By Tax Foundation Analysis Desk
The debate over who ultimately bears the financial burden of international trade barriers has long divided economists, policymakers, and business leaders. Conventional economic modeling has frequently suggested that when the United States imposes tariffs on foreign goods, the domestic economy pays the overwhelming price—often calculated as a near-complete pass-through to domestic importers and, by extension, American consumers.
However, groundbreaking empirical research from trade economist Caroline Freund is challenging this established consensus. Analyzing the landscape of the 2025 U.S. tariffs, Freund’s study reveals a more nuanced financial split: foreign exporters absorbed roughly 47 percent of the tariff burden, leaving U.S. importers to pay the remaining 53 percent.
While these findings offer rare empirical support for the idea that a large economic power can use its market influence to force price concessions from foreign suppliers, economists are quick to issue a major caveat. Proving that foreign companies shoulder a significant fraction of the tax is entirely different from proving that the tariffs made the United States better off on net.
As legal challenges dismantle key pieces of the 2025 tariff regime and trade specialists debate the long-term systemic fallout, the question of who pays for tariffs remains at the center of modern economic policy.
Main Facts: Deconstructing the 2025 Tariff Pass-Through
To understand the debate, one must first look at how tariffs function economically versus legally. Legally, a tariff is paid directly to customs authorities by the importer of record. Economically, however, the burden is often shifted.
When a tariff is levied, it artificially inflates the cost of imported items, which naturally suppresses domestic demand for those products. To prevent steep drops in sales volume, foreign sellers may choose to lower their pre-tariff export prices. By absorbing part of the cost themselves, they help cushion the blow to consumers, thereby sharing the economic burden of the tariff.
To measure this phenomenon, economists calculate "pass-through rates"—the precise percentage of the tariff cost absorbed by domestic importers versus foreign exporters.
Freund’s study breaks away from recent literature by analyzing comprehensive import data spanning from September 2023 through January 2026 across 50 key U.S. trading partners (which together account for roughly 95 percent of U.S. goods imports from 2024). Her evaluation tracked the 12-month shifts in prices before and after the implementation of the tariffs.
The core takeaways from the data include:
- The Split: Foreign exporters absorbed 47 percent of the tariff burden, while U.S. importers covered 53 percent.
- Unit Value Shifts: The "unit value"—a metric representing the price received by exporters, calculated as customs value divided by quantity—fell during the period.
- Landed Cost Growth: The "landed cost" (the price paid by importers, inclusive of the tariff) rose by an amount strictly less than the full value of the tariff itself.
Chronology: The Evolution of Recent U.S. Tariffs and Economic Studies
The dialogue surrounding tariff incidence has evolved rapidly over the past decade, driven by aggressive shifts in American trade policy.
2018–2019: The First Wave of Modern Trade Confrontations
When the Trump administration imposed broad-scale tariffs in 2018 and 2019, early economic studies overwhelmingly concluded that American importers and consumers were paying nearly 100 percent of the costs.
However, subsequent research began to complicate this narrative. For example, economists Ganapati and Hottman examined the 2018–2019 data and discovered that pass-through rates dropped from near-completion to roughly 60 percent once researchers accounted for scale economies. When exporters were forced to ship smaller batches due to falling U.S. demand, their per-unit production costs rose. To stay competitive, these firms strategically lowered their baseline prices, masking the true extent of their absorption.
2023–2025: The Implementation of the New Tariff Regime
As new tariffs were rolled out heading into 2025, early analyses by institutions like the IMF and various Federal Reserve branches once again pointed toward a high pass-through rate, suggesting American buyers were footing almost the entire bill.
Late 2025–2026: The Supreme Court Intervention and New Methodologies
The legal foundation of the 2025 tariffs faced a dramatic reckoning when the U.S. Supreme Court struck down key duties enacted under the International Emergency Economic Powers Act (IEEPA).
