Trade Wars on the Income Statement: The Effects of Tariffs on Firms 
The United States has enacted two rounds of major import tariff increases in recent years. While the 2018 episode was limited to a small number of industries and countries of origin, the 2025 increases were far larger and broader. Yet the consequences of these policies for domestic firms remain poorly understood. Companies absorb and transmit tariff shocks through several channels: They import exposed goods directly, source inputs from domestic suppliers that themselves import, and sell into foreign markets subject to tariff retaliation. Most of the existing literature, however, focuses mainly on the direct import effects. This paper addresses this gap by constructing firm-level measures of tariff exposure across all three channels—direct import costs, upstream supplier costs, and export retaliation—and linking them to the financial outcomes of US public companies, which account for a disproportionate share of domestic production and trade exposure and are subject to mandatory financial disclosure.
Key Findings
- The 2025 tariff episode represents a dramatically larger shock than 2018: The average firm-level tariff rate increased about 12 percentage points in 2025 versus 2.5 percentage points in 2018, and direct import exposure was roughly 10 times higher.
- Larger firms showed higher exposure across all three channels, reflecting their greater involvement in international trade. However, supplier exposure affected the broadest set of firms, including many with little direct import activity.
- Export retaliation exposure was concentrated in manufacturing, mining, and agriculture; import and supplier cost exposure was more evenly spread across industries.
- In 2018, exposure to all three channels had essentially no measurable effect on firm sales, costs, profit margins, or investment.
- In 2025, firms exposed through direct imports or supplier costs experienced declines in both sales and cost of goods sold of similar magnitude.
- Firm-level exposure measures are validated using stock market reactions to tariff announcements and sentiment in earnings call transcripts. This validation exercise confirms that financial markets and firm managers price in tariff-related risk consistent with these measures and their effects.
Implications
The results show that tariff cost shocks tend to pass through into prices and quantities rather than compress firm profit margins, consistent with a model of constant markups in which demand responses cause revenues and variable costs to contract together. In other words, this finding is consistent with cost pass-through that leads to a demand response, which lowers overall firm profit. The stark contrast between the muted 2018 effects and the pronounced 2025 effects underscores that the breadth as well as the scale of a tariff shock determine whether significant economic consequences materialize. For policymakers, these findings imply that evaluating tariff policy solely through their direct effects on firms that are subject to import tariffs may substantially understate the effects of such policies, and that monitoring firm-level supply chain and import exposure is essential to understanding who ultimately bears the cost of trade policy and how large these costs are.
Abstract
We construct firm-level exposure to the 2018 and 2025 US tariffs through own imports, suppliers' imports, and foreign retaliation, and estimate their joint effects using quarterly financial statements. Exposure is widespread and travels down supply chains, reaching firms that import little themselves. In 2025, cost exposure reduced sales and cost of goods sold equally within three quarters, by about 1.2 percent for the average direct importer and 0.5 percent through suppliers. Firms at least partly passed tariffs on to prices and shrank production rather than cutting margins. Retaliation instead compressed gross margins. The 2018 effects are small.