Editor’s Note: In this episode of Economics Applied, host Steven Davis sits down with economist Brent Neiman to break down the real-world data and consequences behind President Trump’s tariff policies. Together, they explore who actually bears the financial burden of these trade penalties, why overall trade deficits have barely budged, and how unpredictable policy shifts create long-term uncertainty for the global economy.
TRANSCRIPT:
Introduction
STEVEN DAVIS: President Trump deploys tariff hikes and threats of tariff hikes as tools of U.S. economic and foreign policy. He sees tariffs as a useful response to persistent U.S. trade deficits. Is that the case? And by the way, who really pays those high American tariffs?
Welcome to Economics Applied, a production of the Hoover Institution. I’m Steven Davis, host of the show. Joining me today is my former Chicago Booth colleague, Brent Neiman. Brent is a professor — the Edward Eagle Brown Professor of Economics at Chicago Booth. From 2022 to early 2025, he served at the U.S. Treasury as counselor to the secretary and deputy undersecretary for international finance, where he worked on a broad set of international economic issues, including the bilateral U.S. relationship with China. Brent, welcome. It’s great to have you on the show and good to see you again.
BRENT NEIMAN: Thanks for having me, Steve. It’s good to be with you. Good to see you again, too.
The U.S. Trade Deficit: Has It Changed?
STEVEN DAVIS: The online edition of today’s Wall Street Journal contains the following headline: “America imported a record amount last year despite seismic trade policy changes.” The article goes on to note that the US trade deficit hardly changed from 2024 to 2025. And here I’m quoting, “Despite steep Trump administration tariffs aimed at closing trade gaps.” Are you surprised by these statistics?
BRENT NEIMAN: Well, I’d say a few things. First, you quoted The Wall Street Journal. If you look across different outlets, different articles and headlines, you actually can find different signs — some people talking about the deficit going up versus down.
Right away, I would start with what’s going on: there’s a differentiation between a focus on the overall goods and services deficit versus just the goods deficit. And so we can get to it a lot later, but one thing I think is kind of amazing is that now that the world is focused so much on these tariffs, on goods deficits, and on overall deficits, it actually matters, I think, from an economics perspective. We typically would think of goods and services together as the much more meaningful thing to think about.
Second reaction in terms of whether I’m surprised or not — it’s a boring answer, but we should be very careful about putting too much stock in this 12 months of data that happens to start at a particular spot and end at a particular spot. There was — is widely believed to have been, and the data looks to me like it exhibited — significant tariff front-running. As soon as President Trump was elected, I think importers understandably, correctly it turns out, predicted that tariffs would come on in the future, so sort of shifted intertemporally some purchases forward. And then there are lags, and I wouldn’t put too much stock in month-to-month changes.
STEVEN DAVIS: Well, that’s why I focused on the 2024 to 2025 change. To your point about the front-running, The Wall Street Journal article has a very nice picture of how things look from month to month, and they show exactly what you said. The imports shot up in the early months after the Trump administration took office for the reasons you say. Then they dropped off quite a bit, very sharply, and then they’re kind of back up to something like 2024. So I think the puzzle isn’t so much the month to month — I agreed with you — the 2024 to 2025: essentially, no change.
BRENT NEIMAN: Yeah, I think it’s a fair qualitative assessment. Things basically didn’t change. And so I guess here are the two reactions to it. First is the standard economic view of tariffs and the relationship to net trade — to whether imports net of exports would change very much — is typically we don’t think of tariffs as a particularly useful tool to change that net trade.
Why Tariffs Don’t Necessarily Reduce Trade Deficits
STEVEN DAVIS: Explain that. To the layman, it seems a bit odd. You make tariffs, you make imports more expensive. Why don’t you get fewer of them? And why doesn’t that then cause the trade deficit to fall?
BRENT NEIMAN: Right. So zooming very far out, if you say, why does a country import more than they export, or vice versa? The way economists typically think about it is it’s intertemporal trade. It’s taking the ability to consume today and shifting it into the future, or if you run a deficit, vice versa — consuming more today in exchange for promises to consume less.
STEVEN DAVIS: And that’s because we have to give the foreign exporters to our markets something in return for the goods and services we import. And if we can’t give them other goods and services, we give them promises — to pay later.
BRENT NEIMAN: Look, why would you, if you’re a foreign country and you produce something — you took your weekends away from your family and kids, you spent the time and effort to make this thing, but you’re not going to use it, you’re not going to eat it or consume it, you’re going to ship it to me — why would you do that? You’re not being altruistic. You do it because in the future, I’m promising to do the same and ship my goods that I worked hard to create to you. The way that works is when you ship it to me, it’s in exchange for me giving you, let’s say, an asset, some dollars.
STEVEN DAVIS: If I take that logic, why has the US been running a trade deficit for decades?
BRENT NEIMAN: Yeah, so the point I was going to get at — because the question you’re asking now is quite deep and I certainly don’t have a convincing answer, the profession doesn’t have a consensus view — but if that’s the kind of thing that causes countries to run trade surpluses or deficits, and that can reflect productivity trends or slowly moving demographic trends or any number of things, then it doesn’t strike me as so surprising that something like an import tariff or an export subsidy equivalently would affect that net amount.
In a more mechanical, concrete, and in some sense easier to think of a way — how could it be, or what might it look like if a trade deficit doesn’t change despite tariffs?
STEVEN DAVIS: Yeah, let’s talk about that.
BRENT NEIMAN: One would be retaliation. If you put tariffs on imports from the rest of the world, that might reduce your imports relative to, let’s say, your exports, all else equal. But if there are restrictions placed abroad on your exports to them, well, that’s a countervailing factor.
STEVEN DAVIS: Okay, and that can happen. It often has happened historically. Hasn’t happened that much this time, except perhaps in terms of China’s reaction.
