domestic market, the economic burden of these taxes can be distributed across various parties within the supply chain. When a tariff is imposed, it raises the cost of imported goods. This increased cost typically leads to a reduction in demand for those goods within the importing country. In response to this dampened demand, foreign sellers may opt to lower their pre-tariff prices to offset some of the tariff burden, thereby striving to maintain their market share and sales volumes. When foreign exporters reduce their prices, they effectively absorb a portion of the tariff’s economic cost. The extent to which this occurs is measured by "pass-through" rates, which quantify the share of the tariff burden borne by importers versus exporters. A low pass-through rate to importers suggests that foreign sellers are significantly cutting their prices, while a high pass-through rate implies that importers are bearing most of the additional cost, which is then often passed on to domestic consumers through higher retail prices.
Historically, numerous studies on US tariffs, particularly those enacted during the late 2010s, have converged on the conclusion that US importers and, by extension, American consumers, bore almost the entirety of the tariff costs. For instance, influential research by economists like Mary Amiti, Stephen Redding, and David Weinstein, and others at institutions like the Federal Reserve Bank of New York, frequently pointed to pass-through rates close to 100 percent. These studies often analyzed the impact on import prices and consumer prices, finding little evidence that foreign exporters significantly lowered their prices to absorb the tariffs.
Freund’s Methodology and Distinct Findings
Caroline Freund’s recent paper, published by the Centre for Economic Policy Research (CEPR), distinguishes itself through a unique methodological approach: weighting import data by pre-trade war import volumes. This crucial step addresses a potential bias in previous analyses by ensuring that tariff impacts on economically significant trade categories are not overshadowed by those on minor ones. By weighting the data based on actual trade flows prior to the implementation of tariffs, Freund’s study provides a more representative picture of the overall economic incidence. Her research meticulously examines detailed import data spanning from September 2023 through January 2026, encompassing trade with 50 key US trading partners responsible for 95 percent of US goods imports in 2024.
The study measures the 12-month change in prices before and after the imposition of tariffs. Freund’s analysis specifically tracks the "unit value"—a measure of prices received by exporters, calculated by dividing customs value by quantity—and the "landed cost"—the total price paid by importers, inclusive of tariffs. The findings reveal that the unit value has demonstrably fallen, while the landed cost has risen by less than the full amount of the tariff. This discrepancy is key: if the tariff had been entirely passed on to importers, the unit value would have remained flat, with the importer’s price increasing by the exact tariff amount. The observed decline in unit values indicates that foreign exporters are indeed absorbing a substantial portion of the tariff burden by lowering their export prices. Through this weighted analysis, Freund concludes that throughout 2025, foreign exporters shouldered nearly half of the tariff burden, while US importers paid the other half.
This finding provides empirical support for the "terms-of-trade" effect, a concept in international economics suggesting that large importing countries can leverage their market power to reduce the pre-tariff prices of imported goods when imposing tariffs. In essence, the sheer size of the US market gives it a degree of leverage over foreign suppliers, compelling them to accept lower prices to retain access.
Contrasting Perspectives and Methodological Nuances
While Freund’s study offers a compelling new perspective, the economic literature on tariff incidence is rich with diverse methodologies and sometimes conflicting results. One important caveat comes from another recent study on the 2025 tariffs by Ahn et al. This research found that decreases in tariff-exclusive import prices were primarily attributable to importers substituting toward lower-quality and lower-priced products within similar product categories. In this scenario, the apparent price reduction by exporters is not a concession to absorb the tariff, but rather a reflection of importers actively seeking cheaper, often inferior, alternatives to mitigate the tariff’s impact. This "quality substitution" represents another type of cost imposed by tariffs, as consumers may end up with lower-quality goods. After accounting for this channel, Ahn et al. concluded that tariffs still effectively raised import prices. Freund’s study incorporates fixed effects to mitigate some of these adjustment types, but it acknowledges that it cannot entirely rule out that some observed price reductions could be due to such quality or product substitutions.
