The impacts of tariffs, then and now

Allison Ross:

Decades before he became president, Donald Trump was a big fan of tariffs. He believed global trade was tilted against the U.S., and tariffs could even things out.

For instance, in 1988 a company from Japan - a country Trump had long criticized for "taking advantage" of the U.S. and its military protection - outbid him at auction for a piano used in the movie "Casablanca."

After the auction, Trump told a reporter, quote: "I believe very strongly in tariffs. … America is being ripped off. … We have to tariff, we have to protect this country." End quote.

So, it's not shocking that Trump enacted new tariffs in 2018 during his first term and again in 2025 during his second term. And he's used the same rhetoric each time about tariffs being a tool to right wrongs and address unfair trading practices.

But even though the same president enacted them, the 2018 and 2025 tariff policies are very different. Boston Fed research director Egon Zakrajsek noted one key distinction in the 2025 tariffs.

Egon Zakrajsek:

I think partly it's just the sheer size and the breadth of the tariffs.

Allison Ross:

The 2018 tariffs were generally targeted at specific goods, like steel or aluminum, and applied to a smaller number of countries, mostly China. Meanwhile, the 2025 tariffs covered everything imported from every country targeted. Here's Boston Fed senior economist Omar Barbiero.

Omar Barbiero:

By spring 2025, the measures touched a much wider set of trading partners, basically the whole world, and most of these tariffs were applied at the country level. So, no matter what you produce, all the goods from this country will be tariffed this much.

Allison Ross:

The U.S. Supreme Court addressed that policy in a February 2026 ruling. The court found the president does not have the authority to impose tariffs of unlimited amount, duration, and scope - including country-wide tariffs.

After the ruling, President Trump tried to enact a temporary global tariff, but that was disputed. Meanwhile, some importers have since worked to get refunds for the tariffs they've already paid, though the Court never addressed exactly how refunds should be given.

It's all made the future of Trump's tariff policy murkier. But there's plenty to learn from what already happened. Companies have already passed on costs from the invalidated 2025 tariffs to customers. And some of the new tariffs remain in force.

Overall, different results have emerged from the 2018 and 2025 tariff regimes.

For instance, productivity for U.S. companies spiked in 2025. We also saw far more "exposure" in the 2025 tariffs. In other words, many more companies were potentially affected.

And measures show the "emotional reaction" to the tariffs was much greater in 2025.

Egon Zakrajsek:

The size of the so-called shock was significantly, significantly larger.

Allison Ross:

I'm Allison Ross, and this is Six Hundred Atlantic, a podcast produced by the Federal Reserve Bank of Boston.

A paper co-authored by Barbiero compares the impacts of the 2018 and 2025 tariffs on public companies. It was presented at the Boston Fed's 69th Economic Conference, and we'll talk about some of its findings in this episode.

Some material in this episode is taken directly from the conference. But we also relied heavily on post-conference interviews with Barbiero, Zakrajsek, and George Matouk, a local CEO from Massachusetts.

Matouk runs a manufacturer by the same name which is based in Fall River and sells high-end linens, bedding, and bath products. The company has been around since 1929, so it was operating during both the 2018 and 2025 tariffs.

For Matouk, there is no comparison: The more targeted tariffs of 2018 didn't affect him or his suppliers. The 2025 tariffs were a different story, and Matouk is blunt in his characterization.

George Matouk:

It really did feel like an attack on American business.

Allison Ross:

Matouk believes the 2025 policy was misdirected and arbitrary. To illustrate the point, he speaks of his company's dealings with the tiny European country of Liechtenstein, where the population barely cracks 40,000.

That's less than half the size of Fall River. It's also where Matouk gets finished down products from a regional supplier.

The 2025 tariffs on Liechtenstein were initially announced at 39% of the value of the imported good. It then dropped to 15%, in line with tariffs on the rest of the European Union.

The Trump administration hailed that deal for securing hundreds of billions of investment in the U.S. and giving American companies new access to foreign markets.

To Matouk, the deal just raised his costs for reasons he can't fathom.

George Matouk:

Why are there such punitive additional tariffs placed on products like that that are not available here, that are for U.S. consumers, coming from a country that the U.S. clearly has no strategic or economic beef with?

