Introduction
In 2018, the U.S. imposed tariffs of 10 to 25 percent on roughly $300 billion worth of Chinese imports. Twenty-six goods-producing industries were hit, from semiconductors to machinery to textiles. When companies face cost shocks that big, they have an incentive to get creative with where they book their profits. If a firm can shift income to a subsidiary in Ireland or Singapore, that's one way to recover what the tariff just took. I wanted to know if that's actually what happened.
I tested this using a difference-in-differences design on 1,674 publicly traded U.S. firms from 2015 to 2024, combining SEC filings, Bloomberg financials, and tariff exposure data at the industry level. The idea is simple: compare the effective tax rates of firms in heavily tariffed industries to firms in lightly tariffed industries, before and after 2018.
Tariffs did reduce effective tax rates in exposed industries, and that result holds across 14 different specifications. When I dug deeper though, median regression showed no effect at the typical firm, meaning the result was driven by companies with extreme tax positions. And when I split the sample by whether firms actually had foreign operations, the effect wasn't concentrated there. If this were really profit shifting, the firms with subsidiaries abroad should have been the ones responding, but they weren't.
Tariffs caused something, but it wasn't profit shifting. It looks more like domestic tax base erosion, where tariff costs squeezed profits and made tax rates more volatile for certain firms. That's still a real finding, and it matters for understanding the full cost of tariffs beyond what companies pay at the border.