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This edition was written by Sarah Ahmad, Andrew Rosin, Jack Spira, and David Wessel.
In 2025, U.S. importers faced rising costs not only from higher tariffs, but also from increasingly complex trade regulations. Spencer Bowdle and Fariha Kamal of the Federal Reserve Board estimate that new documentation and reporting requirements imposed implicit costs equivalent to a 1.4% to 2.5% tariff on imports—amounting to $39 billion to $71 billion annually for the manufacturing sector. Even without new tariffs, the added compliance burden would have doubled average effective tariff rates. The industries facing the largest dollar increase in compliance costs—computer and electronic products, transportation equipment, and chemicals—account for a third of manufacturing shipments and employment.
Drawing on evidence about use cases and adoption, Martin Neil Baily of Brookings and coauthors argue that generative artificial intelligence (genAI) exhibits many traits of two types of innovations—general-purpose technologies (GPTs) and inventions of methods of invention (IMIs)—that historically have raised both the level and long-run growth rate of productivity. GPTs, such as the internal combustion engine, drive sustained productivity growth through (1) widespread adoption, (2) complementary innovation in products, processes, and organizational models, and (3) continued improvement of the technology itself. IMIs, such as the compound microscope, accelerate the pace of innovation by enhancing observation (as with the microscope), analysis, communication, or organization. The authors find early signs that genAI could spur productivity growth through similar channels. The magnitude and trajectory of that growth, however, will depend on the extent of its adoption and on how rapidly the economy expands its energy capacity and adjusts its organizational structures.
Firms differ widely in how much they pay, even for similar workers—and transitions across firms are a key driver of long-run earnings growth. Itzik Fadlon and Vedant Vohra of the University of California, San Diego, and Briana Sullivan of the Census Bureau find a significant racial disparity in how career setbacks—defined as moves to lower-paying firms—affect earnings. For every $1 in earnings lost by a White worker following a career setback, Black workers’ earnings decrease by an additional $0.24. The authors show that this disparity is not driven by differential pay within firms but instead arises because Black workers tend to transition into firms with lower average pay than white workers. The authors argue that tighter liquidity constraints facing Black workers help explain this pattern. They find that Black workers are twice as likely as white workers to make early withdrawals from retirement accounts following a downward job move, suggesting they may be less able to wait for better offers.
“I can think of a couple of... reasons that may limit the impact [of tariffs] on consumers. The first is that the slowing down of the rollout of many tariffs, with multiple postponements for continuing negotiations, may be giving U.S. importers time to substitute finished or intermediate goods to domestic suppliers or foreign sources subject to lower tariffs," says Christopher Waller, Governor of the Federal Reserve Board.
"A second reason is that, faced with the slowing economy that I have described and the likelihood that tariffs will be weighing on consumer spending, foreign producers and importers may be finding ways to hold the line on prices to maintain their presence on store shelves and hold on to customers. In fact, slowing demand increases competition for all firms, and consumers may benefit.
Finally, despite all of the discussion of supply chain disruptions, tariff effects on supply chains are completely different than what happened during the pandemic. In the pandemic, supply chains were actually broken: Many workers were not working, factories were idle, and waves of COVID were hitting at asynchronous times across the globe. In contrast, in the case of the higher tariffs, we know exactly where things are being produced, and nothing is broken—firms are simply arguing about prices and who will eat the tariffs. Once that gets resolved, goods will flow naturally across the globe but potentially using different routes.”
About the Hutchins Center on Fiscal and Monetary Policy at Brookings
