Tariffs: Estimating the Economic Impact of the 2025 Measures and Proposals

Key Takeaways

• We compute the average effective tariff rate (AETR), which reflects the average tariff paid across all imports. In 2024, importers paid an estimated 2.2 cents in duties for every dollar of goods imported.
• Adding 20 percent tariffs on all Chinese imports and 25 percent tariffs on aluminum and steel — measures already in effect as of March 2025 — increases the AETR to 7.1 percent. Assuming full pass-through, the cost of imports from China rises by approximately 22 cents for every dollar of imported goods.
• Adding 25 percent tariffs on imports from Canada and Mexico that fall outside United States-Mexico-Canada Agreement coverage raises the AETR to 10.4 percent. Mexico’s and Canada’s effective rates rise sharply, to 15.5 percent and 11.9 percent, respectively.
• Applying the 25 percent auto tariffs lifts the AETR to 12.4 percent. Tariff burdens deepen in sectors like transportation equipment, and country-level AETRs reach 30 percent for Mexico and 20 percent for Canada.
• We also find that a 25 percent tariff on all imports from the European Union is added to the previous experiments, the AETR rises to 17.0 percent, the highest in the analysis.

Tariffs are taxes imposed by a government on imported goods, typically calculated as a percentage of the import’s value (known as an ad valorem tax). Governments use tariffs for various purposes, such as raising revenue, protecting domestic industries from foreign competition and influencing international trade patterns. By increasing the cost of imported products, tariffs encourage consumers to shift toward domestically produced goods, thus supporting local businesses and potentially stimulating domestic economic activity.

However, the overall impact of tariffs depends critically on how much of this cost increase is passed along to domestic consumers and producers, a concept known as pass-through. Empirical research has found that the pass-through rate is generally high (often near 100 percent), meaning that the burden of tariffs typically falls on domestic consumers and firms rather than foreign exporters.

The economic significance of tariffs is underscored by recent data from the First Quarter 2025 CFO Survey. More than 30 percent of surveyed firms identify trade and tariffs as their most pressing business concern, up sharply from just 8.3 percent in the previous quarter. This rapid rise highlights firms’ heightened sensitivity to tariff-related disruptions, reflecting widespread concern among business leaders about the potential economic consequences of recent tariff proposals.

In this article, we first provide historical context on U.S. tariff policy to frame the significance of the proposed tariff changes for 2025. Next, we analyze how tariffs impact producers differently across industries due to varying reliance on imported inputs. Finally, we examine the specific implications of recent tariff proposals for all counties in the U.S.

A Bit of History on Tariffs

Historically, the U.S. relied heavily on tariffs — often exceeding 30 percent — as its primary source of federal revenue from the nation’s founding until the introduction of income taxes in 1913.

During this early period, these high tariffs also served to protect emerging industries through a strategy called import substitution. After World War II, international trade agreements like the General Agreement on Tariffs and Trade significantly reduced tariffs globally from an average of around 20 percent in 1947 to below 5 percent following the Uruguay Round in 1994. The globalization movement of the 1980s and 1990s further accelerated tariff reductions, culminating in the establishment of the World Trade Organization (WTO) in 1995. Since then, tariffs among WTO member countries have generally remained around 2.5 percent, reinforcing greater global economic interconnectedness.

The Benefits of Free Trade

Economist Greg Mankiw once noted, “Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.”

Free trade — international commerce with minimal barriers such as tariffs or quotas — promotes economic efficiency, growth and consumer welfare by allowing countries to specialize according to their comparative advantages. By removing trade restrictions, countries benefit from greater access to a wider variety of goods at lower prices, fostering increased competition, increased innovation and improved productivity. In turn, free trade expands markets, encourages the exchange of ideas and technology, and raises living standards by enabling consumers to purchase a broader selection of goods at lower prices.

Although free trade can present challenges for certain industries or workers facing international competition, its overall effect is typically positive, enhancing global economic welfare and fostering international cooperation. Economists often describe free trade as a “win-win” for countries involved.

The Backlash Against Free Trade

The recent backlash against free trade policies largely stems from the economic disruptions known as the “China shock,” a period characterized by rapid growth in imports from China following its entry into the WTO in 2001. The steep decline in manufacturing sector jobs as well as factory closures and economic hardship in many industrial regions of the U.S. have been attributed (in part) to a surge in Chinese imports, as well as “unfair trade practices” such as dumping and subsidization of Chinese production.

Although consumers broadly benefited from lower-priced goods and enhanced variety of goods, the uneven distribution of economic gains and losses fueled public skepticism about globalization. The backlash reflects frustration over insufficient support for displaced workers and the uneven distribution of trade gains, highlighting the need for better policies in addressing and mitigating the adverse effects experienced by specific groups, something often overlooked by proponents of free trade. Developed economies (including the U.S.) have since faced growing pressure to provide greater support and protections for negatively affected industries and communities.

