Paper Trail

At the Dock vs. At the Register: Unpacking the 2025 Tariff Shock

April 20, 202618:24Paper Trail

This episode explores the significant economic impact of the U.S. tariffs implemented in 2025, revealing that 90% of these costs were passed directly onto American importers, contrary to political claims. Listeners will learn how economists used granular product-level data to demonstrate that U.S. businesses, not foreign countries, bore the brunt of this historically restrictive trade policy.

Key Takeaways

Detailed Report

In 2025, the U.S. implemented broad, sweeping tariffs that pushed the average duty rate to an 80-year high of 9.6%. While political rhetoric suggested foreign countries would bear the cost, new economic research paints a different picture, revealing that these tariffs primarily acted as a domestic tax with significant, often hidden, economic consequences.

A Dramatic Policy Shift

The 2025 tariffs represented a dramatic escalation in U.S. trade policy. Prior to this, the average U.S. tariff duty was around 2.4%. The sudden jump to 9.6% made it the most restrictive U.S. trade policy in over 110 years, when measured by tariff revenue as a share of GDP, even surpassing the infamous Smoot-Hawley tariffs of 1930.

Unlike the more targeted tariffs of 2018-2019, which focused on specific goods and countries, the 2025 policy was a comprehensive, blanket tariff applied to virtually all trading partners. This broad scope had an immediate and widespread impact across the economy.

Pinpointing the Impact: The Identification Challenge

Economists faced a significant challenge in isolating the specific effects of these nationwide tariffs amidst other economic turbulence. To overcome this "identification problem," researchers Fajgelbaum and Khandelwal employed a clever econometric technique using incredibly granular data.

They exploited product-level variation, noting that not all products faced the exact same tariff increase. By comparing the price trajectories and import volumes of heavily taxed goods against lightly taxed or untaxed goods, they effectively created thousands of micro-experiments. This "difference-in-differences" approach allowed them to strip away broader macroeconomic noise, such as overall inflation, and isolate the pure effect of the tariffs.

Who Pays? The Dock vs. Foreign Exporters

The research unequivocally shows that 90% of the 2025 tariffs were passed directly onto U.S. importers. This means American businesses—manufacturers, retailers, and distributors—were the ones paying these new taxes at the customs dock. Foreign exporters absorbed only about 10% of the cost by slightly dropping their pre-tariff prices, definitively debunking the political claim that "foreign countries pay the tariffs."

This massive tax on U.S. importers also had a severe impact on trade volumes. The elasticity of import values in 2025 was a stark -1.81, meaning that for every 1% increase in the tariff rate, the import volume of that good collapsed by 1.81%. This was a significantly sharper drop than during the 2018-2019 trade war, largely because the 2025 tariffs were so broad, leaving fewer options for importers to shift supply chains to avoid duties.

The Surprising GDP Impact and Wealth Redistribution

Despite the massive border friction and collapse in trade volumes, the aggregate net welfare impact on U.S. Gross Domestic Product (GDP) was statistically tiny, ranging from a 0.13% loss to a 0.10% gain. This near-zero impact, however, does not mean the policy was inconsequential; it masks a violent, forced redistribution of wealth.

The Welfare Ledger

  • Losses: U.S. consumers and import-reliant businesses suffered substantial consumption losses, paying higher prices and seeing their purchasing power erode.
  • Gains: The federal government experienced a historic windfall, with tariff revenue tripling to a remarkable $264 billion, making tariffs a major pillar of federal taxation. Additionally, protected domestic producers saw income gains, as they could raise prices and increase market share, shielded from cheaper foreign competition.

Essentially, the losses to consumers and importers were largely counterbalanced by gains to the government and specific domestic industries. The policy acted as a massive wealth transfer from U.S. consumers and businesses to the federal treasury and select domestic sectors.

Policy Report Card: Successes and Failures

Fajgelbaum and Khandelwal's paper offers a clear assessment of the 2025 tariffs' performance against stated policy goals.

Achieved Goals

  • Decoupling from China: The tariffs successfully accelerated the trend of reducing trade reliance on China, continuing a pattern observed since 2018.
  • Federal Revenue Generation: Tariffs became a significant source of federal income, contributing 4.9% of total federal receipts in 2025.

