International Liberty

In Part I and Part II of this series, we looked at research showing that Americans are bearing the burden of Trump’s trade taxes.

Those findings are a useful antidote to Trump’s silly and illiterate claim that foreign companies are swallowing the added cost.

In both of those columns, however, I pointed out that I’m more concerned about the macroeconomic damage of Trump’s tax increases on trade.

So in Part III of this series, let’s look at some fresh evidence about the economic impact of trade taxes published by the National Bureau of Economic Research.

The study, authored by Tamar den Besten and Diego R. Känzig from Northwestern University, finds that protectionism causes considerable damage.

This paper studies the macroeconomic effects of tariffs using long-run U.S. historical data. …We find that tariff increases are contractionary. A one-percentage point increase in the average tariff rate leads to a sizable and persistent decline in real GDP, accompanied by sharp reductions in imports, exports, and manufacturing output. These responses run counter to the protective intent of tariffs and highlight the importance of general-equilibrium effects: while imports fall as intended, exports and domestic production decline as well, weakening aggregate economic activity rather than redirecting demand toward domestic producers. …Overall, the evidence implies that tariff increases depress economic activity and trade once their indirect and general-equilibrium effects are taken into account. The historical record suggests that the aggregate consequences of tariffs depend not only on their direct impact on import prices, but also on exchange-rate adjustment, foreign responses, and the monetary environment.

For readers who like visuals, here’s Figure 3 from the report.

Pay special attention to the third chart of the right column. You’ll notice that protectionism has a negative impact on manufacturing.

This research is hardly a surprise.

We’ve already seen that Trump’s trade taxes in 2025 have not worked, even when looking at his preferred (but wrong) measure of success.

And we know that the manufacturing sector has not been helped.

I’ll close by expressing happiness about the Supreme Court’s ruling this morning against Trump’s arbitrary trade taxes. But I don’t want to celebrate this libertarian legal victory too much because I fear that Trump will simply re-impose tariffs using some other bit of trade law. Which means more economic uncertainty and further legal cases that will take months – or even years – to decide.

The bottom line is that Trump is causing destruction, but not the right kind.

In Part I of this series, we reviewed some new research from the New York Federal Reserve.

That study showed that Americans bear about 90 percent of the burden of Trump’s Liberation Day trade taxes.

Though I added my own two cents because I don’t actually care that much about who bears the burden of the tax.

I’m more worried about protectionism throwing sand in the economy’s gears. Here’s a brief excerpt of my analysis.

What concerns me is that trade barriers are sort of like regulations in that they create barriers to economic efficiency. Regardless of whether trade taxes are borne by buyers or sellers (or whether regulations are borne by consumers of producers), the economy is burdened by “clutter.”

For today’s column, let’s look at some additional recent research. The Germany-based Kiel Institut published a study last month that investigated the economic impact of Trump’s protectionism.

The report, authored by Julian Hinz, Aaron Lohmann, Hendrik Mahlkow, and Anna Vorwig, was very critical of Trump’s big tax increase on trade. Here are the policy conclusions from the study.

The evidence presented in this brief leads to several unavoidable conclusions. First, tariffs are a tax on Americans. The claim that foreign countries “pay” for US tariffs is empirically false. With approximately 96% pass-through, nearly all the tariff burden falls on American importers and, ultimately, consumers. The $200 billion surge in customs revenue represents $200 billion extracted from American businesses and households. Second, tariffs do not transfer wealth from foreigners to Americans. They transfer wealth from American consumers to the US Treasury. This is economically equivalent to a consumption tax—but one that applies selectively to imported goods, creating additional distortions and inefficiencies. Third, trade volumes adjust, not prices. The primary effect of tariffs is to reduce imports, not to force foreign producers to accept lower prices. This means fewer goods, less variety, and disrupted supply chains for American firms. The costs are real and immediate; the purported benefits are illusory. Fourth, supply chains bear significant costs. American manufacturers that rely on imported inputs face higher costs. They must either absorb these costs (reducing profits and investment), pass them to customers (raising prices for downstream buyers), or scramble to find alternative sources (incurring adjustment costs and delays). None of these options is costless. Fifth, the 2025 tariffs repeat the mistakes of 2018–19. Prior research documented near-complete pass-through during the first trade war. The 2025 tariffs, despite being larger in scope and magnitude, produce the same result. There is no evidence that the dynamics of tariff incidence have changed.