BRENT NEIMAN: Yeah, China — and for instance, soybeans would be like a natural example to look at. But you’re right, I think it’s happened to a lesser extent than we expected.
Another change — which again has not happened this time around, but that would play into this — is typically economists, in the most standard simple models, would say the direct effect of tariffs: an import tariff should be an appreciation or at least upward pressure on the value of your currency. That would also push exports down. That also, this time around, hasn’t happened.
STEVEN DAVIS: That’s an issue we’ve talked about in previous episodes of this podcast. I’ll put links in there for that. And there’s some deep waters in that one. So I think we’re going to set that one aside for this episode, and interested viewers can go to another episode. But let me just try a different angle.
BRENT NEIMAN: Well, let me actually — real quick — the last thing I’ll say, in part just because it also ties very clearly into recent work I’ve done, is I think given the fact that most standard economic theory would say the effect of tariffs on trade deficits — not necessarily on trade, but on trade deficits — shouldn’t be so massive. You need a truly massive shock in order to really expect much movement.
STEVEN DAVIS: So we’ll get to how massive this one was.
BRENT NEIMAN: I think it wasn’t as massive as a lot of your viewers have in mind.
Bilateral vs. Overall Trade Deficits
STEVEN DAVIS: Okay, so we’re going to drill into that. You have a recent paper on that with Geeta Gopinath, professor at Harvard and another former colleague of ours at Chicago Booth, so we will definitely get into that. But before we do, I want to just ask you about one other thing on the deficit side, which is President Trump often dwells on bilateral trade deficits. Thus far, we’ve been talking about the overall deficit for the United States vis-à-vis other countries.
What do you think about his focus on bilateral trade deficits? And I should just say — I think this is a fair characterization — the way he thinks about it, if another country sells more to us than we buy from them, we’re disadvantaged, perhaps even deliberately so by nefarious intentions or policies by our trading partner. So what’s your view about that?
BRENT NEIMAN: Yeah, I’m glad that you brought us back to that because I think that’s an important and incredibly faulty view — that the existence of a bilateral imbalance in trade is in any way on its own evidence of any sort of unfairness or even a relationship that’s disadvantageous.
There are reasonable reasons to focus on the multilateral, the overall trade deficit with the world. We could talk about those. But I think especially for the many dozens of countries that have been hit hard by these reciprocal tariffs that are explicitly aiming to close bilateral deficits, I think that’s a terrible policy goal. And so anything you do to try to achieve that goal is likely to have negative effects.
The simplest way I explain it to students, I quote Bob Solow — the Nobel Prize-winning MIT economist — who had this great quip. He said, “I have a chronic deficit with my barber, who doesn’t buy a darn thing from me.” Because of course, the barber didn’t take Solow’s MIT economics courses. And there’s nothing about bilateral imbalance when you and I go to the grocery store or the local dry cleaners that means the grocer or the dry cleaner is ripping us off, and certainly nothing that says we should stop buying their goods until they start buying ours.
STEVEN DAVIS: Right. Okay, so I’m on the same page as you here, as are almost every professional economist. But let me just point out — it could be the case that if another country unfairly restricts the imports of American goods to their markets, that that would affect the bilateral trade deficit. It’s possible that the bilateral trade deficit could be, and probably often is, affected by policy decisions made in the United States and abroad. That I think is pretty clear.
Your point though is, okay, that’s true, but that doesn’t mean a bilateral trade deficit or surplus — for that matter, in and of itself — is a sign of any unfairness or disadvantage. In fact, as your barbershop example illustrates, we benefit by buying things that we don’t produce very well ourselves — like haircuts in the case of Solow, and probably you and me too. And we also benefit when we sell things we’re pretty good at to others. And that’s just as true when you’re looking across countries as it is when you’re looking across persons.
BRENT NEIMAN: Absolutely. And I’m not in any way suggesting that there’s no unfairness in the world, just suggesting that if you want to target that unfairness, looking around for it purely by using bilateral deficits — or even at all by using bilateral deficits as the key signal, the key evidence — is likely to lead you astray.
The Liberation Day Tariffs
STEVEN DAVIS: Yes, and just to remind our listeners in case they’ve forgotten, the Liberation Day tariffs — Trump’s big speech with his chart and everything — those tariff rates were explicitly grounded in a formula that depended on these bilateral trade deficits.
BRENT NEIMAN: Exactly.
STEVEN DAVIS: So I’m making explicit what was implicit in your statement that the whole intellectual underpinning for those Liberation Day tariffs didn’t make much sense — in your view and mine.
BRENT NEIMAN: If there’s country A and country B on that placard that the president held up with the reciprocal tariff rates, and A’s tariff rate was twice as big as B, it wasn’t because the White House put out evidence on what A did that was more unfair — barriers or anything like that. It was purely the numerical assessment that imports less exports was twice as big in A than in B. And that to me is very much faulty logic.
How Big Are the Current Tariffs?
STEVEN DAVIS: Okay. So let’s get to the related issues. How big are the current tariffs in 2025 on average — or as of now, whichever you prefer? How do they compare to tariffs historically? And also, how big are they relative to the headline numbers that we read all about — which is where your study with Geeta Gopinath, I think, really made some progress on our understanding?
Measuring the Actual vs. Statutory Tariff Rate
BRENT NEIMAN: Yeah, let me actually go in reverse order if I could. I think it’ll be easier to explain. You might think it’s really easy to figure out what’s the sort of headline statutory announced tariff rate. Certainly our importers need to know it. They need to know what they’re paying taxes on.
In fact, in previous episodes, I studied the price response of imports, import prices to the tariffs that were put on in ’18 and ’19 in the first Trump administration. This wasn’t a very challenging thing to do. The tariffs were basically on China, plus some industries like aluminum and steel or solar panels. They were announced and then they kind of stuck there. They were defined in a way that was more concordant with the definitions of products that firms knew, you know, what they fit into or not. This time around, it’s been much, much more challenging.
