In the complex theater of international trade, few topics are as contentious—or as misunderstood—as the tariff. When the United States imposes these trade barriers, the prevailing assumption is often a binary one: either the foreign nation pays, or the domestic consumer bears the cost through higher prices. However, a groundbreaking new study by trade economist Caroline Freund challenges the simplicity of this narrative, suggesting that the reality of the 2025 U.S. tariff regime is far more nuanced.
According to Freund’s research, the economic burden of these tariffs is split, with foreign exporters absorbing roughly 47 percent of the costs, while U.S. importers shoulder the remaining 53 percent. This finding stands in stark contrast to several other recent academic papers, which have argued that the "pass-through" to the importer is nearly absolute. By utilizing a methodology that weights data by pre-trade war import volumes, Freund’s study provides a critical lens through which to view the efficacy—and the hidden costs—of current U.S. trade policy.
The Mechanics of the Tariff Burden
To understand why this distinction matters, one must first distinguish between the legal and economic incidence of a tariff. Legally, the importer of record is responsible for paying the tariff at the border. Economically, however, the burden is often shifted. When a tariff increases the landed cost of a foreign-made good, demand for that product typically softens. To maintain their market share in the United States, foreign sellers may choose to lower their prices, thereby absorbing a portion of the tariff.
Measuring this "pass-through" is the holy grail of trade economics. If an importer pays the full tariff without the exporter lowering their price, the pass-through is 100 percent. If the exporter drops their price to offset the tax, the pass-through is lower. Freund’s study analyzed import data from September 2023 through January 2026, covering 50 trading partners that represent 95 percent of U.S. goods imports.
Her key innovation is the use of trade-flow weighting. Previous studies often treated a $100 niche product category with the same statistical gravity as a $100 billion industrial commodity sector. By weighting the data based on actual, pre-trade war volumes, Freund avoids the statistical noise that has skewed earlier findings. The result is a more precise picture of how market power—or the "terms-of-trade effect"—allows a large economy like the U.S. to force price concessions from its trading partners.
A Chronology of Conflict and Correction
The 2025 tariff environment did not emerge in a vacuum; it is the latest chapter in a long-standing trend of protectionist policy that gained momentum during the late 2010s.
- 2018–2019: The Trump administration initiated a series of aggressive tariffs, sparking global trade friction. Economists like Ganapati and Hottman later determined that these tariffs were often masked by a reduction in "scale economies." As exporters shipped smaller batches to the U.S. due to falling demand, per-unit costs rose, leading firms to cut prices to remain competitive—a phenomenon that made it appear as though the burden was being shared more equitably than it actually was.
- 2024: As the U.S. government ramped up its tariff schedule, trade economists began preparing the data sets that would eventually inform the 2026 academic reports.
- 2025: The implementation phase of the new tariff regime occurred throughout the year. Data from this period serves as the primary basis for Freund’s analysis.
- 2026: A wave of academic research—including studies from the IMF and the Federal Reserve—began to emerge, with many concluding that importers were paying almost the entirety of the tariff costs.
- The Supreme Court Ruling: A significant wrinkle in the 2025 timeline was the Supreme Court’s decision to strike down tariffs imposed under the International Emergency Economic Powers Act (IEEPA). This ruling forced the U.S. government to begin refunding tariff payments to importers, fundamentally altering the economic impact of the policy.
Supporting Data: The Quality Substitution Trap
While Freund’s study suggests that foreign exporters are absorbing a significant portion of the cost, other researchers urge caution. A study by Ahn et al. suggests that some of the apparent "price reductions" by foreign exporters are actually a mirage caused by "quality substitution."
In this scenario, importers do not see a price drop from the same supplier; instead, they pivot to purchasing lower-quality, cheaper varieties of goods within the same category to offset the tariff. If an importer switches from a high-end $500 machine to a lower-tier $400 version, the data might record a price drop, but the American consumer is receiving a lower-value product. While Freund employs fixed-effect modeling to filter out these distortions, the debate continues over whether we are seeing a true terms-of-trade gain or simply a degradation of the goods flowing into the U.S. market.
Official Responses and the "Rules-Based" Dilemma
The political and economic establishment remains deeply divided on the efficacy of these measures. The Tax Foundation and other policy watchdogs have repeatedly highlighted that even if a portion of the tariff is extracted from foreign entities, it does not necessarily result in a "win" for the United States.
The primary concern is the destruction of economic efficiency. When trade flows are distorted, the U.S. loses the gains from comparative advantage. Furthermore, the threat of retaliation by trading partners—and the erosion of the global rules-based trading system—represents a long-run cost that far outweighs any short-term price concessions extracted from foreign firms.
Freund herself warns of a "prisoner’s dilemma." When major economies use tariffs to extract price concessions, they invite a race to the bottom. If multiple countries simultaneously adopt this strategy, the global volume of trade shrinks, and the resulting deadweight loss hurts all participants. In the view of many experts, the short-term benefit of forcing a foreign exporter to lower prices is quickly negated by the long-term uncertainty and higher business costs that follow.
Implications: A Net Negative for Welfare?
Perhaps the most significant takeaway from the current body of research is that "extracting" a burden from a foreign country is not the same as improving domestic welfare. For the U.S. to be better off on a net basis, the revenue gains from the tariffs would need to exceed the combined total of:
- Deadweight Loss: The lost economic activity resulting from decreased trade.
- Distortionary Costs: The inefficiencies introduced by businesses switching to suboptimal products.
- Administrative Costs: The legal and bureaucratic expenses of managing the tariff regime.
- Retaliatory Losses: The damage done to U.S. exporters facing foreign tariffs.
The situation is further complicated by the IEEPA refunds. Because the Supreme Court mandated that many of these tariffs be returned to importers, the U.S. government effectively transferred money from the public treasury to private companies. In instances where the government also pays interest on those refunds, the U.S. economy suffers a net revenue loss while still dealing with the market distortions caused by the initial tariff.
Conclusion: The Myth of the "Free Lunch"
Caroline Freund’s work provides a sophisticated, data-driven update to our understanding of trade, proving that foreign exporters are indeed capable of absorbing a significant portion of the tariff burden. However, the study is careful to stop short of labeling these tariffs a success.
The evidence suggests that while the United States has successfully utilized its market power to extract concessions, the cost of doing so is high. We are seeing a shift in trade patterns that prioritizes protectionism over efficiency, and we are witnessing a legal and economic scramble to reconcile these policies with constitutional mandates.
As policymakers move forward, the lesson from the 2025 tariffs seems clear: there is no such thing as a "free lunch" in international trade. Even when a portion of the cost is successfully pushed onto a foreign neighbor, the resulting friction, retaliatory risk, and market distortion ensure that the U.S. economy remains burdened in ways that a simple price-incidence study cannot fully capture. The long-term health of the American economy will likely depend less on the ability to squeeze foreign exporters and more on the stability and predictability of the global trading system.
