Tariffs Fail to Crush Imports Amid AI-Driven Boom

Despite rising tariffs in 2025 to levels not seen since the Great Depression, imports continued to increase. Researchers at the Federal Reserve Bank of Minneapolis sought to understand this anomaly by developing an open-economy New Keynesian model that accounted for tariff heterogeneity, inventories, and shocks to investment driven by the AI boom.

The model accurately predicted the untargeted paths of imports, output, and inflation, allowing researchers to decompose the effects of tariffs and the investment boom. Without the investment boom, imports would have fallen by 10 percent and economic activity would have contracted by 0.7 percent. The researchers found that tariffs on consumption and intermediates acted like supply shocks, while those on capital goods had a demand-side impact.

The concentration of tariff increases on consumption goods and the relative sparing of capital goods limited the damage to output but amplified the inflationary impulse. This suggests that policymakers can mitigate the effects of tariffs by targeting specific industries or sectors.