Allison Ross:

Tariffs are, in essence, taxes placed on imported products or services. And, like a tax, the U.S. receives them as revenue.

Omar Barbiero:

It can be used to protect certain industries, it can be used for geopolitical reasons, it can be used to gain leverage in negotiations. They can be used for many different reasons, but they're like a toll, basically, on a bridge.

Allison Ross:

Barbiero notes that, technically, the tariff is paid at the border by the importer - the domestic company buying the good or service. But it's not as clear who is ultimately absorbing the cost.

Omar Barbiero:

Who really bears the cost can vary because companies can react to a tariff by renegotiating the contract. Sometimes the cost is shared between foreign suppliers and the U.S. firms who buy this. And that's basically the aim of much research in economics, to understand where the real incidence of the tariff is, and who bears it, and in what share.

Allison Ross:

Zakrajsek said one thing is certain.

Egon Zakrajsek:

We know the tariffs are being passed on. There's two choices that are going on. Who is paying for tariffs? U.S. importers are paying almost all of the tariffs that are being imposed. Then the only question is, do these U.S. importers, how much of it do they pass on to you and me in terms of final prices, and how much of it do they absorb in their profit margins? Those are the only two things that they can do. And here the story is still, you know, murky.

Allison Ross:

In 2018, the U.S. raised tariffs in stages, starting in 2019. Several hikes occurred between February and September that year, and the aim was to protect specific American producers and hurt specific foreign competitor(s).

Omar Barbiero:

They started with specific products, like solar panels, washing machines, steel, and aluminum, and then they expanded gradually, heavily, to goods from China, basically. Not all goods from China, but most goods from China. The latest waves were mostly targeting Chinese goods, rather than specific industries.

Major partners all retaliated tit for tat. So, Europe retaliated to the fact that there were steel and aluminum tariffs imposed on them by the exactly same amount, in terms of economic costs. It was a standard tit-for-tat trade war.

Allison Ross:

Those tariff polices were renewed during the Biden Administration. But then Trump ramped up tariffs in 2025. And one key difference is that by then, global trade had become even more interconnected.

Here's what we mean: Supply chains these days are less about Country A making a finished product and trading it with Country B. Finished products aren't shipped around as much anymore. Instead, components are assembled in a multi-step supply chain that can cross numerous borders.

Barbiero says that complicates efforts to direct tariff policy at a particular nation or industry to protect or lure back the domestic manufacturing. You may hit your target, but that's probably not all you'll hit.

Omar Barbiero:

Tariffs can hit you even if you don't import directly. So, maybe you say, "Ah, tariffs are not going to impact me at all because all my suppliers are domestic." But you don't know where your domestic suppliers are getting their materials from. Some of them are probably buying them from abroad. And so the protection of a certain industry is not automatic. Even if tariffs raise prices for foreign competitors, domestic firms may still face higher costs through imported inputs and supply chain linkages.

Allison Ross:

This indirect impact falls under the category of tariff "exposure" that Barbiero tracks in the Boston Fed paper. And he concludes that many more companies were exposed in 2025 than in 2018.

Obviously, you're "exposed" if a tariff hits your imported goods directly. Or if you're a company that exports goods that are hit with punitive tariffs from a retaliating country.

Exposure can also be a positive thing for a company. For example, it could be in an industry with a lot of foreign competitors who are being tariffed, and the company benefits because its costs are now relatively cheaper.

Omar Barbiero:

We have different measures of exposures. In general, all of these exposures show that they're much broader and larger in 2025 because all goods have been impacted, and the magnitude of these tariffs because of that are just 10 times larger, basically.

So, before there were only some companies that were impacted and only the ones that were particularly, for example, trading with China. In 2025, the story is completely different.

Allison Ross:

Not only was exposure much higher, so were the tariffs themselves.

Omar Barbiero:

To give an example, the average tariff rate increases faced by firms in our samples are about 2.5 percentage points in 2018, so that's the average tariff rate in 2018. And the average tariff rate in 2025 was 12 percentage points.

Allison Ross:

Zakrajsek says one interesting development is that firms responded to the more sweeping 2025 tariffs by becoming notably more productive. This didn't happen in 2018 and 2019, and he says that may be because artificial intelligence and automation technologies that can improve productivity weren't as prevalent.