Simultaneously, trade economists began refining their data collection methods. Freund introduced a breakthrough methodological contribution: weighting import data by pre-trade war import volumes. Without this weighting, a niche category representing $100 of trade would carry the same statistical weight as a massive sector representing $100 billion of imports. Applying this correction drastically shifted the output, revealing that foreign entities absorbed nearly half of the 2025 tariffs throughout the year.
Supporting Data and Methodological Debates
Despite Freund’s meticulous approach—which utilized fixed effects to strip out extraneous noise—methodological debates within the economic community remain fierce.
The Quality-Substitution Debate
A competing study on the 2025 tariffs by Ahn et al. reached different conclusions regarding why tariff-exclusive import prices appeared to drop. The authors argued that the apparent price decreases were not necessarily evidence of foreign exporters cutting profit margins to stay competitive. Instead, they found that U.S. importers were actively substituting toward lower-quality, cheaper products within the same broader product categories to offset rising expenses.
In short, if importers shift from buying high-end European steel to lower-tier alternatives, average prices drop, but consumers experience a hidden cost through degraded product quality. While Freund’s model attempts to control for these types of adjustments, economists acknowledge that completely isolating pure price cuts from quality downgrading remains exceptionally difficult.
The Nuance of Intraparty Trade
Another critical caveat lies in the nature of modern supply chains. Much of international trade is classified as "intraparty trade"—transactions occurring between a U.S. multinational corporation and its foreign affiliate.
When a "foreign exporter" lowers its price on paper to absorb a tariff, that entity may actually be a subsidiary of a U.S. parent company. Consequently, the financial burden may still land squarely on American balance sheets, even if the customs data records it as an absorption by a foreign actor.
Official Responses and Welfare Implications
Perhaps the most important element of Freund’s research—and one emphasized heavily by the author herself—is that demonstrating a terms-of-trade gain is not synonymous with proving overall economic success.
The Trap of Measuring Net Welfare
For the U.S. economy to genuinely benefit on net from a tariff regime, the revenue extracted from foreign exporters must outweigh a massive cascade of negative economic consequences, commonly known as deadweight losses. These include:
- Trade Distortions: The economic activity that ceases entirely because artificial barriers make transactions unprofitable.
- Retaliatory Measures: Counter-tariffs and trade penalties levied by aggrieved international partners against American exporters (particularly in agriculture and manufacturing).
- Policy Uncertainty: The long-term dampening effect that unpredictable trade rules have on business investment.
- Efficiency Losses: Disruptions to highly integrated, globalized supply chains.
The IEEPA Refund Complication
The welfare calculation is further muddied by the Supreme Court’s ruling against the IEEPA tariffs. Because many of the tariffs collected in 2025 are currently being refunded to U.S. importers, the financial dynamic has morphed into a peculiar economic transfer.
Foreign exporters bore part of the initial economic burden by lowering their prices, but because those tariff payments are now being returned to American importers via court-mandated refunds, the U.S. government realizes little to no net revenue gain (and often incurs administrative and interest losses). The distortions remain, yet the fiscal upside for the state evaporates.
Global and Long-Term Implications
Stepping back from immediate balance sheets, trade experts warn that the aggressive pursuit of terms-of-trade gains through unilateral tariffs can trigger a classic "prisoner’s dilemma" on the global stage.
If major economic powers routinely deploy tariffs to extract price concessions from one another, the predictable result is a race to the bottom. Global trade rules weaken, retaliatory cycles escalate, and the architecture of the rules-based international trading system erodes.
As Erica Quinn and Alex Durante of the Tax Foundation note, while Freund’s empirical evidence confirms that foreign exporters absorbed a significant share of the 2025 tariffs—validating the economic theory of market-power pricing—it leaves open the broader, more critical question: Did the tariffs actually improve American welfare?
Given the compounding costs of trade distortions, legal refunds, retaliatory risks, and the long-term degradation of international trade norms, the ultimate bill for the 2025 tariff experiment may prove far higher than any immediate savings captured at the border.