Another important contribution to the discussion comes from Ganapati and Hottman, who examined President Trump’s tariffs imposed in 2018 and 2019. Their research found that pass-through to importers, initially near complete, fell to about 60 percent after accounting for reductions in scale economies among exporting firms. They argued that when tariffs reduce demand, exporters ship smaller batches, which can raise the per-unit cost of production. To maintain market share, these firms might cut their prices, effectively absorbing some of the tariff. These effects could offset each other, making measured unit values appear flat, even when the exporter is bearing a cost.
Furthermore, a significant methodological challenge in tariff studies lies in the nature of trade data. Most analyses rely on country-level trade statistics, which do not differentiate between related-party trade (transactions between a US multinational and its foreign affiliate) and arm’s-length transactions. A substantial portion of US goods trade is, in fact, intra-party. This means that a "foreign exporter" might actually be a foreign subsidiary of a US company. In such cases, if the foreign entity absorbs part of the tariff, the ultimate economic burden still falls on a US-owned enterprise, effectively leaving US firms bearing a higher share of the tariffs than indicated by studies that do not account for ownership structures. This nuance suggests that even when foreign entities appear to absorb the tariff, the economic pain might still circulate back to the US economy through multinational corporate structures.
The Broader Context of US Tariff Policy and Timeline
The tariffs analyzed in Freund’s study, and the broader debate around tariff incidence, are set against a backdrop of increased US reliance on protectionist trade measures in recent years. While the article refers to "2025 tariffs," the analytical timeframe (September 2023 through January 2026) strongly suggests an examination of tariffs already in effect or proposed during that period, likely stemming from the trade policies of the Trump administration, which significantly escalated the use of tariffs.
- 2018-2019: The Trump administration imposed tariffs on a wide range of goods, citing national security (Section 232 on steel and aluminum) and unfair trade practices (Section 301 on various Chinese goods). These tariffs sparked retaliatory measures from trading partners like China, the European Union, Canada, and Mexico, leading to significant disruptions in global supply chains and increased costs for many businesses.
- Ongoing Trade Disputes: Many of these tariffs remained in place into the Biden administration, continuing to shape trade flows and pricing. The "2025 tariffs" likely refer to the sustained impact and ongoing analysis of these existing or similarly structured trade barriers.
- International Emergency Economic Powers Act (IEEPA): A significant legal and economic development related to these tariffs was the Supreme Court’s decision to strike down certain tariffs imposed under IEEPA. This ruling had profound implications for tariff revenue.
The Supreme Court’s Intervention and its Impact
A critical complicating factor highlighted in the original article is the Supreme Court’s decision to strike down tariffs imposed under the International Emergency Economic Powers Act (IEEPA). This ruling has led to a situation where much of the revenue collected from these specific tariffs is now being refunded to US importers.
The IEEPA grants the President broad authority to regulate international commerce during a national emergency. The Trump administration invoked IEEPA, among other statutes, to impose tariffs on certain goods. The Supreme Court’s decision essentially deemed these specific applications of IEEPA for tariff imposition unlawful.
From an economic perspective, this legal reversal creates a peculiar outcome. While foreign exporters bore part of the economic burden by lowering their prices, and US importers initially paid the tariff, the subsequent refunds mean that US importers are now receiving back the money they paid. This transforms the situation, at least partially, into a transfer from foreign exporters (who absorbed costs by cutting prices) to US importers (who are being reimbursed for their payments). Crucially, this transfer leaves no net revenue gain for the US government from these "illegal" tariffs. In some cases, the government might even incur revenue losses due to interest payments on the refunds. Moreover, while the financial burden on US importers is alleviated by refunds, the economic distortions—such as altered trade flows, decreased efficiency, and the costs of compliance and uncertainty—are not undone. This illustrates the complex and often unforeseen consequences of trade policy, especially when subject to legal challenges.
Welfare Implications and Economic Debate
Despite the finding that foreign exporters are absorbing a larger share of the tariff burden than previously estimated, Freund’s study explicitly cautions against concluding that these tariffs have enhanced overall US welfare or were optimally structured. The paper itself notes, "The finding that foreigners absorbed just over half the tariff does not imply the tariffs were successful on welfare grounds."
