Tariff Incidence and Market Power: Evidence from the 2025 US Tariff Shock

Using monthly bilateral trade data for 50 countries at the HTS-10 product level, this paper finds that foreign exporters absorbed 40-50 percent of the tariff increases, consistent with optimal tariff theory. Absorption was highly unequal: dominant exporters absorbed 50–65 percent of the tariff shock through lower export prices, while smaller suppliers passed through most or all of the tariff. The results differ from previous studies finding near-complete pass-through for the 2025 tariff shock because of asymmetrical treatment of suppliers. Other studies evaluate whether the typical trade partner absorbed tariffs—it did not. But given trade is highly skewed, with the top exporting country in a product accounting for nearly 50 percent of trade on average, and the top 1 percent of products accounting for over 50 percent of trade, the focus here is on aggregate effects. Provided the largest suppliers are absorbing tariffs, consumer prices will rise by less. The results are robust to a wide range of controls.