Dan Wales, Director in Economic Research, Fulcrum Asset Management, writes that since early 2025, US trade policy has shifted sharply toward protectionism, marked by a broad set of tariffs imposed under emergency and trade-related authorities.
These measures, justified by national security and industrial strategy, are broader and more volatile than previous episodes, with frequent reversals and exemptions. We have noted the short-run macroeconomic effects (rising inflation and slower growth) consistent with models of permanent trade shocks. Here we summarise recent research evaluating a central political claim: that the costs of tariffs are being absorbed by foreign exporters, rather than US consumers or firms.
We find little support for this claim. Customs and fiscal data confirm that US tariffs are generating over USD300 billion annually, roughly 1 per cent of nominal GDP. But this revenue does not reveal who ultimately pays. Detailed trade data show exporters have diverted roughly 15 per cent of affected trade flows away from the US, shifting sourcing from China to countries like Vietnam and South Korea. There is little evidence of exporters reducing dollar prices, mirroring the 2018–2019 episode. While domestic prices have risen only modestly, with core PCE up about 0.25 percentage points, model-based estimates suggest larger long-run pass-through is likely. The burden of these tariffs is therefore falling primarily on the US side of the border.
Measuring tariffs and diversion
Our high-frequency dataset of announced tariffs shows the average US tariff rate rose from 2.5 per cent in January to a 28 per cent peak in April before moderating due to suspensions and delays. The current effective tariff rate is about 16 per cent, lower than headline announcements because of exemptions and trade adjustments.
Firms have rerouted supply chains to avoid high tariffs, largely substituting imports from China with those from Vietnam and South Korea. This trade diversion offsets roughly 1.4 percentage points of the tariff increase and explains much of the observed adjustment.
Producer price pass-through
Supporters of the tariffs argued that foreign exporters would cut prices to stay competitive, shielding US buyers. The data show otherwise. Prices paid by US importers at the border have remained stable despite sharp tariff increases, as in 2018. Rather than lowering prices, exporters have reduced shipment volumes. These volume declines have been remarkably universally distributed across products and regions. American importers have absorbed the cost by paying more, sourcing from new suppliers, or cutting purchases. Across both tariff episodes in 2018 and 2025, the conclusion is consistent: adjustment comes through changing volumes and trade partners, not foreign price cuts.
Establishing a benchmark
We introduce a simple economic model that tracks how tariff shocks spread through the economy, influencing prices and production. This model features four agents: households, domestic firms, foreign firms, and the government. It accounts for how consumers might switch between buying imported or domestic products and how companies rely on both domestic and imported materials in their supply chains.
Applied to US data, the model suggests recent tariff announcements should have significantly raised consumer prices. Initially, the tariff shock was expected to increase headline inflation by about two percentage points, but after reversals, the net effect dropped to roughly 0.9pp. The largest price increases are projected for goods such as games, toys, and hobbies. Around one quarter to one third of the overall price effect comes from indirect channels, through supply chain linkages.
Current tariff incidence
Comparing model predictions with observed price data shows that roughly 40 per cent of expected price increases had passed through to consumers by July, with a marked pickup in recent months. Most tariff costs, however, have yet to be reflected in consumer prices.
Given that foreign producers and consumers have absorbed little of the shock, we conclude that domestic firms have borne most of the adjustment in their profit margins—around 60 per cent so far. This is inconsistent with claims of even cost sharing. Consumers are gradually seeing more of the burden passed through, suggesting that tariffs have mainly squeezed company margins to date.
Looking ahead, as firms seek to restore profitability, more of the tariff costs are likely to be passed on to consumers, implying further price pressures later this year.
Conclusion
Foreign absorption of the tariff shock remains minimal. The burden falls largely on domestic producers and consumers.
Trade diversion has offset about 15 per cent of the shock, and profit margins have so far cushioned much of the rest, delaying the full inflationary impact. But as margins normalise, more of the cost is likely to appear in consumer prices. In short, these tariffs are being paid by Americans.
