1Q1A – where we ask one question and an expert gives one answer
By Inga Kiderra | UC San Diego Today
As Americans continue to worry about the cost of living, U.S. tariffs are back in the news.
Supporters argue they strengthen American manufacturing and create jobs. Critics warn these import taxes raise prices for consumers and businesses. Economists, meanwhile, are beginning to measure what actually happened after the sweeping U.S. tariffs of 2025.
In a new working paper, Caroline Freund, dean of the UC San Diego School of Global Policy and Strategy and a former World Bank trade economist, examines one important piece of that story. So we asked her the question on many consumers’ minds.
Are tariffs making prices go up?
Caroline Freund: Yes, tariffs are making prices go up – but much less than many economists expected. Major foreign exporters cut their prices to keep selling to the U.S. market, absorbing a surprisingly large share of the tariffs themselves.
Some examples make this more concrete. When tariffs on Chinese toys and dolls rose by 28 percentage points, Chinese exporters cut their prices by 22%, absorbing roughly 80% of the increase. South Korean exporters of some passenger cars faced a 22-point tariff increase and cut their prices by 12%, absorbing about half. Indian cotton bedsheet producers lowered their prices by about 16% in response to a 28-point tariff increase, also absorbing roughly half.
Across U.S. imports overall, my research finds that foreign exporters absorbed roughly 40 to 50% of the 2025 tariff increases through lower export prices. That’s very different from earlier studies, which focus on the typical exporter, and found that U.S. importers bore nearly the full cost of tariffs.
What matters is who the exporter is. The largest foreign suppliers – who have more room to reduce their profit margins and also more to lose if American customers go elsewhere – were much more likely to cut their prices when tariffs went up. By contrast, smaller exporters, who make up the vast majority of trade relationships but only a small share of trade, passed most or all of the tariff through to buyers.
That helps explain why consumer prices have risen much less than the headline tariff rates might suggest. But it does not mean the tariffs are good for the U.S. economy. Prices are only one part of that equation.
Tariffs distort trade and reduce the variety of imports available. They can also provoke retaliation from trading partners, setting off a tit-for-tat cycle that weakens the rules-based trading system. And the resulting policy uncertainty makes it harder for businesses to plan for the future.
Foreign exporters bore more of the costs than many economists expected. But that alone doesn’t make tariffs good economic policy.
Learn more: VoxEU blog post and the CEPR working paper.