There’s also specific analysis of the trade taxes Trump imposed on imports from Brazil and India.

The net result: Foreign producers did not lower their prices. As a result, Americans bore the burden of those higher taxes.

We focus on two countries that experienced sharp, sudden tariff increases in August 2025: Brazil and India. These cases offer clean natural experiments because the tariff increases were large, discrete, and applied to nearly all products from these countries simultaneously. This allows us to use other countries as a control group and examine the dynamic evolution of prices before and after the tariff shock. …Following the imposition of a 50% tariff, Brazilian exporters did not substantially reduce their dollar prices. …This finding confirms our baseline results in a cleaner setting: Brazilian exporters did not “eat” the tariff. The burden of the 50% tariff was passed through nearly in full to US importers. …We compare Indian exports to the US against Indian exports to the EU, Canada, and Australia—destinations that did not impose new tariffs on Indian goods during this period. The pattern is striking: export unit values to the US remained unchanged relative to other destinations. The volume effects, however, were substantial. Export values to the US fell by approximately 18–24% relative to other destinations, and quantities fell by similar magnitudes. Indian exporters responded to US tariffs by shipping less, not by cutting prices.

For very wonky readers, here’s the visual showing the Brazilian and Indian data.

I’ll close with a bit of repetition.

As explained above, I don’t fixate on who pays trade taxes. That’s not how you measure economic damage.

I don’t like Americans having to pay more taxes to a wasteful government, of course, but my greater concern is politicians adding more barriers to prosperity.

P.S. Just because Americans are bearing the brunt of Trump’s trade taxes, that does not mean tariffs are inflationary. Tariffs are bad because they distort relative prices and cause economic inefficiency. Inflation, by contrast, is a change in the overall price level and is caused by bad monetary policy.

This 2019 video explains uses theory and evidence to argue in favor of free trade.

Are my arguments still correct?

Let’s update our analysis of trade by looking specifically at the impact of Trump’s second-term protectionism.

The President repeatedly claims that his tax increases on trade are absorbed for foreigners.

Yet this table shows the opposite is true. Americans are bearing between 86 percent and 94 percent of the burden.

The table comes from some new research published by the New York Federal Reserve.

Here are some excerpts from the study, which was authored by Mary Amiti, Chris Flanagan, Sebastian Heise, and David E. Weinstein.

Tariff incidence is the technical term for how the costs of a tariff are split between foreign exporters and domestic importers. While importers pay the duty, the “economic burden” of the tariff can be shifted onto exporters if they lower their export prices. …Because tariff incidence hinges on how tariffs affect export and import prices, we now focus on estimating the impact of tariffs on these prices. We follow the approach used in our previous study, which analyzed the effect of the 2018-2019 tariffs on prices for goods exported to the U.S. …We now conduct the same analysis for the 2025 tariffs, covering twelve-month changes from January 2024 through November 2025… Our results show that the bulk of the tariff incidence continues to fall on U.S. firms and consumers. …We highlight two main results. First, 94 percent of the tariff incidence was borne by the U.S. in the first eight months of 2025. This result means that a 10 percent tariff caused only a 0.6 percentage point decline in foreign export prices. Second, the tariff pass-through into import prices has declined in the latter part of the year. That is, a larger share of the tariff incidence was borne by foreign exporters by the end of the year. In November, a 10 percent tariff was associated with a 1.4 percent decline in foreign export prices, suggesting an 86 percent pass-through to U.S. import prices.

For what it’s worth, I’m not overly fixated on who bears the burden of trade taxes.

