“new research on foreigners bearing the tariff burden”
Commentary by Erica York at the Tax Foundation on the pass-through impact of tariffs on pricing in the United States. The other possibility is companies may they eat it for a short period of time and maybe pass it through later in the time-table. The idea being the United States may later drop the tariff scheme.
To passthrough or not passthrough: Beige Book insights and new research on foreigners bearing the tariff burden, Erica York, Tax Foundation.
The February Beige Book released last week included several reports made before the Supreme Court’s tariff decision. The overarching narrative was that the price effects of tariffs are still actively working through supply chains, with some firms increasing how much of the burden they were passing through and others choosing to hold back in the face of increasingly price sensitive consumers.
In all, the Beige Book had more examples of price increases than absorptions—the national summary noted “Nine Districts [out of Twelve] mentioned that tariffs contributed to increased costs. Some firms continued to pass tariff-related cost increases through to their customers, and others began to do so after having absorbed previous increases.” Multiple reports noted that stabilizing uncertainty and more clarity on trade policy was improving economic conditions. Of course, that has now changed as the administration is pivoting to new tariff authorities after the emergency tariffs were struck down by the Court.
The Beige Book anecdotes also point to a deeper question economists have been trying to answer since the 2018–2019 trade war: when tariffs raise costs, who ultimately bears them?
The early empirical literature on the 2018–2019 tariffs generally found nearly complete pass-through to US import prices: the domestic economy bore most of the tax burden as import prices remained roughly flat and tariffs were added on top. A new paper by Sharat Ganapati and Colin J. Hottman finds a different result: in aggregate, only about 60 percent of the tariff burden in 2018–2019 passed through to domestic buyers.
How could import prices stay flat while foreigners actually bore about 40 percent of the tariff burden? The answer, according to the authors, lies in transaction-level quantity discounts. It’s arguably the missing piece that reconciles apparent full passthrough with other strains of economic literature that say we should expect partial passthrough.
Here’s the mechanism at play. The new research finds that a 10 percent increase in transaction size lowers per-unit costs by 2.9 percent. In other words, larger shipments are cheaper per unit to move and process. The savings are not due to market power or price discrimination, but instead efficiencies in shipping, processing, and logistics.
But when tariffs were imposed, order sizes fell significantly—a 10 percent tariff increase led to a 6 percent decrease in individual transaction sizes. Smaller orders meant higher per-unit costs. Not because of the tariffs themselves, but because of lost economies of scale.
While foreign sellers responded to tariffs by cutting their base prices to absorb part of the burden, domestic buyers responded by decreasing the size and frequency of their orders. And that meant the price cuts were largely offset by rising per-unit costs from smaller shipment sizes. As a result, measured unit values appeared flat, masking the portion of the tariff burden absorbed by sellers.
The paper’s core contribution is that it separates these two offsetting effects: movement up the cost curve from smaller order sizes, which raises per-unit prices, and tariff absorption by foreign sellers, which lowers them. (If it helps to picture it: in the standard supply and demand framework, the relevant supply curve slopes downward over the relevant range—smaller quantities mean higher per-unit costs.) The observed price stability in the literature to date conflates the tariff absorption with movement up this cost curve.
“When transaction sizes decline in response to tariffs—as our data show they do—standard measures of passthrough will overstate the extent to which sellers can shift the tariff burden to buyers. This is because smaller transactions occur at higher unit prices due to scale economies, creating the appearance of greater pass-through even when the underlying price schedule has shifted down substantially.”
Once these scale effects are accounted for, the apparent complete pass-through in earlier studies largely disappears. Ganapati and Hottman find that foreign sellers absorbed about 40 percent of the tariffs in 2018-2019, offsetting a significant portion of the burden on domestic buyers.
Before considering broader welfare effects, the paper’s partial-equilibrium accounting implies that tariff revenue exceeded domestic buyer losses by roughly $13 billion, in other words, there was a term of trade effect—foreign sellers lost $22.9 billion, domestic buyers lost $16.6 billion, and the government collected $30 billion in tariff revenue. However, pass-through calculations alone do not capture the full welfare picture.
As Ganapati and Hottman demonstrate, the tariffs reduced order frequency, size, and, in some cases, dissolved trade relationships altogether—losses that neither buyers, sellers, nor the government recover. The paper’s own approximations suggest these second-order costs result in total welfare losses that are four times larger than the first-order accounting suggests, and they eliminate the apparent domestic gain: foreign sellers lost $35.9 billion, domestic buyers lost $30.3 billion, with revenue still at $30 billion. Notably, these estimates do not account for retaliatory tariffs, which would further increase domestic losses without generating any additional government revenue.
Bottom line: foreigners likely bore more of the 2018–2019 tariff burden than previously thought, but the tariffs still reduced overall domestic welfare because of high efficiency costs.
Erica York
Vice President of Federal Tax Policy
Tax Foundation