Missed Targets

  • Trade Deficit Reduction: Despite claims, the overall goods trade deficit actually *rose* by 2.2%. This likely occurred as tariffs triggered retaliatory measures, potentially strengthened the U.S. dollar, and raised input costs for U.S. exporters, causing exports to fall faster than imports.
  • Protecting Manufacturing Jobs: Manufacturing employment *fell* by 0.53%. This "downstream effect" meant that higher costs for imported components forced U.S. manufacturers to cut costs, often through layoffs, to remain competitive.
  • Friend-Shoring: The policy did not effectively encourage trade with allies. Tariffs were correlated almost entirely with bilateral trade deficits, not geopolitical alignment, acting as a blunt instrument rather than a strategic tool.

From Dock to Register: The Consumer Experience

While 90% of the tariffs were absorbed by U.S. importers at the border, a second NBER paper by Cavallo, Llamas, and Vazquez, using high-frequency retail microdata, found a stark difference at the consumer level: only 20% to 24% of the tariff cost was passed through to consumers at the register in the short run.

Supply Chain Shock Absorbers

This significant gap was absorbed by several mechanisms within the supply chain:

  • Margin Compression: Retailers and distributors absorbed much of the initial cost by shrinking their profit margins to maintain market share in competitive environments.
  • Inventory Lags: Goods on shelves were often imported months before tariffs took effect, delaying the true impact until pre-tariff inventory cleared.
  • Consumer Substitution: As prices for heavily tariffed goods slowly rose, consumers shifted to cheaper brands or alternative products, pressuring retailers to keep price hikes modest.

The Ticking Clock

Despite these short-term mitigations, the researchers warn that these shock absorbers cannot last indefinitely. While the tariffs contributed about 0.7 percentage points to the Consumer Price Index (CPI) in six months, corporate margins cannot compress infinitely, and inventory eventually turns over. The clear implication is that if these tariffs remain in place long-term, the 90% border friction will inevitably make its way from the dock to the register, accelerating the consumer burden.

Conclusion

The 2025 tariff shock was a complex economic event. It proved highly effective in generating federal revenue and accelerating the decoupling of trade from China. However, it failed to achieve other key objectives, such as reducing the trade deficit or protecting manufacturing jobs. Crucially, the research highlights that tariffs are primarily a domestic tax, leading to a massive, often invisible, redistribution of wealth within the U.S. economy, with a delayed but inevitable impact on consumer prices.

Show Notes

Works Referenced

  • The Macroeconomic Impact of the 2025 Trade Policy: A National Bureau of Economic Research working paper by Pablo D. Fajgelbaum and Amit K. Khandelwal, analyzing the effects of the 2025 U.S. tariffs on importers, trade volumes, and wealth redistribution.
  • The Pass-Through of Tariffs to Consumer Prices: Evidence from the 2025 U.S. Trade Policy: A National Bureau of Economic Research working paper by Alberto Cavallo, Juan Llamas, and Ricardo Vazquez, examining how the 2025 U.S. tariffs impacted consumer prices using high-frequency retail data.
  • National Bureau of Economic Research (NBER): A leading non-profit economic research organization that publishes working papers and conducts research on various economic issues.
  • PriceStats: A company that collects and analyzes high-frequency retail microdata, used in one of the referenced NBER studies to track consumer price changes.
  • Smoot-Hawley Tariff Act of 1930: A U.S. law that raised import duties to protect American farmers and other industries, often cited as a historical example of highly restrictive trade policy.