What concerns me is that trade barriers are sort of like regulations in that they create barriers to economic efficiency.

Regardless of whether trade taxes are borne by buyers or sellers (or whether regulations are borne by consumers of producers), the economy is burdened by “clutter.”

• Clutter almost always leads to lower income.
• Clutter almost always leads to fewer jobs.
• Clutter almost always leads to less growth.

In other words, the direct burden of the tax is important, but it’s also important to consider the indirect costs to the economy. Indeed, these indirect costs are the ones that affect living standards.

I’ll close by stating that incurring costs may be worthwhile if some offsetting benefit is being obtained. But that’s not the case with Trump’s trade taxes. We get the negative of economic inefficiency along with the negative of more money for politicians.

P.S. I have acknowledged that some trade barriers can be justified, but those exceptions don’t apply to what Trump is doing.

Donald Trump, who describes himself as “Tariff Man,” recently wrote a column in defense of his protectionist trade policy for the Wall Street Journal.

After reading the column, my first thought was that Trump was trying to show he is more economically illiterate than Joe Biden (a big challenge, as seen here and here).

And my second thought was that it seems as if America is governed by a random guy from the phone book or the quirky uncle who spouts off at Christmas dinner.

But let’s side aside my grousing and focus on what Trump actually wrote. Here are some excerpts.

When I imposed historic tariffs on nearly all foreign countries last April, the critics said my policies would cause a global economic meltdown. Instead, they have created an American economic miracle… Countless so-called experts…predicted confidently that the Trump tariffs would crash stock markets, crush economic growth, cause massive inflation, destroy American exports, and trigger a “worldwide recession.” Nine months later, the results are in, every one of those predictions has proven completely and totally wrong.  …Joe Biden handed me…the highest trade deficit in world history. But with the help of tariffs, we have…slashed our monthly trade deficit by an astonishing 77%… The data shows that the burden, or “incidence,” of the tariffs has fallen overwhelmingly on foreign producers and middlemen, including large corporations that are not from the U.S. According to a recent study by the Harvard Business School, these groups are paying at least 80% of tariff costs. …It was the tariff that made America strong and powerful in generations past, and it is tariffs that are making our country stronger, safer and richer than ever before.

Eric Boehm of Reason was not impressed.

He looked closely at three of Trump’s assertions. He started by debunking Trump’s claim of a smaller trade deficit.

Trump’s op-ed claims that he has “slashed our monthly trade deficit by an astonishing 77%.” That would be astonishing. But in reality, the Census Bureau reported last week that the trade deficit increased—not decreased—by nearly 37 percent in November, the most recent month for which data are available. Through the first 11 months of 2025, the trade deficit was 4 percent higher than it had been in 2024. That is literally the opposite of what Trump is claiming.

This is absolutely correct. As I wrote about a month ago, the trade deficit has increased under Trump (though remember that this isn’t a bad thing).

He then points out that Trump misinterpreted the HBS study.

In fact, the paper he cited concludes that “tariffs led to both rapid and gradual retail price increases.” The study found that “prices began rising within days of the March announcements and continued to increase steadily over subsequent months,” and also that “imported goods rose roughly twice as much as domestic goods relative to pre-tariff trends.” There is no getting away from this fact: tariffs are pushing prices higher. The Harvard Business School, Trump’s favorite source on the matter, recently noted that prices for imported goods are up 9.7 percent from their pre-tariff trends, while domestic prices are up 4.4 percent.

Last but not least, Boehm points out that America avoided some of the economic damage because Trump hasn’t followed through on some of his worst ideas.

Trump repeatedly backed down and eased tariff threats in the face of negative shocks from both the stock market and the bond market. The “Liberation Day” tariffs announced on April 2 were postponed a week later after a huge stock market sell-off, and those that were later imposed were at lower rates. A threatened 130 percent tariff on Chinese goods never materialized. No wonder “TACO”—”Trump Always Chickens Out”—entered the political and financial lexicon last year. As the Yale Budget Lab’s data show, Trump raised the average U.S. tariff rate from less than 3 percent to more than 25 percent with his Liberation Day tariffs and other moves in the first half of 2025. But those rates declined in the second half of the year and settled around 17 percent. That’s still very high, but not as high as it could have been—so it makes sense that the consequences were less severe.

