Fed Misinterprets ‘Who Covers Tariffs’
“You’re shouldering 90% of President Trump’s tariffs,” Wall Street Journal editorial board stated last week.
It’s quite a bold statement. The issue is pretty clear. You, the consumer, are effectively the ones footing the bill. The WSJ editors referenced a recent study by the New York Fed regarding import prices.
However, the study, conducted by economist Mary Amity, relies on data and methods that have been known to be flawed for years. Ultimately, it’s still unclear who is bearing the customs duties.
The findings from the New York Fed are actually quite limited. The value of tariff units hasn’t changed significantly. Thus, there’s no indication that foreign exporters have lowered their prices to offset tariffs. I find that observation useful, but I can’t quite agree with the WSJ’s interpretations or answers as posed in a recent New York Fed blog post asking, “Who Will Pay U.S. Tariffs in 2025?”
Issues with the Fed’s Analysis
Facts have emerged that challenge 90% of these claims. Approximately half of U.S. imports involve related-party transactions—shipments between companies under shared ownership. The Census Bureau anticipates that related-party imports for consumption will reach 49.5% in 2024. Essentially, about half of the “price” data stems from transactions where the buyer and seller are within the same corporate family, which often reflects a transfer price, rather than a market price determined through negotiations.
In economics, this creates an identification problem. The Fed seeks data to establish who pays the tariffs, but what they track—the tariff bill—does not consistently behave like the variable they need.
Let’s consider the Fed’s method. Customs duties are paid at the border by the importer of record. That’s well-accepted. But the critical question revolves around what unfolds before and after the check is written—Will foreign companies lower pre-tariff prices, or will the burden remain with U.S. importers and those they can press to bear costs?
The approach from the New York Fed defines “foreign payments” via reductions in pre-duty prices for exporters. Unable to access the exporters’ internal pricing, the Fed uses the unit tariff price as a stand-in for the pre-tariff price. The import amount divided by the quantity. They look closely at how unit prices behave after tariff hikes. If unit prices don’t decrease, it’s called the “U.S. incidence.” Conversely, if they do fall, it’s labeled a “foreigner outbreak.” That’s how they operate.
But this method encounters three significant issues, each of which can undermine the claim that “Americans paid 90 percent,” and together, they pretty much dismantle it.
First, consider the foreign companies involved. “U.S. importer” refers to the location, not the nationality. Many importers are U.S.-based subsidiaries of foreign corporations. If tariffs lead to tighter margins for these importing firms, the burden could land on the consolidated profits of the foreign parent company and its shareholders. Fed Director Stephen Milan touched upon this definitional issue, acknowledging that trade data can be misleading. A “U.S. importer” might simply be a U.S. branch of a foreign corporation. The Fed’s analysis doesn’t track who benefits from the importers’ residual profits. Sure, the transaction is logged in the continental U.S., but it doesn’t follow that “Americans are paying.” It indicates that the payment originates from a U.S.-registered entity.
This distinction is vital because it complicates the interpretation of the “American side” bucket from an economic viewpoint—just being a legal remitter doesn’t mean ownership is also American.
When Price Reductions Look Like Tax Evasion
The second point is about regulatory constraints. The Fed’s model anticipates a clear response in export prices. So, if foreign entities are indeed paying a part of the tariff, we should see lower prices charged. But in related-party transactions, the neat price reductions the Fed is searching for could raise the eyebrows of customs officials. This might compromise the tax base as soon as tariffs rise.
This isn’t some conspiracy theory; it’s embedded in the customs valuation regulations governing related-party trade. Although guidance from the WTO states that transaction value is the primary measure, if customs officials have doubts, the importer may need to show that the relationship hasn’t impacted pricing and provide evidence that goods were previously valued similarly.
In plain terms, affiliates aren’t easily “discovered.” Once tariffs increase, the reported costs decrease. This doesn’t raise scrutiny because it operates more like management protocol than traditional negotiation. Thus, unmeasured price reductions in invoices may not conclusively indicate economic burden, but rather compliance with customs regulations.
Accepting this alters our understanding of the Fed’s critical “finding” that unit values haven’t notably decreased. It may suggest that foreign companies were unable to absorb the cost, or it might simply indicate that multinational corporations haven’t dared to change their documentation.
Lastly, there’s the issue of cost transfer. Ignoring ownership and compliance issues, the Fed’s logic doesn’t really hold water in a global context.
Multinational enterprises facing tariffs don’t have to react by lowering their prices. They can explore other strategies. Maintain declared import prices (especially if they’re wary of customs scrutiny), uphold retail prices (due to competition), or offset tariffs by cutting the costs linked to foreign operations: wages, supplier fees, overheads, and quality investments. There’s no need to modify the invoice price in either scenario. These approaches wouldn’t reflect as unit tariff price decreases. However, the import procedures could remain unaltered, shifting the real burden to foreign workers and suppliers.
The Fed doesn’t acknowledge this channel. The reason we view this burden as “U.S.-initiated” is that overseas absorption is defined as lower bill prices. When adjustments are made based on overseas factor payments, “no foreign price response” is recorded and the output concludes “the U.S. pays.”
Another challenge is that tax incentives can counterbalance customs incentives. The U.S. International Trade Commission highlights the pressure to undervalue imports for customs to lower tariffs, while overvaluing the same amount for tax authorities to decrease corporate profits and taxes. Hence, whether or not the invoice amount shifts, it might reveal an optimization of the broader tax and customs landscape rather than clarifying “who pays.”
Misinterpretation of Customs Data Led to Overreaching Conclusions
All things considered, the assertion “Americans paid 90 percent” isn’t just an exaggeration; it lacks precision. The Fed’s inquiry doesn’t clarify who is actually bearing the customs dues.
Real-world data aligns with identification failures. Since Liberation Day, the rate of increase for goods excluding food and energy—categories most sensitive to import price adjustments—has been less than 0.5% per year. So, the claim about 90% consumer incidence doesn’t hold water.
What the Fed can credibly state is narrower and more useful—that reported tariff unit prices haven’t significantly dropped following tariff rate hikes. That’s a fact worth exploring. Unfortunately, the Fed’s economists overlooked that.
Instead, the journal seemed to take the Fed’s numbers at face value, jumping to the 90 percent conclusion and directing it at the public. This is a rhetorical stretch stemming from a misinterpretation of the New York Fed’s tariff data.
This isn’t the first time we’ve flagged this concern. We raised it back in 2019 when similar claims regarding China tariffs surfaced. Seven years later, it appears that the New York Fed economists are still making the same analytical errors.
