The Fed’s Tariff Study: Who Got Cheaper Chinese Imports?

The Federal Reserve has published a new study that complicates one of the central promises of tariff policy. The paper finds that the first Trump administration’s 2018–19 tariffs pushed down the prices of targeted Chinese goods in countries outside the United States, even though the research literature found little corresponding price adjustment in the American market. By 2021, the estimated price of tariffed Chinese products in third-country markets was 4.4% lower relative to comparable non-tariffed products. The largest and most persistent reductions appeared in emerging markets; the effect in the European Union was weaker and short-lived. The finding does not prove that today’s tariffs are lowering prices, nor that American consumers escaped higher costs. It shows that trade barriers can redirect the burden and benefits of competition across borders, creating winners among importers and consumers in some markets while increasing pressure on producers competing with cheaper redirected goods.

The new evidence is about where the goods went

The paper, “Trade Deflection: The Spillover Effects of U.S. Tariffs on Import Prices in Bystander Countries,” was posted by the Federal Reserve Board on 10 November 2026 as International Finance Discussion Paper 1449. Its authors are Sofie Grouws, Giulia Lo Forte, Sharon Jeon and Justin Pierce. The paper is preliminary research, not a policy statement or a formal position adopted by the Federal Reserve Board. Its publication is new; the historical tariff episode it studies is not. The authors examine the 2018–19 U.S. tariffs on Chinese products and the subsequent period through 2021.

The central distinction is between a tariff’s effect on the market that imposes it and its effect on other destinations. A tariff can make selling into the United States more expensive. A Chinese exporter may respond by reducing its U.S. shipments, accepting a lower margin elsewhere, changing the mix of products it sells, or finding new customers in markets that have not imposed the same barrier. That process is known as trade deflection. The tariff does not make the goods disappear. It changes the routes, prices and competitive pressure associated with them.

The scale of the redirection was substantial. The Federal Reserve paper reports that China supplied more than 22% of U.S. imports at the end of 2017; by December 2024, the share had fallen to 13%. Over the same 2017–24 period, China’s total global exports rose by more than 50%. Those aggregate figures do not prove that every lost U.S. sale was redirected to a particular country, but they show why looking only at bilateral U.S.–China trade misses a large part of the adjustment.

What the researchers measured

The authors assembled six-digit Harmonized System import data from the UN Comtrade database for 69 importing economies over 2017–21. The sample excludes the United States and China because the question is what happened in third-country markets. It includes 13 advanced economies, among them Canada, Australia, the United Kingdom and the European Union, as well as 56 emerging markets.

The data problem is important. Customs statistics often report quantities in changing units: one year a product may be recorded in kilograms, another in pieces or another unit. Dividing declared trade value by an inconsistent quantity can create apparent price jumps that are measurement artefacts. The authors developed an algorithm to identify consistent quantity units over time, then compared the price movement of tariff-targeted Chinese products with non-targeted products while controlling for common product, origin, destination and time effects. Their main design is a difference-in-differences analysis, with additional event-study and alternative-specification checks.

The headline estimate is a 4.4% relative decline by 2021 in the unit values of tariffed Chinese products in third-country markets, compared with non-tariffed products in the same markets. The authors interpret this as evidence that Chinese exporters lowered prices as they redirected shipments away from the United States. It is an average unit-value measure, not a record of every individual transaction price. A change in the mix of models or varieties inside a product category can also move an average unit value. The researchers test this concern using more detailed European Union product data and report similar results, but the limitation remains relevant when translating the estimate into a household’s shopping basket.

The results vary sharply by destination. In emerging markets, the relative decline reached 4.8% by the end of the sample and continued to accumulate through 2021. For advanced economies, the estimated decline was 2.2% and began to fade in 2021. The European Union showed an even more restrained pattern: the paper finds that the price effect was short-lived and that the EU had no measured relative price change in 2021. ASEAN countries experienced the largest response, with relative unit-price declines of around 12% in 2020 and 2021.

That is the first useful correction to the political debate. The evidence does not support a simple story in which every rich economy was flooded with permanently cheaper Chinese goods because Washington raised tariffs. The strongest price effects were found in emerging markets, while the EU effect was weaker and temporary. Nor does the paper establish that the same pattern will repeat under the much broader and different tariff measures introduced in 2025 and 2026. The authors explicitly caution that recent measures cover more countries and leave fewer genuine bystander markets.

Why geopolitics changed the price result

The paper’s most distinctive finding is that geography alone does not explain where price reductions were largest. The authors test product characteristics, market concentration, the importance of the U.S. market to Chinese exporters before tariffs, and the importing country’s geopolitical distance from China.

The results suggest that prices fell more for goods that China had previously sold heavily into the United States. That is consistent with exporters having a stronger incentive to find alternative buyers for products whose access to their largest high-income market had become more expensive. Price reductions were also larger in import markets concentrated among fewer supplier countries, where competition and substitution patterns can make redirected shipments more consequential.

But the researchers find that geopolitical alignment is especially important. Countries geopolitically closer to China experienced larger price declines, and this relationship appears within both advanced economies and emerging markets. The paper measures political distance using countries’ voting positions in the United Nations General Assembly. This is evidence of an association between geopolitical alignment and the distribution of trade-price effects, not proof that Beijing selected destinations as a political reward or instructed companies to sell at a loss. The authors identify a pattern; they do not establish a state-directed pricing scheme.