Glossary

  • Tariff pass-through: The extent to which the cost of a tariff is reflected in the price paid by the buyer, either at the border (importer) or at the retail level (consumer).
  • Identification problem: In econometrics, the challenge of isolating the specific causal effect of one variable (like a tariff) from other confounding factors when all variables change simultaneously.
  • Counterfactual challenge: The difficulty in determining what would have happened in the absence of a specific policy or event, as there is no "control group" for large-scale economic changes.
  • Product-level variation: Analyzing economic data by looking at individual goods or services, rather than aggregated categories, to identify specific effects.
  • Difference-in-differences approach: An econometric technique that compares the changes in outcomes over time for a group affected by a policy (treatment group) to a group not affected (control group) to estimate the policy's causal effect.
  • Terms-of-trade adjustment: When an exporting country reduces its pre-tariff prices to absorb some or all of the tariff cost, preventing the final price for the importing country from rising.
  • Elasticity of import values: A measure of how sensitive the volume of imported goods is to changes in tariff rates; a high negative elasticity means imports fall significantly with tariff increases.
  • Gross Domestic Product (GDP): The total monetary value of all finished goods and services produced within a country's borders in a specific time period, used as a measure of economic activity.
  • Welfare ledger: A macroeconomic accounting framework that balances the gains and losses from an economic policy across different sectors or groups to determine the overall impact on societal well-being.
  • Federal receipts: The total amount of money received by the federal government from all sources, including taxes, duties, and other revenue streams.
  • Decoupling: The process of reducing economic interdependence or trade reliance between two countries or regions, often driven by geopolitical or strategic considerations.
  • Trade deficit: An economic measure that occurs when a country's imports exceed its exports, indicating that it is buying more goods and services from abroad than it is selling.
  • Downstream effect: The impact of a policy or economic change on subsequent stages of a supply chain or production process, such as higher input costs for manufacturers due to tariffs on raw materials.
  • Friend-shoring: A strategy to diversify supply chains by relocating production and sourcing to countries considered geopolitical allies or trusted partners.
  • Consumer Price Index (CPI): A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, used to gauge inflation.
  • Umbrella effect: When domestic producers raise their prices under the "umbrella" of tariffs that force foreign competitors to increase their prices, thereby expanding their own profit margins.
  • Margin compression: When businesses absorb increased costs (like tariffs) by reducing their profit margins rather than fully passing them on to consumers, often to maintain competitiveness.
  • Inventory lags: The delay between when goods are imported (and tariffs are paid) and when they are sold to consumers, meaning the full impact of tariffs on retail prices is not immediately felt.
  • Consumer substitution: When consumers respond to higher prices for certain goods by switching to cheaper