The 2018-19 Tariffs

Between 2018 and 2019, the U.S. imposed tariffs ranging from 10 percent to 25 percent on hundreds of billions of dollars of imports from China. These tariffs significantly disrupted global supply chains, increasing input costs for American businesses and raising consumer prices. The resulting disruptions contributed to a decline in manufacturing employment, heightened investment uncertainty and substantial shifts in global supply chains. Rather than returning production to the U.S., many firms responded by shifting supply chains to other countries, such as Mexico and Vietnam. Consequently, the expected boost in domestic production and employment was modest.

Empirical research indicates that each 10 percent increase in tariffs generally raises producer prices by about 1 percent. Given the increase in the average effective tariff rate during 2018-19, this translated into roughly a 0.3 percent rise in the consumer price index.

Although these tariffs provided some targeted economic benefits by increasing employment in protected sectors, they ultimately produced a net loss to the U.S. economy. A 2019 working paper found that tariffs generated approximately $51 billion (about 0.27 percent of GDP) in losses for consumers and firms reliant on imported goods, though factoring in job gains within protected industries reduced the net loss to about $7.2 billion, or roughly 0.04 percent of GDP.

Additionally, although tariffs boosted employment in specific protected sectors, they resulted in a relative employment decline of about 1.8 percent — equivalent to approximately 220,000 jobs lost in industries heavily dependent on imported inputs — as firms faced higher production costs. When accounting for China’s retaliatory tariffs on U.S. exports and subsequent economic impacts, a 2024 working paper estimates that the total employment reduction rises to approximately 2.6 percent, equivalent to about 320,000 jobs.

Thus, the economic effects of the 2018-19 tariffs — while beneficial for a limited set of domestic industries — resulted in a net negative outcome for the broader economy. These burdens were felt most by U.S. consumers, producers reliant on imported inputs and workers in adversely affected sectors.

The 2025 Tariffs

As of this writing (March 2025), the U.S. has introduced new tariffs, including an additional 20 percent on all imports from China and a 25 percent tariff on aluminum and steel imports from several countries. Further tariffs of 25 percent on goods imported from Canada and Mexico which are not subject to the United States-Mexico-Canada Agreement (USMCA) are scheduled to take effect in April 2025, along with potential tariffs targeting automotive imports and goods imported from the European Union (EU). These recent tariff proposals could have significant implications for industries and regional economies across the U.S., especially once fully implemented.

A natural question arises: How substantial are these tariffs compared to those implemented in previous periods? To assess the impact of the proposed tariffs for 2025 relative to historical tariffs, we use a measure known as the average effective tariff rate (AETR). The AETR aggregates tariffs across various imported goods and countries into a single number. Specifically, it is computed by weighting the tariff imposed on each good imported from each country by that good-country combination’s share of total imports. For example, if the U.S. imports 20 percent of its steel from Mexico (facing a 10 percent tariff) and 80 percent from Canada (facing zero percent tariffs), the AETR for steel would be 2 percent (0.2 × 10% + 0.8 × 0%). Thus, the AETR represents the average tariff cost per dollar of imports, providing a useful metric to evaluate and compare the overall impact of tariff proposals across different scenarios and historical periods.

We construct a benchmark AETR using data from the 2024 U.S. Trade Census. We follow closely the work by Michael Waugh. The Census reports both duties (tariff revenue collected) and imports (the dollar value of goods imported) over time. The AETR is defined as the ratio of duties to imports: AETR = duties / imports.

In our benchmark scenario, the AETR is 2.2 percent. This means that, on average, the government collected 2.2 cents in tariff revenue for every dollar of imported goods. Establishing this baseline allows us to meaningfully assess the potential economic impact of new tariff proposals introduced in 2025 by comparing them to current trade patterns and tariff levels.

Because the Census data provide detailed information at both the product and country level, we observe imports and tariff revenues by country of origin and by product, classified at the six-digit level of the Harmonized Tariff Schedule (HTS). The HTS is an internationally standardized system used to classify traded goods. This granularity allows us to compute effective tariff rates at the level of individual HTS-6 products and trading partners by taking the ratio of duties collected to the value of imports for each good-country pair. This allows us to compute AETR by country of origin.

Scenario 1

The benchmark AETR of 2.2 percent reflects the tariff regime in place at the end of 2024, incorporating WTO most-favored-nation (MFN) tariffs, the China-specific tariffs imposed during the 2018-19 period, and any other tariff measures or exemptions still in effect. In Scenario 1, we simulate the impact of an additional 25 percent tariff on all steel and aluminum imports, as well as a 20 percent tariff on all imports from China.

The increase in the AETR from 2.2 percent to 7.1 percent may seem large, but it is driven by the size and composition of the affected import flows. The 25 percent tariff on steel and aluminum alone raises the AETR to approximately 4.4 percent. Although steel and aluminum represent a relatively narrow range of products, they generate a disproportionately large share of tariff revenue due to both the volume of imports and the uniform 25 percent duty applied.

According to U.S. Customs and Border Protection, Section 232 duties may not be waived due to a free trade agreement. As a result, these tariffs apply even to imports from close trading partners such as Canada and Mexico. This has a pronounced effect on the tariff burden faced by goods imported from these countries. In Scenario 1, Canada’s AETR rises from just 0.1 percent to 1.5 percent, and Mexico’s AETR rises from 0.2 percent to 2.8 percent. These are substantial increases, especially considering that Canada and Mexico account for 12.6 and 15.5 percent of total U.S. imports, respectively. The fact that Section 232 tariffs override free trade agreement provisions magnifies their impact on these key trading partners.