STEVEN DAVIS: Okay.
BRENT NEIMAN: The announcements are made about tariffs going up and down and things change day to day, week to week, certainly well within a month. Sometimes that announcement is translated or reported in the Federal Register in a way that still has ambiguities. Sometimes Customs and Border Patrol later clarifies the way to implement the Federal Register’s interpretation of the announcements. And then lastly, there are exemptions and carve-outs, some of which actually are even sort of firm-specific, and so you couldn’t even really get from the aggregate data or quickly identify it.
So it’s a challenge to even know, you know, what are we talking about? Are these announced tariffs big or small, what are they? And so to try to solve that problem, what we did — and it’s admittedly an imperfect technique, but I think it’s a helpful and informative approach — we looked across imports into the United States by country and by product. And for a given month, for a given exporter, for a given product, there are a lot of different observations of the FOB value, the essentially value of the imports.
STEVEN DAVIS: FOB, meaning when it arrives at the dock?
BRENT NEIMAN: Excluding, you know, insurance and freight and stuff like that.
STEVEN DAVIS: Okay.
BRENT NEIMAN: And then we look at the actual tariff revenue that was paid or collected by the government associated with those import value. And there are a number of different observations of this even within a given month, because you see it depending on where the shipments enter the United States. Maybe something comes in through the San Jose port or through Virginia. Similarly, there’s different tariff programs or import programs that you might, as an importer, declare the shipment to be under.
A nice example there would be some imports might be declared to be USMCA compliant, others not. USMCA is, of course, the free trade agreement between Canada, Mexico, and the US that replaced NAFTA. And finally, you might even see different sort of values depending on where the shipment was unloaded. So there’s a lot of these observations. And we look across them, and we say, what’s the biggest? If there’s 2 observations of 0% paid and 3 observations of 10% paid —
STEVEN DAVIS: And this is within a particular product category in a certain month?
BRENT NEIMAN: Within a month, within a product category, a narrow one.
STEVEN DAVIS: Narrow one, okay.
BRENT NEIMAN: And from a given exporter.
STEVEN DAVIS: Okay.
BRENT NEIMAN: Let’s say there’s 40 such observations and they range from 0 to 10%, let’s say. We’re going to grab 10% and say that’s the statutory rate.
STEVEN DAVIS: Right.
BRENT NEIMAN: Why do we say that? Well, it’s reassuring that someone is paying that, and these aren’t small — it’s not shipment-level data, so that means that someone really paid that. So okay, we’re going to call that the headline rate. But then we also will measure the average rate, which would aggregate the 10% but with the 5% and the 3% and the 0% by weights. And that measures what we’ll call —
STEVEN DAVIS: I presume the average here is calculated taking into account the shares of the goods value that paid the 3%, the 0%, the 10%.
BRENT NEIMAN: Exactly. Okay, exactly.
STEVEN DAVIS: So that’s what we call the actual tariff, the actual rate for that product category — narrow one — in that month. And so this is kind of how you cut through all the complexity of announcements, implementations, exemptions at the product level, at the country level, based on a whole bunch of stuff. It’s just —
BRENT NEIMAN: It’s imperfect, but it’s a way to let the data speak, right? We are not parsing any news announcements made by USTR. We’re not looking at the Federal Register.
STEVEN DAVIS: What’s actually happening on the ground at the port, so to speak.
The Gap Between Statutory and Actual Tariff Rates
BRENT NEIMAN: And when you look at those series, there are two things that really strike me. One is there’s a huge gap between them. We assess the statutory rate now in November — that is the latest data, and our paper is frozen in time as of September. But I should note on my web page every month that automatically updates, we’re through November.
STEVEN DAVIS: Okay.
BRENT NEIMAN: Because we didn’t update today. And the statutory rate is on the order of 27%, 28%.
STEVEN DAVIS: Okay.
BRENT NEIMAN: Compared to the actual rate of more like 13%. So it’s even less than half. That’s the first point I would make. And happy to talk about gaps in a second, what constitutes that.
But the second relates to what you opened this conversation with, which is you said, you know, are you surprised that there’s no movement? And I kind of said, well, first, you know, we probably don’t want to get too worried about, you know, is it 1%, 2% one way or the other? But the other thing is we show that the actual tariff rate started 2025 very, very low and grew very, very slowly during 2025 up to the 13% rate that we see as of November. For many months in 2025, even when the statutory rate was way up there in the 20s or higher, the actual rate was 5, 6%. And so from that perspective, since the 2025 trade data integrates over all the months in 2025, there just haven’t also been that many months where there’s been very large tariffs that have actually applied to the data covering goods coming in.
STEVEN DAVIS: Okay, so summarizing, the average effective tariff rate in 2025, maybe what, 8%?
BRENT NEIMAN: That seems reasonable. So it started at zero, 2, and it went to 13.
STEVEN DAVIS: So we had maybe a 6 percentage point increase in the average tariff rate on imported goods in ’25 to 2024. I’m just trying to do some simple arithmetic here.
BRENT NEIMAN: Just a reasonable back of the envelope.
STEVEN DAVIS: So 6 percentage points and a little bit more arithmetic — imports are what, 12, 15% of US GDP?
BRENT NEIMAN: So 15 if you include services, 14 really, and 11 for goods.
STEVEN DAVIS: Let’s make the arithmetic a little easier.
BRENT NEIMAN: But the 11, to be clear, actually, the 6 percentage point change that you’re describing actually only applies to the 11.
STEVEN DAVIS: Oh, okay.
BRENT NEIMAN: Because there’s not hitting services.
