In the complex theater of international trade, few topics are as contentious or as misunderstood as the tariff. Often presented in political discourse as a mechanism to force foreign entities to "pay up" for market access, the economic reality is far more nuanced. A groundbreaking new study by trade economist Caroline Freund has injected fresh data into this debate, suggesting that the burden of the 2025 U.S. tariffs is split more evenly between foreign exporters and domestic importers than previously assumed. Yet, as experts warn, the discovery that foreign entities are shouldering a portion of these costs does not equate to a national economic victory.
The Core Finding: Reassessing the Burden of Import Taxes
When the United States government imposes a tariff, the immediate legal obligation falls upon the importer of record. However, the economic incidence—the "who actually pays"—is determined by market dynamics. When a tariff is applied, it increases the landed cost of goods, often leading to a drop in demand. In response, foreign sellers may lower their prices to remain competitive, effectively absorbing a share of the tax to protect their market share.
Freund’s study, which analyzed detailed trade data from September 2023 through January 2026, posits that foreign exporters have absorbed approximately 47 percent of the 2025 tariff burden. Conversely, U.S. importers have paid the remaining 53 percent. This finding stands in stark contrast to several other recent analyses, which suggested a "nearly complete pass-through," meaning U.S. consumers and businesses were bearing the entire weight of the tax hikes.
The discrepancy, Freund argues, lies in her methodology. Unlike previous studies that weighted all trade categories equally, Freund’s research weights data by pre-trade war import volumes. By ensuring that a category accounting for $100 billion in trade is not mathematically equal to a category accounting for a mere $100, the study provides a more accurate representation of how these costs permeate the U.S. economy.
A Chronology of the 2025 Tariff Conflict
The current trade landscape is the result of a rapid escalation in protectionist policies that began in early 2025.
- Early 2025: The U.S. administration implements a sweeping series of tariffs targeting major trading partners, citing national security and trade imbalances under the International Emergency Economic Powers Act (IEEPA).
- Mid-2025: As trade flows begin to shift, economists observe a tightening of supply chains and a rise in "landed costs" for domestic retailers. Academic institutions begin tracking the pass-through rates to determine if foreign exporters are lowering prices to maintain their U.S. footprint.
- Late 2025: Data accumulates showing that while some prices for consumers rose, the "unit value"—the price received by foreign exporters—began to decline in specific sectors, signaling the start of the observed 47 percent absorption rate.
- 2026: The legal landscape shifts dramatically when the U.S. Supreme Court strikes down the tariffs imposed under the IEEPA, deeming them an overreach of executive authority. This ruling forces a massive, complex refund process for U.S. importers, effectively creating a financial feedback loop where foreign exporters have already absorbed the cost, but the U.S. government is now refunding the tariff payments to the importers.
Supporting Data: Why "Lower Prices" Aren’t Always Good News
While Freund’s study highlights that foreign firms are absorbing costs, other researchers have raised significant caveats. A study by Ahn et al. suggests that what appears to be "foreign price absorption" may actually be a shift in consumer behavior toward lower-quality goods.
When tariffs make premium imported goods too expensive, businesses and consumers often substitute those items for lower-quality, cheaper alternatives. Because these lower-quality goods are naturally priced lower, the data may look like a price reduction by foreign exporters, when in reality, it is simply a change in the basket of goods being imported.
Furthermore, trade data is often organized by country rather than by corporate ownership. A significant portion of U.S. imports occurs between a U.S. multinational corporation and its own foreign affiliate. In these cases, the "foreign exporter" is actually a U.S. company. If a tariff is imposed, and that U.S.-owned foreign affiliate lowers its price to absorb the tariff, it is ultimately the U.S. parent company that is eating the cost—hardly a win for the domestic economy.
The Welfare Question: Are We Better Off?
The most critical takeaway from the current body of research is that the distribution of costs is not the same as an assessment of national welfare. Even if foreign exporters absorb 47 percent of the tariff, the overall U.S. economy may still be suffering.
Welfare, in economic terms, accounts for more than just who pays the check. It includes the lost efficiency of supply chains, the cost of retaliatory measures from trading partners, the uncertainty that freezes capital investment, and the "deadweight loss"—the value of trades that simply stopped happening because of the tariffs.
For the U.S. to be "better off" on net, the revenue gains captured from foreign exporters would have to exceed the total economic damage caused by these distortions. Current evidence suggests this is not the case. The Supreme Court’s decision to refund tariff payments adds a layer of irony: if the U.S. government must return the tariff revenue to importers, the nation loses the revenue while the market remains distorted by the initial policy, leading to a "lose-lose" scenario for the federal budget and the broader economy.
Implications: The Prisoner’s Dilemma and Long-Term Costs
Freund warns that the attempt to use market power to extract price concessions from foreign nations can trigger a "prisoner’s dilemma." When one country successfully forces price cuts through tariffs, others are incentivized to do the same. This creates a global race to the bottom, where the rules-based international trading system—which has governed global prosperity since the post-WWII era—begins to erode.
The long-run costs of this erosion may be far more damaging than the short-term fluctuations in import prices. As trading partners retaliate, U.S. exporters find themselves locked out of foreign markets, further hampering domestic growth.
Key Considerations for Policy Makers:
- Market Power Limitations: While the U.S. is a large market, its ability to force price concessions is limited by the global nature of supply chains.
- The Substitution Effect: Policymakers must be wary of "quality degradation" in imports, where the appearance of lower prices masks a reduction in the standard of goods available to citizens.
- Intra-firm Trade: A significant volume of trade is internal to multinational corporations. Tariffs on these goods effectively tax U.S. firms twice—once through the tariff and once through reduced affiliate profitability.
- Systemic Stability: The cost of damaging the global rules-based trading system likely outweighs the marginal, temporary gains in terms-of-trade.
Conclusion
The latest research from Caroline Freund and her contemporaries paints a picture of a trade policy that is less about "winning" and more about managing the unintended consequences of protectionism. By confirming that foreign exporters do bear a significant share of the tariff burden, the study provides a vital empirical correction to previous models. However, it also clarifies that this burden-sharing does not equate to net economic gain.
As the dust settles from the 2025 tariff episode, the evidence suggests that the primary outcomes were not a revitalized domestic economy, but rather a series of market distortions, legal challenges, and the potential for long-term friction in the global marketplace. For policymakers looking toward the future, the message is clear: tariffs are a blunt instrument that, even when they hit their intended target, often cause collateral damage that leaves the domestic economy poorer than before.