To assess the true welfare impact, economists must consider a much broader range of factors beyond just the immediate pass-through. These include:
- Distorted Trade Flows: Tariffs divert trade from more efficient global producers to less efficient domestic or alternative foreign producers, leading to higher costs or lower quality.
- Cessation of Trade: Some trade transactions cease entirely due to the increased costs, eliminating mutually beneficial exchanges.
- Retaliatory Measures: Tariffs often provoke retaliatory tariffs from affected trading partners, harming domestic exporters in other sectors and escalating trade disputes.
- Uncertainty: The unpredictable nature of trade policy creates uncertainty for businesses, discouraging investment and long-term planning.
- Lost Efficiency: Tariffs protect less competitive domestic industries, reducing the incentive for innovation and efficiency gains.
- Deadweight Loss: This refers to the net loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved. Tariffs create deadweight losses by raising prices for consumers, reducing consumer surplus, and reducing overall economic activity.
For the US welfare to have improved on net, the revenue gains extracted from foreign exporters (due to their price reductions) would have to significantly outweigh all these efficiency losses, the deadweight loss, and the portion of the tariff burden that still fell on US importers. The complexities of measuring these interconnected effects make a definitive welfare judgment challenging.
Global Trade System and the "Prisoner’s Dilemma"
Freund’s research also delves into the broader implications for the global trading system, framing the pursuit of terms-of-trade gains through tariffs as a "prisoner’s dilemma." In game theory, a prisoner’s dilemma describes a situation where individual rational choices lead to a collectively suboptimal outcome. If multiple countries simultaneously attempt to extract price concessions from their trading partners through tariffs, the cumulative effect would be a reduction in overall global welfare. Each country might individually see a benefit from imposing tariffs, but when all act similarly, the result is a cycle of protectionism, retaliation, and economic harm for everyone.
Freund emphasizes that such actions contribute to a weakening of the rules-based international trading system, primarily embodied by the World Trade Organization (WTO). This erosion, she notes, could prove to be "more costly than it might otherwise appear." The long-run costs of such an episode, according to Freund, include not only direct retaliation by trading partners but also the systemic degradation of the very framework designed to facilitate stable and predictable international commerce. The WTO’s dispute settlement mechanism, for example, has faced increasing challenges and disuse, hindering its ability to resolve trade conflicts peacefully.
Stakeholder Reactions and Future Outlook
The findings of Freund’s study, alongside other recent research, are likely to elicit varied reactions from different stakeholders.
- Government Officials: Proponents of tariffs might point to the foreign absorption rate as evidence that tariffs can indeed compel other nations to bear some of the costs, potentially validating the use of such measures to achieve specific trade objectives or protect domestic industries. However, officials focused on broader economic welfare might remain concerned about the unquantified costs of distorted trade and reduced efficiency.
- US Importers: While the study suggests they bore about half the burden, the Supreme Court’s ruling on IEEPA tariffs and subsequent refunds would be a welcome relief for those affected. However, the uncertainty and administrative burden associated with tariffs, regardless of who ultimately pays, remain significant concerns.
- Foreign Exporters: The findings confirm their significant financial sacrifice in the face of US tariffs, underscoring the pressure they face to remain competitive in the US market. This could lead to continued calls for a more stable and predictable international trade environment.
- Consumer Advocates: While foreign absorption might partially mitigate direct price increases, the potential for quality substitution and the overall economic inefficiency caused by tariffs remain a concern for consumer welfare.
Ultimately, while Caroline Freund’s study provides valuable new insights into the immediate incidence of US tariffs, indicating a more balanced distribution of costs between foreign exporters and domestic importers, it serves as a critical reminder that the economic effects of trade policy are multifaceted. The complex interplay of direct costs, supply chain adjustments, legal challenges, and global trade relations demands a holistic perspective. The evidence, even when showing some terms-of-trade gains, does not inherently confirm that these tariffs enhanced overall US welfare. The lingering questions about efficiency losses, retaliatory spirals, and the integrity of the rules-based global trading system underscore the profound and often costly implications of protectionist trade policies.