Estimating the Inflation Impact
STEVEN DAVIS: It’s good. So now we’re at some overall impact. We’re getting — there’s another important point here, which is why I’m running through the arithmetic. You do the multiplication. 11% of 6 percentage points is around 1, around 0.6 of a percentage point.
BRENT NEIMAN: Yeah.
STEVEN DAVIS: So this would be just in a very crude way, ignoring spillover effects to the prices of other goods and services, this kind of gives you a direct impact on the inflation rate of half a percentage point, maybe a little more.
BRENT NEIMAN: A little more.
STEVEN DAVIS: And now all of a sudden this clears up another, I think, confusion, misperception. Where’s all the high inflation? Well, there is inflation. People have done these studies. If you look very narrowly at the goods and services that were heavily affected by tariffs, but the overall impact on the US economy, the direct impact at least, would be well short of 1 percentage point.
BRENT NEIMAN: I mean, I don’t know if I want to say “well short of,” but I like your back-of-the-envelope very much. The way I do it is —
STEVEN DAVIS: I’m just trying to go — not doing anything complicated.
BRENT NEIMAN: Let’s pick even simpler numbers. I think ballpark, if a viewer wants to truly ballpark it, if there’s 10% of consumption is hit, you know, 10% of GDP is hit, because that’s approximately 11%, and there’s full pass-through, then you get pretty close to 1%. And that’s, I think, pretty close. So the latest estimates that I find compelling come from Alberto Cavallo’s work. It’s hard to measure this stuff properly, but a few months ago — I haven’t looked at literally what today it says — but a few months ago he was at 0.7, you know, 7/10 of a percentage point. I’ll bet it’s closer to 1 at this point, and that seems about right.
STEVEN DAVIS: Okay. Now, by the way, I want to hasten to add, just because the overall impact of tariffs on the price level is modest, as we just talked about, doesn’t mean the economic costs of the tariffs are modest. That’s a separate question, because the economic costs depend in part on these exemptions, the uncertainty that’s been associated with Trump’s trade policy. The undermining of clarity and commitment in US trade relationships — we’ll come to these things. But I just want to make a clear marker here: small effects on the price level doesn’t mean small effects on everything else.
BRENT NEIMAN: So yes, I completely agree with that, including, as I hope we get back to later, even non-economic costs associated with this stuff. But the last thing is, I’m not totally sure I want to grant that 1 percentage point is small, including given we don’t know that it stops there. For example, there’s a question: does this actual tariff rate that I said remains well below the statutory rate even today, does it continue? It’s got a whole way longer to go if it’s going to catch up.
And I do think there’s a bit of a misperception on what economists mean by, you know, kind of an important implication for inflation. I mean, if inflation goes up 1 percentage point and you price the repercussions, let’s say, in capital markets of a Fed hike aiming to undo that 1% increase, I mean, you could easily get to some big numbers. So if listeners have in mind this is a 10 percentage point thing, fine. But economists never, I don’t think, envisioned a direct price level increase anything like that.
STEVEN DAVIS: Exactly. I’m just trying to take the straw man off the table, which is sometimes put out there by advocates of the tariffs that say, “Where’s all the inflation? There hasn’t been that much inflation yet, and because the effect of tariffs aren’t that big.”
BRENT NEIMAN: Now, you also might never see it. In principle, you know, the price level, the aggregate inflation rate, responds to, you know, for instance, Federal Reserve policy. Sure, it’s really the relative price that we think tariffs would affect.
STEVEN DAVIS: That point’s well taken. I’ve made that point another time.
BRENT NEIMAN: I know you know this, of course.
Pass-Through at the Border vs. Final Consumer Prices
STEVEN DAVIS: Glossed over it here, of course. So you hinted at the work of Alberto Cavallo, and he’s at Harvard, and I want to come back to his work for a minute, because — and correct me if I’m wrong here, because you’ve updated your paper and I may miss the latest updates — but as I understand your paper with Geeta Gopinath, you are mainly focused on measuring the size of tariffs, as we just discussed, the extent to which they are passed through at the border.
BRENT NEIMAN: Right.
STEVEN DAVIS: And then there’s the question of, well, okay, they get passed through at the border, but how are they divided up between the importers, the people they distribute them to, the businesses that use the products, and the final consumers?
BRENT NEIMAN: That’s right.
STEVEN DAVIS: And if I put that — so again, correct me if I’m wrong, but my understanding, if I put your work with Geeta together with the study by Cavallo and others, what we conclude is that, at least as of 2025 on average, most of the tariff effects that had been passed through at the border were showing up in the form of firms with smaller margins or higher input costs. And only a fraction of it was showing up to the final consumers. Is that right? I got it basically right.
BRENT NEIMAN: This episode or the 2018-2019 episode are you asking?
STEVEN DAVIS: I asked about the — we can talk about both, but I was asking about 2025.
BRENT NEIMAN: I see. So you are right that Geeta and my paper really focuses on the at-the-border prices, the prices that the importers pay. And we really don’t weigh in on how that should be broken up between, let’s say, a wholesaler or an OEM or whoever this importer is versus the consumers where, if this is passed along —
Who Bears the Cost? Pass-Through at the Border
STEVEN DAVIS: So to be concrete, is Walmart taking smaller margins or are they passing along to consumers? That’s correct.
BRENT NEIMAN: But my read— so, Alberto is a co-author of mine, a friend of mine. I did not do this recent work of his.
STEVEN DAVIS: Okay.
BRENT NEIMAN: But I did read it before coming to talk to you today. And I think his number is, as of today, 43% of it has been passed along to retail prices.
STEVEN DAVIS: So that’s his most recent data towards the end of 2025.
BRENT NEIMAN: Correct. So, Geeta and I worked together with Alberto and someone named Jenny Tang in 2018-19 to study that episode. And I think Alberto characterizes this episode as exhibiting faster pass-through, given what happens at the border, to retail.
