Tariffs, Investment, and the Missing Trade Collapse

Abstract

U.S. tariff rates in 2025 rose to levels not seen since the Great Depression, yet imports increased. To account for the missing trade collapse, we develop an open-economy New Keynesian model with tariff heterogeneity, inventories, and shocks to investment that capture the AI-driven boom. The model matches the untargeted paths of imports, output, and inflation; we use it to decompose the effects of tariffs and the investment boom. Absent the investment boom, imports would have fallen by 10 percent and activity would have contracted by 0.7 percent. The effects of tariffs depend on which goods are tariffed: tariffs on consumption and intermediates act like shocks to supply; tariffs on capital goods act like shocks to demand. The concentration of the 2025 tariff increases on consumption goods and the relative sparing of capital goods limited the damage to output while amplifying the inflationary impulse.