For Western policymakers, that distinction matters. A government may be able to impose a tariff at its border, but it cannot assume that the resulting trade flows will follow purely commercial logic. Supplier relationships, diplomatic alignment, market concentration and the ability to substitute one source for another can influence which countries absorb redirected products. That is relevant to the United States, Canada, the UK and the EU as they assess exposure to Chinese supply chains and the resilience of domestic producers.

The American consumer did not receive the same price adjustment

The paper contrasts its third-country result with earlier research on U.S. imports. It replicates the finding that the 2018–19 tariffs did not produce a corresponding reduction in the prices U.S. importers paid for Chinese goods. In the authors’ account, the U.S. market did not receive the same export-price adjustment observed elsewhere. The tariff therefore operated differently for American buyers than for buyers in some other destinations.

That does not mean the whole tariff was necessarily passed through to every American consumer in the same proportion. Importers, wholesalers, retailers, foreign suppliers and domestic competitors can share the burden in different ways. Product exemptions, substitution, margins, contracts and exchange rates all matter. The paper’s result is narrower: it finds no comparable downward adjustment in Chinese import unit values in the United States, while targeted products became relatively cheaper in other markets.

The distinction is central to the political claims made by Donald Trump (opens in a new tab) and the White House (opens in a new tab) about using tariffs to strengthen domestic production. A tariff may protect a domestic producer from a foreign competitor, but it can also raise the cost of an imported input used by American factories. Whether the policy creates more domestic capacity depends on investment, workforce, infrastructure and the availability of alternative suppliers—not simply on the tariff rate. The paper does not evaluate the full U.S. employment or welfare effects, and it should not be used as if it did.

Who gains and who pays

The immediate beneficiaries in the study’s third-country markets are importers and buyers able to purchase targeted Chinese products at lower relative unit values. Manufacturers using those products as inputs may also benefit if the lower prices reduce their costs and the savings are passed through. Chinese exporters may preserve sales volumes by accepting lower prices, although the paper does not calculate their profits. Domestic producers competing against the redirected goods can face lower selling prices, reduced market share or pressure to cut costs. Workers in those industries may bear some of the adjustment if firms lose revenue or relocate production. In the United States, the tariff-protected producer may gain room to compete, while importers and downstream businesses may face higher costs. Consumers ultimately pay only to the extent that those costs are passed into retail prices; the paper does not estimate that final household incidence.

The indicators that should decide whether the policy works

The relevant welfare test is not the number of tariff lines announced. It is whether the measures change import prices, domestic producer prices, employment, output and household purchasing power in a measurable way. The first indicator to watch is global consumer price inflation (opens in a new tab), but the paper’s unit-value estimates should not be mistaken for a direct estimate of the overall consumer price index. The transmission mechanism runs from redirected trade to import prices, then through firms’ input costs and retail margins into consumer prices. The cost-of-living pressure driver (opens in a new tab) captures the broader household-budget channel, while household purchasing power is the relevant longer-run question: do lower prices translate into more goods and services that wages can buy?

For producers, the counter-indicator is the price and market share of domestic firms exposed to the redirected products. For workers, it is employment and real earnings in the sectors that compete with those imports. For the United States, an assessment should compare tariff revenue and domestic investment with the cost of imported intermediate goods and any loss of export access caused by retaliation. A lower import price in a third country can be a consumer gain and a producer threat at the same time. An aggregate inflation number alone will not reveal who captured the benefit.

What happens next

The next test is whether the 2025–26 tariff regime produces a similar pattern. It is not safe to extrapolate the 2018–21 estimate mechanically: the newer measures cover a wider set of trading partners, the geopolitical environment has changed, and the supply chains affected are different. Researchers will need updated product-level data, consistent quantity units and enough time after implementation to separate tariff effects from changes in demand, shipping costs, exchange rates and Chinese domestic prices.

A second test is whether governments in advanced economies can distinguish genuine import competition from trans-shipment or relabelling designed to evade tariffs. The Federal Reserve authors identify fraudulent origin relabelling as a possible measurement and enforcement concern, but do not claim to have quantified it. Customs enforcement, rules of origin and transparent trade statistics will matter if governments want to protect domestic producers without taxing legitimate inputs unnecessarily.

The new study therefore changes the question more than it settles the argument. Tariffs can reduce direct imports from a target country while redirecting goods to other markets, where prices may fall and competition may intensify. The strongest observed price gains in this study accrued outside the advanced economies that dominated much of the public debate. For U.S. and European policymakers, the lesson is to measure the full route of trade adjustment—and the prices, jobs and productive capacity it changes—rather than treating a bilateral import decline as proof that the economic cost has disappeared.

Sources

• Federal Reserve Board — Trade Deflection: The Spillover Effects of U.S. Tariffs on Import Prices in Bystander Countries, IFDP 1449, 10 November 2026 (opens in a new tab)
• Federal Reserve Board — IFDP 1449 abstract and research disclaimer, 10 November 2026 (opens in a new tab)
• U.S. Trade Representative — USTR Issues Tariffs on Chinese Products, 15 June 2018 (opens in a new tab)
• Federal Register — Section 301 action on Chinese technology-transfer and intellectual-property practices, 20 June 2018 (opens in a new tab)
• UN Comtrade — International merchandise trade statistics database (opens in a new tab)
• European Central Bank — Macroeconomic projections, September 2025 (opens in a new tab)