Trump Tariffs, Who Pays?
Warning: Today’s Post Will be even Wonkier Than Usual . . .
Until recently the question of who pays tariffs (Paul Krugman) wasn’t controversial among economists. The overwhelming consensus was that under normal circumstances tariffs — taxes on imported goods — are passed on to consumers in the form of higher prices. There are caveats and exceptions to this consensus, but these caveats are well understood and for the most part don’t apply to the tariffs imposed by the Trump 47 administration.
Once tariffs became a centerpiece of Trump’s economic policy, however, views about their impact became politicized, and Trump supporters were obliged to echo his claim that foreigners, not U.S. consumers, bear the tariff burden. There was a slightly comical demonstration of this politicization during a recent House Financial Services Committee hearing, when Scott Bessent was asked whether, before joining the Trump administration, he had sent a letter to hedge fund investors declaring that “tariffs are inflationary.” At first, Bessent denied having written that. Confronted with proof that he had, he declared that he had been mistaken.
But who is, in fact, paying the Trump tariffs? Two reports released last week — the Congressional Budget Office’s latest report on the budget and economic outlook, and a study released by the Federal Reserve Bank of New York — both concluded that the tariffs are overwhelmingly being borne by U.S. households and firms. But Friday’s report on consumer prices showed fairly low inflation, rather than a big price spike from tariffs.
So are Trump officials right? Are studies concluding that Americans, not foreigners, are paying the tariffs wrong?
No and no. The evidence that foreigners aren’t paying the tariffs, which means that Americans are, is rock-solid. And the seemingly mild impact on measured inflation (the qualifier “measured” is important) isn’t a mystery once you do the math. Conventional economic analysis says that the tariffs should have pushed consumer prices around 1 percent higher than they would otherwise have been. Parsing the data to isolate the tariffs’ effect suggests that they have in fact raised prices by something close to that amount.
But I understand why the seeming contradictions between economic reports are confusing. So I thought I would postpone my next primer on the Federal Reserve and write today about who is paying the Trump tariffs.
Beyond the paywall, I’ll address the following:
1. What economic theory says about tariffs and prices
2. The evidence that foreigners aren’t paying the Trump tariffs
3. Why we shouldn’t have expected consumer prices to soar
4. Estimating the effect of tariffs on consumer prices
5. Are there still big price hikes ahead?
What economic theory says about tariffs and prices
Tariffs are taxes. Specifically, they are excise taxes, taxes levied on the sale of particular goods or services. The U.S. federal government imposes many other excise taxes, for example on the sale of airline tickets — 7.5 percent of the fare — and gasoline — 18.4 cents per gallon. In addition, state governments also impose a number of excise taxes, for example on cigarette sales.
Tariffs are excise taxes levied on the domestic sale of goods produced abroad. The principle of how these taxes work should be the same as the principles we apply to other excise taxes — the basic economics doesn’t change simply because tariffed goods cross a border. And when economists — or, for that matter, anti-tax advocates — estimate the burden of taxes, they normally assume that excise taxes are passed on to consumers in the form of higher prices. There’s no reason to believe that the price effects of taxes on the sale of goods produced abroad are any different.
Now, in practice excise taxes sometimes lead to cuts in sellers’ prices, and therefore don’t fall completely on consumers. Here’s why: by raising prices to consumers, excise taxes induce those consumers to buy less of the goods being taxed. And reduced demand for their products can induce sellers to shave a few percent off their prices. The size of this effect depends on how easy it is for sellers to reduce production or divert sales to markets where they don’t face excise taxes. (For readers who’ve taken economics, I’m talking about the elasticity of supply.)
We would, however, expect this effect to be small when it comes to U.S. tariffs. Why? Because although the U.S. has a huge economy and is a very big market, we’re still a relatively small part of the world economy as a whole. In 2024 the United States only accounted for 13 percent of total world imports. This means that foreign companies selling into the U.S. market are likely to respond to tariffs mostly by diverting their sales to other markets rather than by slashing prices. In fact, the EU has experienced a surge of Chinese imports as Chinese exporters re-directed goods that would previously have gone to the US.
OK, one more complication: Nations that impose tariffs often see their currencies rise, and a stronger dollar would, other things equal, lead to lower import prices. However, the dollar has declined, not risen, over the past year. Why this has happened is an interesting story, but not one we need to go into now.
The bottom line is that conventional economic analysis predicts that U.S. consumers, not foreign producers, will pay the bulk of U.S. tariffs. Is this what has actually happened?
The data show that foreigners aren’t paying the Trump tariffs
The U.S. Bureau of Labor Statistics collects data on import prices — the prices paid for goods purchased from abroad at their point of entry into the United States, that is, before payment of tariffs. The study just released by the New York Fed, carried out by Mary Amiti, Chris Flanagan, Sebastian Heise, and David E. Weinstein, uses these prices to estimate the “incidence” of the Trump tariffs — who paid them. The authors explain:
Suppose foreign exporters charge $100 for a good, and the importing country decides to levy a 25 percent tariff on it. If the foreign price remains unchanged at $100, the duty paid is $25, increasing the import price to $125. In this case, the tariff incidence falls entirely on the importer; in other words, there is 100 percent pass-through from tariffs to import prices, and therefore on U.S. consumers and firms.
In contrast, the exporter might lower its price in order to avoid losing market share. If foreign exporters respond to the tariff by lowering their price to $80 (i.e., $100 divided by 1.25), the price paid by importers will remain $100 (with $20 in duties paid to the government). In this case, 100 percent of the tariff incidence falls on foreign exporters, who now receive $20 less for the same good; in other words, there is zero pass-through from the tariff since the import price is unchanged.
So what do the data actually look like? Amiti et al calculate two measures of the increase in tariffs since January 2025 (I’ll explain the difference between the measures shortly):
Chart 1 Source: Amiti et al
To prevent a 10 percent tariff hike from translating into higher consumer prices, import prices — the prices that foreign exporters receive — would have to have fallen by about 9 percent. A quick look tells us that we haven’t seen anything like that:
Chart 2
The measure that I use for import prices excludes petroleum because the price of oil fluctuates wildly for reasons that have nothing to do with tariff policy — e.g., who we’re bombing this week. The prices of non-oil imports shot up during the supply-chain snarls of 2021-2022, then fell. Since the massive tariff hikes of April 2025, the prices of imports (excluding oil) have gone up, not down.
Amiti et al do a much more careful assessment, breaking imports into finely divided categories and applying a number of controls. Their conclusion, however, matches what one gets from a quick-and-dirty overview: Foreign suppliers bore very little of the burden of tariffs. As you can from the data in the last column of the table below, the overwhelming share of the cost of the tariffs fell on Americans – either producers or consumers. Over time that share ranged from 94% to 86%.
“Who Is Paying the Trump Tariffs?” Paul Krugman