That greater productivity is helping offset the greater tariff costs of 2025.

Egon Zakrajsek:

This is allowing firms, even those who import a lot, who face increased costs of their imported inputs, to preserve their profit margins and not to pass on those costs by generating cost savings elsewhere.

We think that potentially accounts for the fact that, given the level of tariffs and how broad-based those tariffs were, that the impact on the overall price level on inflation has been sort of less than what we initially estimated, and the profit margins are still quite, quite preserved.

Allison Ross:

Matouk says his company is always looking to be more productive, but there are limits to how much it can offset tariff-driven cost increases.

He says the continuously evolving U.S. tariff policy has created a climate of uncertainty that's tough to do business in.

For instance, contracts with certain customers often include 12-month pricing guarantees. If tariffs raise his company's costs in the meantime, Matouk must absorb it and figure out how to proceed.

Matouk said one way his company responded to the uncertainty was by limiting capital expenditures.

George Matouk:

We throttled back on capital expenses, buying machines, and expanding our plants, and things like that during 2025 to offset the costs of the tariffs. So that's a pretty clear tradeoff which doesn't benefit the U.S. economy. That helped us keep things afloat last year, until we could actually raise prices in 2026. Which we did.

Allison Ross:

Matouk added that he must prepare for the worst when figuring out new pricing. That just means he assumes the tariffs will be, quote, "maximally high."

By doing that, Matouk avoids the risk of setting prices too low to effectively cover tariff costs. But there's also a risk the company will overestimate tariff costs and set prices too high.

George Matouk:

And maybe because the price is higher than it needs to be, they're actually buying less from us. And maybe if they're buying less from us, they're actually finding that they could buy something that replaces what they would have bought from Matouk from a company who's doing all their manufacturing in some low-labor-cost country like India or China.

Allison Ross:

George Matouk's strong disagreement with the 2025 tariff policy lines up with the stronger "emotional reaction" firms had to the latest tariffs.

Barbiero said their analysis relied on measuring negative tone and mentions of tariffs in company earning calls. They also counted references to risk and uncertainty.

Omar Barbiero:

So, what we see is that in 2025, firms' negative and risk language is more sensitive to the tariffs. They sound more worried and uncertain than they did in 2018.

So, why might it be stronger in 2025? I think it was a bigger and broader shock as explained before.

There's also a bit of a post-pandemic mindset probably right now for firms. They're all coming out with fresh memory of supply shocks, and they may react faster to anything that threatens their planning now.

Allison Ross:

Zakrajsek said recent higher inflation may also make people more sensitive to how tariffs could impact prices. That sensitivity wasn't as acute in 2018.

Egon Zakrajsek:

Consumers and firms were potentially more willing in some sense to accept some of the price increases. They were not quite as price-sensitive since they were used to having a long period of very stable, very low inflation, in fact below-target inflation.

Allison Ross:

The pricing impacts of the tariffs were seen more quickly in 2025, but Barbiero says more time is needed to see if they do bring manufacturing back to U.S. That didn't happen in 2018, and we don't know yet if it will happen this time.

Omar Barbiero:

I think that if we bring manufacturing back, it's going to be a slow process, that it's going to take years. So, we have to keep updating this paper and keep our eyes open and be ready to measure those effects. But it's not going to take just one year, in my opinion, if it happens.

Allison Ross:

You can find links to the recordings, papers, and other material from the Boston Fed's 69th Economic Conference in the show notes or at bostonfed.org under "news and events." Subscribe to our mailing list and find interviews and seasons at bostonfed.org/six-hundred-atlantic. And we would greatly appreciate if you would rate, review, share, and subscribe to Six Hundred Atlantic on your favorite podcast app.

This episode was written by Jay Lindsay and edited by Amanda Blanco, Nick Brancaleone, Omar Barbiero, Egon Zakrajsek, and Darcy Saas. Chief consultant was Omar Barbiero. Graphics and web design by Michael Konstansky and Michael Sorokach. Production consultants are Nick Brancaleone and Michael Sorokach. Recording and engineering by Steve Osemwenkhae. Project managers are Allison Ross, Nick Brancaleone, and Peter Davis.

I'm Allison Ross, thanks for listening to Six Hundred Atlantic.