# Tariffs and Trade Deficits | Steven Davis, Brent Neiman Source: https://www.youtube.com/watch?v=Fbu3LrGeilI Recap page: https://rapidrecap.app/video/Fbu3LrGeilI Generated: 2026-02-25T19:34:05.857+00:00 --- ## 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. **Context:** Host Steven Davis interviewed former colleague Brent Neiman, who served at the US Treasury, to discuss the economic reality of President Trump's tariff policies, specifically addressing whether tariffs effectively reduce the trade deficit and who ultimately pays the tariff costs. The discussion centered on recent 2025 trade data, which showed little overall change in the trade deficit despite steep tariffs, and the methodology for accurately measuring the actual tariff rates applied versus those announced. ## Detailed Analysis Davis and Neiman analyzed the impact of the recent wave of US tariffs, noting that while the Wall Street Journal reported a record import amount and a trade deficit that hardly changed from 2024 to 2025, this stability is expected from a standard economic view, partly due to front-running before tariffs took effect. Neiman detailed his research with Gita Gopinath, which measures the actual tariff rate paid by importers; they found a large gap between the announced statutory rate (around 27-28% in late 2025) and the actual rate (around 13%), because the actual rate started very low in 2025 and grew slowly, meaning the average tariff applied was much smaller than headline figures suggest, leading to only a modest direct impact on overall US inflation, estimated at under one percentage point. Crucially, the experts confirmed that evidence overwhelmingly supports near-full pass-through of tariffs to American payers (importers, businesses, and consumers), directly contradicting the administration's claim that foreign exporters pay, with studies showing import prices rising almost dollar-for-dollar with the tariffs. Beyond direct costs, both participants stressed that the volatility and lack of commitment associated with deploying tariffs rapidly via AIPA authority create massive uncertainty, deterring long-term investment decisions as businesses wait for policy clarity, which may cause greater economic cost than the direct price increases. ### Tariff Measurement and Impact - Actual applied tariff rate reached 13% by November 2025, far below the 27-28% statutory rate - Direct impact on overall US inflation is estimated to be modest, under one percentage point - The trade deficit remained largely unchanged between 2024 and 2025 despite tariff implementation. ### Who Pays the Tariffs - Research indicates near 100% pass-through of tariffs to import prices at the border - Subsequent analysis suggests 43% of the border cost was passed to retail consumers by late 2025, with the rest absorbed by firms through smaller margins or higher input costs - The fundamental conclusion is that Americans pay the tariff hikes, not foreign exporters. ### Critique of Bilateral Deficit Focus - The focus on bilateral trade imbalances is a faulty policy goal, as imbalances can arise for reasonable economic reasons, exemplified by the barber analogy where one party buys nothing from the other. ### Consequences of Policy Volatility - The deployment of tariffs via the AIPA legislation allows for rapid, unpredictable changes, creating uncertainty that actively deters foreign companies from investing in US factories due to unpredictable intermediate input costs and export risks. ### Complexity of Modern Trade - Tariffs today are more distorting than historical ones because trade relies heavily on intermediate inputs and complex supply chains (like autos across the US-Mexico border), making the true economic bite harder to calculate and plan around. ### Procedural Issues and Commitment - Using the AIPA authority bypasses safeguards like public consultation required by other authorities (Section 232/301), undermining the US's ability to make credible, reasoned commitments in trade policy, which is essential for successful trade negotiations.