Daily Junction.mobi portalBusiness · October 7, 2025 · Marcus Vale · 5 min
The US average effective tariff rate climbed to its highest level since the 1930s in 2025 under sweeping new duties. Here is what economics actually says about who pays tariffs and what they do to prices, jobs and trade.
Tariffs spent decades as a niche topic for trade economists. In 2025 they became the central story in global economics, as the United States introduced sweeping new duties that pushed its average tariff rate to levels not seen since the protectionist 1930s. Because tariffs sit at the intersection of politics and economics — popular as political symbols, contested as economic policy — understanding what they actually do, as distinct from what they are claimed to do, has rarely mattered more.
The best real-world evidence on modern tariffs comes from the 2018-19 US-China trade war, which economists studied intensively. The consistent finding, across research published by economists at the Federal Reserve, Princeton, Columbia and elsewhere, was that the cost of those tariffs fell almost entirely on US importers and consumers — not, as political framing claimed, on China. Domestic prices of tariffed goods rose by close to the full amount of the tariff, meaning American buyers absorbed the cost. China's exporters largely did not cut their prices to offset the duty.
This matters because it directly contradicts the most common political claim about tariffs: that a foreign country "pays" them. Mechanically, a tariff is a tax collected by the importing country's customs authority from the domestic company bringing goods in. That company then decides how much of the cost to pass on to customers — and in the 2018-19 case, it passed on nearly all of it.
The 2025 tariff measures pushed the US average effective tariff rate to its highest level since the Smoot-Hawley Tariff Act era of the 1930s, according to analysis from the Yale Budget Lab and the Peterson Institute for International Economics. Both bodies estimated the measures would raise consumer prices and reduce economic output relative to a no-tariff baseline, with the price effect functioning as a regressive tax — one that takes a larger share of income from lower-earning households, who spend proportionally more on the imported and import-competing goods most affected.
| Claim about tariffs | What the evidence shows |
|---|---|
| "The foreign country pays" | The domestic importer pays and usually passes cost to consumers |
| "Tariffs create jobs" | They can preserve jobs in protected sectors but raise costs elsewhere |
| "Tariffs are free money for the government" | Revenue is real but offset by higher consumer prices and lost output |
| "Trade partners won't retaliate" | Retaliation is common, often targeting agriculture and politically sensitive exports |
What makes the 2025 environment distinct from the targeted 2018-19 measures is breadth. Rather than tariffs aimed at specific goods from specific countries, the newer approach applied duties far more widely, raising the average rate across a huge range of imports. Economists' central concern with broad tariffs is the input-cost problem: many domestic manufacturers rely on imported components, so a tariff intended to protect one industry raises costs for every downstream industry that uses the affected inputs, undermining the competitiveness the policy was meant to build.
"A tariff on steel might protect steelmakers, but it raises costs for every carmaker, appliance manufacturer and construction firm that buys steel — and those industries employ far more people than steel production does. The protected sector is visible; the cost spread across everyone else is diffuse but larger." — a framing consistent with Peterson Institute analysis of the net employment effects of broad tariffs.
For UK businesses, the direct exposure runs through tariffs on UK exports to tariff-imposing markets, but the larger effect is usually indirect: global trade disruption raises input costs, lengthens and complicates supply chains, and dents business confidence and investment. As an open, trade-dependent economy, the UK tends to be more exposed to these second-order effects than to any single bilateral duty. Businesses importing components should model the risk of higher input costs and longer, more variable lead times, much as they did during the recent supply chain disruptions of 2023-25. For consumers, the mechanism is the same as it was for American buyers in 2018-19: broad tariffs tend to raise the prices of affected goods, and because lower-income households spend a larger share of income on those goods, the effect is regressive.
There is also a distinction worth holding onto between the average effect and the distributional one. In aggregate, economists find broad tariffs reduce economic output modestly relative to a free-trade baseline — the losses to consumers and downstream industries outweigh the gains to protected sectors and the tariff revenue collected. But the effects are not spread evenly. Protected industries and their workers can genuinely benefit, at least in the short term, while consumers and export-facing industries bear diffuse costs. This is precisely why tariffs are politically durable despite their contested economics: the beneficiaries are concentrated and visible, the losers are dispersed and often unaware of what a policy has cost them, and that asymmetry shapes the politics far more than the underlying economic analysis does.
Watch whether the 2025 tariff measures prove durable or are negotiated down through bilateral deals, since tariffs have repeatedly been used as negotiating leverage as much as permanent policy. Watch, too, for retaliation: trading partners typically respond with their own tariffs, often targeting politically sensitive exports such as agriculture, which can escalate a bilateral dispute into a broader trade war that raises costs on all sides. And watch the inflation data in tariff-imposing economies — if the 2018-19 pattern repeats, the price effect of broad 2025 tariffs should show up in consumer prices within months, providing a real-time test of who actually bears the cost. For the underlying economics of how prices respond to these shifts, our explainer on supply and demand covers the mechanism beneath the headlines.
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