Tariffs and Trade Deficits | Steven Davis, Brent Neiman

Quick Overview

Economists Steven Davis and Brent Neiman conclude that US tariffs imposed under the Trump administration result in nearly full pass-through, meaning Americans—importers, businesses, and consumers—pay the cost, contrary to claims that foreign exporters bear the burden, and the volatile, unpredictable manner of deployment significantly increases economic costs through uncertainty and planning disruption.

Key Points: The actual effective tariff rate applied in 2025 reached about 13% by November, significantly lower than the statutory rate of 27-28%, resulting in only an estimated 6 percentage point average increase in the tariff rate on goods compared to 2024. The direct impact of tariffs on the overall US inflation rate is estimated to be modest, around half a percentage point or slightly more, which clears up confusion about why overall inflation hasn't seen massive increases solely attributed to tariffs. Research by Davis and Gopinath shows nearly 90% to 100% pass-through of tariffs to import prices at the border, indicating Americans are paying the tariffs, with subsequent work by Alberto Cavalo suggesting 43% of the border pass-through showed up in retail prices as of late 2025. President Trump's focus on bilateral trade deficits as evidence of unfairness is deemed a faulty view by Neiman, who cites the example of a barber having a chronic deficit with his clients who buy nothing from him as an illustration that bilateral imbalances do not inherently signal disadvantage. The use of the AIPA legislation for enacting tariffs, which bypasses standard procedural safeguards like public consultation, creates significant policy uncertainty, making long-term investment planning incredibly hard as businesses wait to see how tariffs will be applied or exempted. Because modern trade relies heavily on intermediate inputs, tariffs today have more complex economic distortions than in the past, where trade was largely final goods, complicating the analysis of where the tariff burden truly lands. The primary economic consequence of the trade policy's volatile deployment is the uncertainty it creates, which can be a more powerful deterrent to investment than the direct price effects of the tariffs themselves.