Full Transcript

HostWhen the U.S. implemented broad, sweeping tariffs in 2025, pushing the average duty rate to an 80-year high of 9.6%, the political rhetoric was clear: foreign countries would be paying the price.
ExpertBut the data tells a very different story. New research from the National Bureau of Economic Research reveals that 90% of these tariffs were passed directly onto U.S. importers. The check was written by American businesses, not foreign governments.
HostSo, despite all the talk, nearly all of this massive new tax ended up on the shoulders of companies here at home, right at the customs dock?
ExpertPrecisely. And this finding alone challenges a fundamental premise often used to justify such policies.
HostThat 90% figure is startling, especially given the public conversation around tariffs. Can you help listeners understand the sheer scale of this policy shift in 2025? Because while there have been tariffs before, this feels different.
ExpertIt really was a dramatic escalation. Prior to 2025, the average U.S. tariff duty was around 2.4%. Then, almost overnight, it jumped to 9.6%. To put that in perspective, the researchers, Fajgelbaum and Khandelwal, describe this as the most restrictive U.S. trade policy in over 110 years, when measured by tariff revenue as a share of GDP. It even surpassed the infamous Smoot-Hawley tariffs of 1930.
HostThat’s a powerful historical comparison. And it’s crucial to distinguish this from earlier trade actions, like the 2018-2019 tariffs. Those were described as more targeted, almost like surgical strikes.
ExpertThey were. The 2018 tariffs were a series of specific, staggered actions on certain goods – washing machines, solar panels, particular Chinese imports. The 2025 policy was a comprehensive, blanket tariff applied to virtually all trading partners. It was an entirely different beast in terms of scope and immediate impact.
HostSo, there was this massive, economy-wide policy shift. A key journalistic question is *how* economists can confidently say that specific outcomes—like that 90% pass-through—were directly caused by these tariffs, and not by all the other economic turbulence happening at the same time. This is what economists call the "identification problem," isn't it?
ExpertIt is. When you implement a nationwide policy, it affects everything simultaneously. How do you disentangle the tariff's specific impact from, say, changes in interest rates, labor market shifts, or other global events in 2025? There's no "alternate universe" U.S. to use as a control group.
HostThis presents the ultimate counterfactual challenge.
ExpertExactly. And Fajgelbaum and Khandelwal addressed this using a clever econometric technique with incredibly granular data. They exploited product-level variation. The key insight was that not every single product faced the exact same tariff increase. Some categories saw massive hikes, others smaller ones, and some were even shielded by existing trade agreements.
HostSo, they weren't just looking at macro numbers, but drilling down into specific goods?
ExpertYes. They used detailed U.S. customs data, tracking import values and prices for thousands of individual goods. By comparing the price trajectories and import volumes of heavily taxed goods against lightly taxed or untaxed goods, they effectively created thousands of micro-experiments.
HostThat's a powerful way to isolate the signal from the noise. If overall inflation was rising due to broader monetary policy, all prices would trend up. But if only specific goods, perfectly correlated with their tariff codes, showed price spikes, then you've got your tariff signal.
ExpertPrecisely. This difference-in-differences approach allowed them to strip away that broader macroeconomic noise and isolate the pure, unadulterated effect of the tariffs.
HostAnd the purest signal, as discussed, was that 90% pass-through. So, who exactly was "paying" this tariff at the border?
ExpertAccording to the paper, 90% of the tariffs were passed through to the tariff-inclusive prices paid by U.S. importers. This means American businesses—manufacturers buying components, retailers stocking shelves, distributors acquiring materials—were the ones cutting the checks for those new taxes at the customs dock.
HostThat directly contradicts the common political claim that "foreign countries pay the tariffs." How would that claim even work, economically speaking?
ExpertFor foreign countries to pay, the foreign exporter would have to slash their pre-tariff asking price so deeply that the final price, inclusive of the new tariff, remained unchanged for the American buyer. This is what economists call a "terms-of-trade" adjustment. The empirical customs data, however, definitively shows this didn't happen. Foreign exporters absorbed only about 10% of the cost by dropping their pre-tariff prices. The remaining 90% was borne by U.S. importers.
HostSo, when politicians say, "We're making China pay," the research suggests it's actually American businesses and ultimately consumers bearing almost all of that cost.
ExpertThat's the clear implication of the data at the border. When prices jump that dramatically, it inevitably changes behavior. The researchers also measured the "elasticity of import values," which tells us how sensitive trade volumes were to these new taxes.
HostHow sensitive were they?
ExpertThe elasticity in 2025 was a severe -1.81. This means that for every 1% increase in the tariff rate on a good, the import volume of that good collapsed by 1.81%. To give that context, during the 2018-2019 trade war, the elasticity was -1.39.
HostThat's a significantly sharper drop in 2025. Why the difference?
