Trade

Higher tariffs directly increase the cost of imported goods, raising prices for U.S. consumers and businesses. Because many imports are used as inputs in domestic production, higher tariffs also indirectly raise the costs of goods and services produced domestically using imports. In CBO’s assessment, foreign exporters will absorb 5 percent of the cost of the tariffs, slightly offsetting the import price increases faced by U.S. importers. In the near term, CBO anticipates, U.S. businesses will absorb 30 percent of the import price increases by reducing their profit margins; the remaining 70 percent will be passed through to consumers by raising prices. In addition, U.S. businesses that produce goods that compete with foreign imports will, in CBO’s assessment, increase their prices because of the decline in competition from abroad and the increased demand for tariff-free domestic goods. Those price increases are estimated to fully offset the 30 percent of price increases absorbed by U.S. businesses that import goods, so the net effect of tariffs is to raise U.S. consumer prices by the full portion of the cost of the tariffs borne domestically (95 percent).2 In CBO’s projections, the new tariffs increase the price index for personal consumption expenditures by about 0.8 percentage points at the end of 2026 but have negligible additional effects in 2027 and beyond.

In addition to raising prices and reducing consumption, tariffs are projected to reduce investment and output. Tariffs raise the cost of imported machinery, components, and materials, dampening real investment. Investment by businesses relocating production to the United States will offset some of the adverse effect of higher costs of investment. Reallocation of resources to produce products that were previously imported also lowers efficiency and reduces output. Uncertainty about the future path of trade policy further discourages and delays investment by increasing the risk associated with long-term planning. The elevated uncertainty about trade policy during 2025, which peaked in April, reduces investment through 2027 in CBO’s projections.