STEVEN DAVIS: OK. So just—
BRENT NEIMAN: But that’s his results. I don’t want to—
STEVEN DAVIS: I understand. But just to finish this thread of the discussion, one seems implication of that is that even if US tariffs were frozen in stone today, it’s likely that we’ll probably see some continuation of the pass-through to final goods consumers going forward, because it’s unlikely that producers are going to accept permanent reductions in their margins.
Measuring Tariff Pass-Through: The Evidence
BRENT NEIMAN: Okay, I agree. The one caveat— so maybe I can take it in a couple steps. So the first question is, what happened at the border? And again, our paper will focus on— and I should say we’ve got good company at this point. So researchers at the New York Fed, a study out of researchers at the Kiel Institute, the CBO, in fact, when it released its annual budget report, all these analyses came up with pass-through rates of tariffs to import prices inclusive of tariffs that are ostensibly close to 1, sort of from 90% up.
STEVEN DAVIS: OK, so that’s a key thing, because I just want to stop you here.
BRENT NEIMAN: The first step is there.
STEVEN DAVIS: That says it’s Americans— wholesalers, original equipment manufacturers, final goods consumers— they’re paying it. So that’s— I’m underscoring this just because it’s contrary to the line you hear from the Trump administration so often.
BRENT NEIMAN: Yeah, and maybe, Steve, we should— just because a lot of people do— I think it’s important to state the scenario, what it would look like if the Trump administration’s line, or anyone’s line, that exporters or foreign countries are paying these tariffs, what would that look like? Because it is not incoherent. It is certainly theoretically possible that this could have been the case. And one of the reasons I studied this empirically, in fact, was just to see if there was any evidence that’s happening.
But you can imagine if a 10% tariff is put on by the United States, an exporter says, “Well, look, the US is a really important customer of mine. The last thing I want is them to switch to some other country or source in a different way, maybe domestically. To preserve my market share, I’m going to reduce my export price by 10%.” Well, that would be a world where the US importer would say, “Okay, I’m paying 10% less.”
STEVEN DAVIS: It’s possible. How do you know that didn’t happen?
BRENT NEIMAN: Instead, what we mostly see when we look at the exporter’s prices in dollars to the US exclusive of tariffs— so ignoring the tariffs— we by and large see that they don’t change. You can think of it as if they were exporting for $20 before the 10% tariff, they’re more or less exporting for $20, maybe closer to $19.50 before the tariff now. And so you add that 10% tariff back on, and importers are paying either $22 or a little less.
STEVEN DAVIS: So you actually see on individual transactions or product-level transactions?
BRENT NEIMAN: We don’t, yes.
STEVEN DAVIS: So where are you— how are you concluding with confidence that most of the— that 95% of the tariff is passed through at the border?
BRENT NEIMAN: I think I don’t want to overstate confidence in a very well-estimated number like 95% per se. The way we could back in 2018-19 when we had time and access— which I don’t think is as easy to get now— to the microdata, like you said, shipment by shipment.
STEVEN DAVIS: Okay.
BRENT NEIMAN: So inference now from us came from a variety of sources where you put them all together, and all of the measures that we see, all the different methods that we tried— and we sort of looked at 3 different things— all give you pretty darn high numbers. And the way at least I think of it is there’s just no evidence that pass-through is low. There’s no evidence—
STEVEN DAVIS: But give me your best— what are you doing? I presume somehow you are following prices at a very detailed level, with and without the tariff.
BRENT NEIMAN: I’ll give you the 2 things that we do that’s simplest to understand.
STEVEN DAVIS: Okay.
BRENT NEIMAN: And then the 3rd, which is more complicated, but which is the thing that gave us our baseline benchmark number of 0.94. If you told me, are you super confident that it’s 0.94 versus 0.97 or 0.9? No, but am I quite confident that the pass-through numbers are very high? Yes.
Three Methods for Estimating Pass-Through
STEVEN DAVIS: Okay.
BRENT NEIMAN: We do 3 things. The first is the BLS, the Bureau of Labor Statistics, creates an import price index, and the key challenge that they’re trying to solve for is the same as for domestic CPI. They want to measure the exact same good transacted from month to month, because otherwise, if you just look at t-shirts, it could be that the quality of the shirt goes up massively. And so the price increase is reflecting better quality as opposed to a quality-adjusted price increase. Same issue with CPI.
The BLS offers these data aggregated to countries and also to industries that look like 2 or 3 or 4-digit SIC industries. Loosely, you can think of heavy-duty trucks as kind of an example. And let’s start with the country case. There’s not that many observations that the BLS offers. They don’t tell you about the prices of imports, quality adjusted, from every country in the world. They give us about a dozen countries. But these countries range, in terms of the tariff that they face now from the United States, from 5 or 6%— which would apply to countries like Europe— all the way up to about 30%, which would be China. And in here, there’s Japan somewhere in the middle, there’s Canada, there’s Mexico, there’s lots of countries.
And our paper basically just shows— I mean, this is one of these results where you don’t need anything fancy. You just look with your eyes and there’s just no evidence whatsoever that any of these import prices in dollar terms are moving meaningfully. They’re all going up or down by 1, 2, maybe 3% relative to trend.
STEVEN DAVIS: From 2024 to 2025, so to speak, over a 12-month horizon ending— and I just want to emphasize, you said this before, these are measurement exercises that the BLS just does routinely. This is not something new they rolled out. Correct. So they’ve been working on this for years, decades, and it doesn’t mean it’s perfect, but this is a stable, reliable statistical exercise that’s been ongoing for a long time.
BRENT NEIMAN: Absolutely. So we do that for countries, we do it for industries, we see high pass-through.
STEVEN DAVIS: Okay.