ExpertThe research points to a few factors. The 2025 tariffs were far broader and left fewer loopholes. In 2018, an importer might have tried to shift their supply chain from China to Vietnam to avoid tariffs. In 2025, with tariffs applied across the board to virtually all trading partners, that "whack-a-mole" strategy was no longer viable. Importers faced a hard wall of friction, leading to a much more immediate and pronounced suppression of international trade volume.
HostSo, there was this massive tax on U.S. importers and a significant collapse in trade volumes. Intuitively, one would expect a major hit to the U.S. Gross Domestic Product, or GDP. But Fajgelbaum and Khandelwal's model yielded a truly surprising aggregate number: the net welfare impact on U.S. GDP was statistically tiny, ranging from a 0.13% loss to a 0.10% gain. How can such massive border friction result in a near-zero impact on the overall economy?
ExpertThis is where understanding the "welfare ledger" becomes critical. In macroeconomic terms, a tariff isn't simply money that vanishes. It's a forced reallocation of capital. So, while there were indeed massive losses, there were also significant offsets.
HostLet's break down those losses first.
ExpertOn one side, U.S. consumers and import-reliant businesses suffered substantial consumption losses. They paid higher prices, bought fewer goods, and saw their purchasing power erode. That's a direct hit to their economic well-being.
HostBut you mentioned offsets. Where did those gains come from?
ExpertFirst, the federal government experienced a historic windfall. Tariff revenue tripled compared to 2024, raking in a remarkable $264 billion. That's a huge injection of cash into the Treasury. Second, protected domestic producers saw income gains. Shielded from cheaper foreign competition, these domestic companies could raise their prices and increase their market share, boosting their profits.
HostSo, essentially, the losses to consumers and importers were largely counterbalanced by gains to the government and specific domestic industries.
ExpertExactly. Think of it like this: if a policy takes $1,000 out of your bank account and deposits it directly into the U.S. Treasury and the bank account of, say, a domestic steel executive, the net change to national GDP is roughly zero. But for you, the individual, that's a highly disruptive event. The researchers stress that a "near-zero" GDP impact does not mean the policy was a non-event. It masks a violent, forced redistribution of wealth beneath the surface of those top-line numbers.
HostIt's a reordering, rather than a net loss or gain. A massive wealth transfer from U.S. consumers and importers to the federal government and select domestic industries.
ExpertThat's the most accurate way to characterize it. It’s an invisible wealth transfer, often obscured by the aggregate statistics.
HostSo, if the 2025 tariffs are graded based on the stated goals of the policymakers who implemented them, how do they perform? Where did they succeed and where did they fall short?
ExpertFajgelbaum and Khandelwal's paper offers a clear report card. The data confirms the tariffs were highly effective in two specific areas. First, they successfully accelerated the decoupling of trade from China, continuing a trend that actually began in 2018.
HostSo, if the goal was to reduce reliance on China for trade, the policy certainly achieved that.
ExpertYes. And second, they were incredibly effective at raising federal revenue. As mentioned, $264 billion in tariff revenue made up a remarkable 4.9% of total federal receipts in 2025, transforming tariffs from a marginal trade tool into a major pillar of federal taxation.
HostThat's a significant shift in how tariffs are often perceived in the U.S. But what about the areas where the policy fell short?
ExpertHere, the data points to some glaring misses. Policymakers often claim tariffs will reduce the trade deficit. Yet, the 2025 data shows the overall goods trade deficit actually *rose* by 2.2%.
HostThat's counterintuitive. Why would that happen?
ExpertWhile imports did fall, the tariffs likely triggered retaliatory measures from other countries, potentially strengthened the U.S. dollar, and, importantly, raised input costs for U.S. exporters. This combination likely caused U.S. exports to fall even faster than imports, leading to a wider deficit.
HostAnd another key justification for tariffs is often to protect American manufacturing jobs. Did that happen?
ExpertUnfortunately, no. Manufacturing employment actually *fell* by 0.53%. This is due to what the researchers call the "downstream effect." Modern manufacturing relies heavily on imported components. When a U.S. automaker or electronics firm has to pay 90% of a massive new tariff on their imported parts, their production costs skyrocket. To remain competitive, they often have to cut costs elsewhere, which frequently means laying off workers.
HostSo, tariffs designed to protect manufacturing actually ended up harming manufacturing employment due to higher input costs. That's a significant policy failure.
ExpertIt is. And perhaps the most surprising finding in a geopolitical context concerns "friend-shoring." The idea was that tariffs might encourage trade with allies. However, the researchers found the tariffs were correlated almost entirely with bilateral trade deficits, not with geopolitical alignment. Tariffs levied on NATO members and strong U.S. defense allies were only slightly lower than those placed on non-aligned nations.
HostSo, the policy acted like a blunt mathematical instrument, punishing trade imbalances, rather than a strategic scalpel forging stronger supply chains with allies.