The additional 20 percent tariff on China further raises the AETR to 7.1 percent. While China’s share of U.S. imports has declined from 22.0 percent in 2017 to 13.8 percent in 2024, it remains a major trading partner. The uniform application of the tariff across all Chinese imports — many of which were already subject to duties — results in a substantial increase in tariffs applied to goods coming from China. As a result, China’s own AETR rises dramatically to 33.5 percent under this scenario.

Scenario 2

In Scenario 2, we add 25 percent tariffs on goods imported from Canada and Mexico that are not covered under the USMCA to the tariffs in Scenario 1. As a result, the overall AETR rises from 7.1 percent to 10.4 percent. The impact is especially pronounced for these two countries: Canada’s AETR increases to 11.9 percent (nearly 10 times higher than its benchmark level), while Mexico’s AETR rises to 15.5 percent.

The increase in the overall AETR — just over 3 percentage points — reflects the composition of imports affected by the new tariff. While approximately half of imports from Canada and Mexico fall outside the scope of the USMCA and are therefore subject to the new measure, these goods do not make up the most import-heavy segments of U.S. trade with those countries.

In contrast to Scenario 1, where tariffs targeted high-volume sectors like steel and aluminum, the newly taxed goods in Scenario 2 are more dispersed across sectors with lower aggregate import values. As a result, the effect on the overall AETR is substantial but not as dramatic as the country-specific increases suggest.

Scenario 3

Scenario 3 builds on the previous measures by adding a 25 percent tariff on all motor vehicles imports, regardless of origin. The products targeted by this policy fall primarily under Chapter 87 of the HTS, titled “Vehicles Other Than Railway or Tramway Rolling-Stock, and Parts and Accessories Thereof.” Although this policy targets a single sector, it affects imports from all major trading partners. As a result, the overall AETR increases from 10.4 to 12.4 percent — with especially sharp effects in countries that are closely integrated into U.S. auto supply chains, such as Mexico, Canada and the EU.

The largest relative increase occurs in imports from Mexico and Canada, two countries with deep integration into North American auto supply chains. Mexico’s AETR rises to 20.1 percent (a 30 percent increase relative to the previous scenario), while Canada’s increases to 14.1 percent. This reflects the fact that a substantial share of U.S. auto imports originates from these two countries, and many of those goods fall outside of USMCA exemption provisions.

The most notable new impact, however, is on the EU. Its AETR increases from 2.5 to 4.4 percent — a substantial jump driven by its status as a major exporter of passenger vehicles to the U.S. In contrast, China’s AETR remains unchanged at 33.5 percent, as autos from China were already subject to elevated tariffs under prior scenarios.

Overall, the addition of auto tariffs in Scenario 3 disproportionately affects North American and European trading partners, further raising the effective tariff burden on key sectors of U.S. imports.

Scenario 4

Scenario 4 further expands the scope of tariff measures by introducing a new 25 percent tariff on all imports from the EU. This broad application leads to a substantial rise in the overall AETR, which increases from 12.4 to 17.0 percent.

The sharp increase reflects the scale of trade impacted: The EU accounts for approximately one-fifth of all U.S. imports, making it one of the U.S.’s largest trading partners. As a result, the imposition of a uniform tariff across this volume of trade has a pronounced effect on the aggregate tariff rate. The AETR for EU imports alone surges from 4.4 percent to 29.4 percent in this scenario, one of the steepest increases observed across all trading partners in our simulations.

The calculations […] represent the immediate (“upon-impact”) effects of the proposed tariffs without accounting for subsequent adjustments that importers or consumers might make in response. For example, the significant reduction in China’s share of U.S. imports — from 22.0 percent in 2017 to 13.8 percent in 2024 — demonstrates how businesses adapted to the 2018-19 tariffs by shifting their supply chains away from China toward alternate trade partners. Similar adjustments could also occur under the new tariffs proposed for 2025. However, initially, these estimates highlight the direct and immediate economic disruptions industries and consumers could face, providing a valuable baseline to assess potential impacts before market reactions and supply-chain adjustments take place.

Average Effective Tariff Rates by Industry

By combining detailed data on imports and tariffs at the product-country level, we can estimate the overall tariff impact at the industry level. To achieve this, we aggregate tariffs using each product-country pair’s share of total industry imports as weights. Note that we do not have data on the share of an industry that relies on imports, so this calculation informs us of the impact on industries that have inputs which are most exposed to the proposed tariffs. Industries are classified according to the North American Industry Classification System (NAICS) at the three-digit level. This method provides a clear picture of tariff exposure across different industries, allowing us to compare their vulnerability under various tariff scenarios.

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Although we assume full pass-through of tariffs to domestic prices, the industry’s overall cost increase is estimated to be smaller than the headline 20 percent tariff. This occurs because these industries source a portion of their imports from other countries that remain unaffected by the tariff increase.