BRENT NEIMAN: Where I get the 0.94— and we do something fancier and probably more serious, and it’s what I would call our baseline measure, but I’m not claiming it’s perfection— is we use microdata that is publicly offered. So we have the code out there, anyone can replicate it and check it out themselves, but offered by Census. What you can do is look at changes in unit values. You know what country a shipment is coming from.
I should say what a unit value is— it’s a value of a shipment. Let’s say we import from Thailand a box that cost $30 to import. For most goods, there’s a somewhat reliable measure of the units or the quantities in that box. This doesn’t always work, but let’s say it’s sofas. That’s probably an HS code, a product code where the unit is count, and that’s pretty reliable. And so it’s not as perfect as the BLS holding fixed goods thing, but if you see there’s 2 sofas in that $30 container, well then we’re going to call the unit price $15 per sofa. And again, to your point, this is what economists have worked on and done things like this forever. Using that, we can regress essentially how did the prices— or compare price changes in those unit values— to tariffs that would be applied.
The Bottom Line: Americans Are Paying
STEVEN DAVIS: Okay, so I think we got far enough into the weeds. That was helpful. No, but I wanted to do that because I think it’s important for people to understand the analytical underpinnings of these claims so they can assess them for yourselves. But I’m going to summarize Brent as being pretty highly confident that the tariff pass-through rate at the border is pretty high, probably north of 90%.
BRENT NEIMAN: Yes, I’m good with that.
STEVEN DAVIS: And it follows from that claim that Americans in some form, businesses or consumers, are paying most of the tariff hikes.
BRENT NEIMAN: Yes.
STEVEN DAVIS: Under the second Trump administration. Yes. That’s kind of the bottom line.
BRENT NEIMAN: That’s the bottom line. I do think it’s important— some of the coverage— I mean, I agree entirely with your characterization. I think the statement that the price incidence of tariffs, or who’s paying more because of this tariff, it’s by and large, almost entirely Americans, whether it’s firms or individuals.
STEVEN DAVIS: Okay.
BRENT NEIMAN: Sometimes that’s mistakenly interpreted as there’s no consequence of that for the rest of the world. And to be clear, that’s not the right way to think of it either. Just because the prices went up only for the consumer, I mean, ask the seller. They’re unhappy because they’re selling less.
STEVEN DAVIS: They’re selling less. Yes, exactly.
The Cost of Uncertainty and Policy Volatility
STEVEN DAVIS: Okay, let’s move a little bit back now to a few more conceptual things, and we touched on these very briefly earlier, but aside from the direct effects of the tariffs themselves, how do you think about the economic consequences of the volatility you referenced earlier, the uncertainty about what tariffs will be? And let’s take that, and then we can move into something I know you want to talk about, which is— let’s just call it the lack of commitment in trade policy as it’s being conducted under the second Trump administration.
BRENT NEIMAN: Yeah, I mean, look, you’re the expert on the effects of uncertainty, but it doesn’t— you don’t have to get so deep into academic expertise to understand that when policymaking is this volatile, when you genuinely don’t know what the tariff rate that’s going to apply to some of your main supplies— let’s say next month, 2 months, 3 months— it’s got to be incredibly hard to plan.
In fact, it might be part of the answer to your question, why haven’t we seen more changes in response to these relative price movements? Part of it may be that as costly as it could be in the wake of this kind of uncertainty, a natural and oftentimes optimal response is just to wait, do nothing, and see. And so I think that the form in which this trade policy was deployed— even if you had the exact same trade policy, but you deployed it in a well-telegraphed, kind of one-time way with a proper time allowed to adjust— my guess is it would have been a lot less disruptive, less costly, and better.
The Uncertainty Effect on Investment Decisions
STEVEN DAVIS: Let me put it in concrete terms. So one of the things the Trump administration has sought to do with various economic policies, including tariffs, is encourage foreign companies to invest in US factories. So let’s think about that. And there, it’s easy to understand why that’s an appealing goal, so I’ll just take it that there are some positive aspects of that. Take it as given.
And I think it’s also clear that if you are thinking about, say, building a new chip fab or automobile manufacturing plant in the United States, that looks less attractive if you think you’re going to have to pay high tariffs on certain intermediate inputs that you will use to produce the chips or the cars. So that’s kind of the direct effect of tariffs on intermediate inputs that is working contrary to the stated intention of encouraging more factories in the United States.
But, and here’s where the uncertainty kicks in, the uncertainty about what you have to pay for those intermediate inputs in the future is another deterrent to investing today and gets to your wait-and-see point, both directly, because maybe I only have to pay a 5% tariff on my intermediate inputs, depending on the president’s desires, maybe have to pay 25%. And that has a huge impact on the desirability of building that factory in the United States.
And going back to something you talked about earlier, there’s uncertainty about how other countries will react to US tariffs. So the uncertainty is biting both directly, in my little example, on my desire, my willingness to invest in a new US factory. But also indirectly, because it creates a lot more uncertainty about, well, what if I want to export some chips or export some automobiles from this new factory that I’m considering to build in the United States?
So these uncertainty effects, at least in principle, especially in the short run, can be more powerful than the direct effects of tariffs that we’ve been dwelling on in most of this conversation. Do you agree with that assessment?
BRENT NEIMAN: I don’t know how to quantify when you say more important, but it’s plausible to me. I certainly could see that. But the qualitative points you’re making, I completely agree with.
The way I think of it is — let’s say you went back to the tariff regime of a year ago or 2 years ago. It would have been a huge mistake to try to manufacture certain things in the United States. In some cases, for some products, there were moments in time during 2025 when that’s flipped, when it is so prohibitive to import, for instance, some things that were produced in China — certain chips, for example — that it would be prohibitive to produce outside the United States. And you could imagine it causing it. And then within a week or two, in fact, you saw an exemption for those goods. So now you’re back in the case where it would have been a huge mistake had you relocated things.