Here’s a chart from the Financial Times showing how Trump backed off after so-called Liberation Day.

For those keep score, that’s 3 wins for Eric Boehm and none for Trump.

My only complaint about the article is that he only corrected three of Trump’s errors.

So I’ll wrap up by looking at a few more of Trump’s claims and seeing whether they are justified. We’ll start with his assertion of a booming economy.

…my policies…have created an American economic miracle…we now have…extraordinarily high economic growth! …In the third quarter of 2025, gross domestic product growth was booming at 4.4%, and…the fourth quarter is projected by the Atlanta Fed to be well over 5%, a number like our country has not seen in many years.

But if the economy is booming, why are workers not enjoying an uptick in their compensation?

And why is there an “affordability crisis”?

Also (and this is a wonky point), GDI is a much better measure of economic performance than GDP. And the GDI number for the third quarter (2.4 percent) is much less impressive than the GDP number (4.4 percent).

Next, let’s look at Trump’s claim about inflation.

I inherited an economy ravaged by the…worst inflation in more than 40 years… Only 12 months into my second term in office, we now have the exact opposite—extremely low inflation. …while the average U.S. tariff rate on foreign products has increased by more than five times, inflation has fallen dramatically!

Yes, we had high inflation under Biden, especially in 2022 (because of bad monetary policy that began under Trump).

But Jessica Riedl points out that prices increases stabilized well before Trump took office again in early 2025.

By the way, protectionist policies are not inflationary. They distort relative prices, but don’t cause overall increases. If you want to know who to blame for rising prices, look at the Federal Reserve.

Next, we have Trump claiming that he’s reduced red ink.

Joe Biden handed me a catastrophically high budget deficit… But with the help of tariffs, we have cut that federal budget deficit by a staggering 27% in a single year

This is another easily debunked assertion.

The budget deficit was just as high in 2025 as it was in 2024, as shown by this data from the Committee for a Responsible Federal Budget.

By the way, the early data for the 2026 fiscal year don’t look any better.

Next, we have Trump claiming trade taxes are good for growth.

We have proven, decisively, that, properly applied, tariffs do not hurt growth—they promote growth and greatness

I’m tempted to simply point to Herbert Hoover and the Great Depression. Or to simply look at the wretched performance of the nations with the worst protectionism.

But I’ll be wonky and instead encourage people to read this Twitter thread from Erica York.

Next we have an absurd claim that Trump’s protectionism is going to produce $18 trillion of foreign investment into the U.S. economy.

I have successfully wielded the tariff tool to secure colossal Investments in America, like no other country has ever seen before. …In less than one year, we have secured commitments for more than $18 trillion, a number that is unfathomable to many.

Once again, Jessica Riedl has an appropriate reaction.

In fairness to Trump, I don’t think he’s ever claimed $18 trillion of investment would be a one-year phenomenon. Though the number is make-believe even when considering Trump’s full second term.

But let’s set that aside and focus on something else, which is that the necessary and automatic flip side of a trade deficit is a capital surplus. So if Trump really did attract $18 trillion of foreign capital, that would only be possible if foreigners first earned $18 trillion by selling goods and services to Americans.

In other words, big trade deficits. Which, of course, Trump is trying to stop.

Last but not least, Trump claims tariffs made America strong in the 1800s.

It was the tariff that made America strong and powerful in generations past.

I wrote a two-part series (here and here) about why this is nonsense, but this tweet from Dean Clancy gets the point across much quicker.

If Trump is willing to abolish the income tax and the welfare state, I’d be willing to trade those great policies for his awful policy of protectionism. I won’t hold my breath waiting for that trade.