ExpertPrecisely. It didn't differentiate much between friend or foe based on strategic goals, but rather on trade volume.
HostAll right, so U.S. importers are paying 90% of these massive tariff hikes at the customs dock. But for listeners, the question probably is: why didn't consumer prices double overnight? If that much cost is being absorbed by businesses, surely it shows up in the everyday wallet, right?
ExpertThat's the crucial question, and it brings us to the second NBER paper, by Cavallo, Llamas, and Vazquez, which used high-frequency retail microdata from PriceStats. They were tracking daily prices from major U.S. retailers, matching them to product-level tariff rates and countries of origin. This allowed them to see price changes day-by-day, isolating the direct effects of the tariff announcements.
HostSo, they're looking at the actual prices consumers are paying, rather than the border prices.
ExpertExactly. And their critical insight is the stark difference between wholesale border pass-through and consumer retail pass-through. While Fajgelbaum and Khandelwal found 90% pass-through at the dock, Cavallo and his team found only 20% to 24% pass-through at the register in the short run.
HostThat's a huge gap! 90% at the dock, but only 20% to 24% by the time it reaches the consumer. Where is that missing 70% going?
ExpertBy September 2025, the retail tariff pass-through contributed cumulatively about 0.7 percentage points to the all-items Consumer Price Index, or CPI. By October, it reached 0.76 percentage points. The data also showed a fascinating divergence: between March and September/October 2025, the retail prices of imported goods rose by roughly 5.4% to 6.2% relative to pre-tariff trends. But the prices of *domestic* goods also rose by 3.0% to 3.6%.
HostSo, even domestic goods got more expensive. That sounds like an "umbrella effect."
ExpertIt is. Domestic producers, seeing their foreign competitors forced to raise prices, realized they had room to raise their own prices to pad their margins. Furthermore, many domestic goods rely on imported raw materials, so their base costs were also driven up by the tariffs.
HostBut back to that 70% gap. What's absorbing that massive difference between the dock and the register?
ExpertThe researchers identify several economic "shock absorbers" within the supply chain. One key factor is margin compression. Major retailers, operating in highly competitive environments, are often reluctant to pass a 10% price hike directly to consumers if it means losing that customer to a rival. So, retailers and mid-level distributors absorbed much of the initial blow by shrinking their own profit margins.
HostThey're essentially eating some of the cost to maintain market share.
ExpertPrecisely. Another factor is inventory lags. Retailers sell goods that were often imported months ago. The items on the shelves in, say, April or May of 2025 were likely imported *before* the March tariffs took effect. The true pain is delayed until that older, pre-tariff inventory clears out.
HostSo, there's a natural time delay before the full impact hits.
ExpertExactly. And finally, consumer substitution plays a role. As prices for heavily tariffed goods slowly began to creep up, consumers dynamically substituted them for cheaper brands or alternative products. This pressure forced retailers to keep price hikes modest to maintain sales volume.
HostThese shock absorbers sound crucial for mitigating the immediate impact on consumers. However, these mechanisms cannot last indefinitely.
ExpertThat's the ominous takeaway. While the short-run retail pass-through was only 20%, corporate margins cannot compress infinitely. Inventory eventually turns over. The researchers' warning is clear: if these tariffs remain in place long-term, that 90% border friction will inevitably make its way from the dock to the register. The current situation might just be a delayed-ignition tax.
HostThis research really cuts through so much of the political noise around tariffs. What are the key takeaways listeners should have about the 2025 tariff shock?
ExpertFirst, the illusion of the foreign tax. The data unequivocally proves that tariffs are primarily a domestic tax. Foreign entities absorbed a negligible 10% of the cost; American importers paid the rest.
HostAnd second, the invisible wealth transfer. The near-zero impact on overall GDP doesn't mean the economy was unaffected. It was a massive, forced redistribution of wealth, with consumers losing billions while the Treasury and protected corporations gained billions.
ExpertAnd finally, the ticking clock on inflation. While supply chains effectively shielded consumers from the immediate impact, the pressure is building. Adding 0.7 percentage points to the CPI in just six months is significant. As inventory cycles refresh and margins bottom out, the consumer burden is highly likely to accelerate.
HostSo, when looking at the data at the dock versus the data at the register, what the researchers have provided is not a picture of a successful economic shield. Instead, it seems like a massive friction event, slowly but surely working its way through the plumbing of the American economy.
ExpertThat's a fair summary. It was a policy that achieved specific goals like revenue generation and decoupling from China, but at a significant, often hidden, cost to other economic objectives and, ultimately, the American consumer.
HostWhat questions should be asked about such policies going forward, especially given this research?
ExpertAnd for listeners, it might be worth considering: how much friction is society willing to tolerate in its economic system for specific policy gains, especially when that friction comes with delayed, but inevitable, costs?