In that context, when you’re producing a fab or making some investment that’s long-lived to the tune of years or decades, it does not surprise me that you’re not going to see much responsiveness right away. Of course, business decisions — household decisions are going to wait and see.
Intermediate Inputs and the Complexity of Modern Trade
The other element I liked that you brought up is how imports are important for producers, both for domestic goods but also for US exports. One thing I think is a lot of times lost is sometimes people say, “These are the highest tariffs we’ve faced in X years,” and X is huge — maybe it’s 100 years, something like that. But 100 years ago, even at the same tariff rate, tariffs, in my judgment, wouldn’t have been as impactful in terms of what they mean for economic activity and distorting economic activity, in part, really for two things.
One is trade just wasn’t as big of a deal back then. The 11%, 14% numbers that we were playing around with on goods and services shares of GDP were much, much smaller 100 years ago. But two, trade was much more commonly, largely final goods back then. Now, most trade is intermediate inputs broadly defined, if you include capital goods and things like that.
And one of the implications of this is I think there’s also a lot more uncertainty on what exactly the implications of these tariffs might be. There are certain supply chains that run back and forth. The famous one is autos between the United States and Mexico, multiple times, in ways that policymakers, I think, would have a very hard time internalizing, thinking through, planning around.
Because of this, we don’t know exactly where there’s reliance on imported inputs that might have been hit by really large tariffs or not. I think these kinds of issues make also the analysis of tariffs and the evaluation of where it’s biting much more complex, much more complicated. The final thing you can imagine thinking about would be that exercise on asking what was passed through. In an intermediate input context, it’s really hard to be able to condition on when a producer is, and to what extent, reliant on inputs that have been hit by tariffs. And I think you’re likely to miss some of the pass-through in those instances.
STEVEN DAVIS: So in the US-Mexico border case, we’ve got goods being passed back and forth across the border, maybe multiple times in the production process. We have something like steel, which has high tariffs under the Trump administration, that are parts of components in cars. So how do we deal with those? Do we deal with it on their percentage of value? How do you calculate that for something that’s in the process of production?
So there’s just a whole bunch of complications — that are introduced because so much of international trade involves now these intermediate inputs rather than final goods. And that’s a complication for the border authorities trying to assign tariff duties, but it’s a complication for businesses making plans.
BRENT NEIMAN: You and I study this stuff typically in a simplified economic environment, in a theoretical model or something, but in the real world, it is my judgment that the messiness of whatever policy you’re trying to implement is a really important consideration. And all the uncertainties that you’re describing, compounded by the fact that there’s on, there’s off, there’s lack of commitment, there’s lack of rules, it’s fast — I think increases the likelihood that there’s even more costs associated with all this.
STEVEN DAVIS: I’m glad you made that point, because I’m going to make the same point a different way. When people think about the uncertainty over tariffs, they tend to think, “Well, okay, it’d be nice to know whether the tariff rate’s going to be 10% or 20%. How costly is that?” But as your remarks are illustrating, the uncertainty around something like trade policy isn’t just one-dimensional. What will the tariff rate be? It’s all these other things about how it will actually be applied on the ground, figuring out what it means in practice — which is one of the reasons you went to the approach you took with Geeta in the first place, is because you can’t just read the tariff tables and say, “Ah, I know the answer.” It’s just too complicated.
The actual implementation is critical here, and there’s a whole set of complexities that arise from that. So I think that’s often lost, not just in the abstract discussions that economists engage in, but even in the newspaper discussions.
IEEPA and the Legal Framework Behind the Tariffs
BRENT NEIMAN: And even in the speed of the policy process itself. So we haven’t talked about it yet, but most of the Liberation Day tariffs were enacted under the authority of IEEPA — the International Emergency Economic Powers Act — which is a 1977 act that had been used as the basis for things like financial sanctions, but not tariffs before. And the Supreme Court’s going to rule on this soon, and we can get to it in a second if it’s of interest.
But one repercussion of the use of this is it eliminates a number of — I think “safeguards” is the wrong way to phrase it, but sort of deliberate process constraints on speed that other authorities, with which you’d use to justify or enact sanctions, require. So things like public consultations or the production of a report reflecting an investigation — these are the kinds of things that Section 232 or 301, more classic tariffs, require. I think there’s greater scope for even policy errors, even taking as given the objective function of the policymakers, when you bypass all of this and you instead can change policy so quickly.
STEVEN DAVIS: Yes, so let me just elaborate on that because I think it’s a key point. President Trump and his administration have appealed to the IEEPA legislation as the basis for most of its tariffs on a value-weighted basis. And judging from his rhetoric and his actions, President Trump thinks that authority gives him the right to set tariffs however he wishes, with short notice or no notice, irrespective of what US treaty obligations the United States has entered into in previous trade agreements, irrespective of any consultations with Congress or anybody else. And so much of the wild tariff gyrations we’ve seen flow out of that logic.
And as you pointed out, that case is before the Supreme Court now. Any week now we could get a ruling on that — maybe tomorrow. We’ll see. And it’ll be a big deal.
But I think your view and my view — and I’ll state my view, you can tell me whether you agree — is that in addition to all the uncertainty and the bad process that this approach leads to in tariffs, it also really undermines the ability of the United States as a whole to make any commitments to trade policy, both the actual trade policy outcomes, but any commitment to a reasoned process for setting trade policy.
So in that sense, I see this IEEPA legislation, this IEEPA case before the Supreme Court, as really critical in narrow economic terms, as we tried to explain, but also in terms of the relationship between the executive branch and the Congress, the relationship between the United States and its trading partners and allies. I just see this as an enormously consequential case on economic and non-economic grounds, as I’ve tried to suggest. And I really want to get your perspective on this as well.
BRENT NEIMAN: Yeah, I agree fully, and I think it’s of underappreciated or underrated importance. A lot of people dismiss the importance of it on the basis that they say — and there are some statements from the administration supportive of the idea — that other authorities would be called upon, and if the administration wants to have high tariff rates, even without IEEPA, they could get it.
What I think that misses is exactly as you characterized: these IEEPA tariffs have allowed the administration to change things at a very rapid clip, and oftentimes for reasons that are not even associated with the emergency. In other words, they have a very broad set of issues that they could say are causing them to either immediately raise or immediately lower tariffs on issue X to industry Y.
And I think what that does — think about trade agreements that we’ve heard about in our lifetime. They are not quick wins. They take a long time. And part of the reason it’s so hard and part of the reason it’s so beneficial is that the political economy of trade negotiations everywhere, including in the United States, is difficult. There are winners and losers from reductions of impediments to trade. Countries have to typically give something up to get something. It’s hard.
And why go through all that trouble if you think that that hard-earned agreement, that involved some costs — including political costs — to you could immediately be undone or overweighted by a pretty spontaneous imposition of an IEEPA tariff? I mean, think about one of the initial waves of the IEEPA tariffs — it was on Canada, hitting Canadian lumber, for example, where the associated emergency was the fentanyl crisis, which itself is a very real and tragic and serious thing, but it’s hard to connect it to lumber.
If an administration is given that kind of leeway, it’s pretty close to saying, “Look, you can just turn tariffs on and off however you want.” And in that world, why would you invest in the hard work required to achieve difficult but ideally mutually beneficial agreements?
So the bottom line is commitment technologies are useful. They’re helpful, and something the United States, I think, has spent decades building up — these commitment devices that can bring us and our partners, and sometimes even our adversaries, to see it as beneficial to negotiate and make hard choices that the United States ultimately says is in our benefit. And I worry we’re getting rid of that commitment device.
Tariffs as Leverage: The Case for Trump’s Approach
STEVEN DAVIS: I agree with that, but I want to take another tack and try to put myself in the shoes of an advocate of Trump’s approach to trade policy, who says, “Well, the president really needs this ability to move tariffs around as leverage in his negotiations with partners so we can get a better deal.” So what’s your response to that?
The Long-Term Costs of Eroding Trade Commitments
BRENT NEIMAN: I mean, there’s always a time consistency sort of issue where if we’ve put structures into place that we think commit ourselves and we think commit other countries to do something, there could always be short-term gains from deviating from those agreements. And you have to weigh that against the long-term losses of having eroded that framework in the first place.
You know, business relationships — you could always steal from your partner tomorrow, but you’re going to give up any ability to do business with them on into the future. And that usually is viewed as a winning long-term strategy in the interest of long-lived institutions or countries.
I’m not saying that there’s never scenarios where I could imagine walking away from agreements or trying to find ways to put significant pressure on partners to the US benefit. But if we’re doing something like that, we better make sure that the juice is worth the squeeze. And I worry in this case that I don’t see changes, concessions, whatever gains it is that a supporter of these policies might argue for. I certainly don’t see them in a way that I would assess to be worth the longer-term erosion of commitment devices and institutions that we see.
And I’ll even go further — in an ex ante sense, I can’t even imagine what it would be for many, many of the dozens of small developing countries with whom we hit with huge tariffs. Things are much more complicated, of course, in many dimensions with countries like China or major advanced economy partners. But it’s hard for me to imagine that kind of logic holding up when we’re talking about a lot of developing emerging market economies where economically, it’s hard to imagine what kind of gains anyway you would get. We’re not going to get deals with Zambia that I think are going to move the needle.
The Fragility of Deals Without Commitment
STEVEN DAVIS: Well, and then two last points on this, and then we’ll wrap up, which is: what does a deal mean if there isn’t any commitment? So these deals are potentially quite ephemeral. It remains to be seen how much countries that have made concessions to the Trump administration almost at gunpoint will actually follow through.
And also got to think about, well, what about the president who comes after Trump? Maybe have very different policy priorities. Do we want that president to start using trade policy as a tool to pursue a very different set of policy objectives than the ones that President Trump pursues and that presumably appeal to many of his supporters?
So it’s important to think through the longer-term consequences of the Trumpian approach to trade policy, not just in the economic arena narrowly construed, but in the political process, in the political arena and the foreign relations arena more broadly down the road. And it’s not a very pleasant picture when you think about what the world would look like when the United States cannot, will not make commitments and agreements that mean anything to other countries.
And I’ll just end here by quoting George Shultz, who had a lot of experience in the foreign policy and the economic policy arena. One of his favorite expressions was, “Trust is the coin of the realm.” Well, there’s not a lot of trust in US trade policy at the moment, in my judgment.
Diplomatic Capital and the Broader Stakes
BRENT NEIMAN: Conversations, and certainly my experience in DC bears this out — diplomatic conversations, it’s not as if you agree to a very narrow set, extremely narrow, this element of trade policy. High-level conversations between countries cover all issues of interest to the countries.
And even in economic policy, not even getting more broadly into financial policy, we’re asking countries and we, I think, benefit from reaching agreement or finding ways to work with countries on — in the future, it’s likely to include things like AI regulation. In the current, it includes things like illicit financing issues, monitoring, efforts to counter the financing of terrorism, pandemic preparedness, et cetera.
And people aren’t going to say, “Well, we’ll work with you on that,” and think about trade policy completely separately. There’s a certain amount of diplomatic capital, and we need to make sure we’re using it effectively, and I worry that we are not.
STEVEN DAVIS: Okay, well put, and we will end it on that note. Thank you so much, Brent. It’s been great to see you again, great to have you here at Stanford and Hoover, and—
BRENT NEIMAN: This was fun.
STEVEN DAVIS: —thanks for joining us.
BRENT NEIMAN: Thanks, Steve. It’s nice to talk to you.
STEVEN DAVIS: Likewise. Take care.
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