Global Supply Chain Disruptions and Tariffs

Two Shocks, Two Different Channels

Introduction

In this post, I would like to discuss the relationship between supply chain disruptions and tariffs. While it is common to draw a direct link between the two, it is important to distinguish between the nature of global supply chain shocks and the economic transmission of tariff shocks. Both can affect prices and trade flows, but they operate through fundamentally different channels.

Pandemic-era supply chain shocks were characterized by physical constraints—factory closures, port congestion, labor shortages—that disrupted the movement of goods across borders. By contrast, tariffs are deliberate policy actions that work through price signals, altering firms’ incentives and reshaping trade patterns over time (especially when they are intended to be permanent). Both can contribute to inflationary pressure, but they do so via different pathways and with varying temporal dynamics.

This analysis builds on the work I contributed to during my time at the Federal Reserve Bank of New York, where I helped develop the Global Supply Chain Pressure Index (GSCPI) to quantify the scope of supply-side disruptions during the COVID-19 pandemic. Using that framework, I contrast the inflationary footprint of supply shocks and tariffs—examining how they differ in magnitude, persistence, and reach. I conclude with some tentative policy reflections informed by the distinct transmission mechanisms outlined throughout the discussion.

Related blogs and links

A New Barometer of Global Supply Chain Pressures (research paper version)

The Dollar’s Imperial Circle (research paper version)

China June-25CPI Inflation Report

U.S. June-25 CPI Inflation Report

Tariffs as Financial Events and Geoeconomic Fractures

The macroeconomic stabilization of tariff shocks: What is the optimal monetary response? (Bergin and Corsetti, 2023, Journal of Monetary Economics)

Background: The Global Supply Chain Pressure Index (GSCPI)

The GSCPI was developed by the International Research Group at the New York Fed as a way to try to capture the disruptions that emerged during the COVID-19 pandemic. The goal was to quantify the degree of stress in global supply chains by tracking shocks related to factory closures, labor shortages, and lockdown measures. These constraints translated into longer shipping times, delivery delays, and rising input costs across borders.

The index aggregates multiple data sources—including delivery times, shipping costs, and PMI indices—across key economies involved in global trade (e.g., the U.S., Euro Area, China, Japan, South Korea). It meant to provide a measure of pressures that emerged from the supply side point of view at the level of the global supply chain. The construction methodology and additional analysis can be found in our New York Fed blog posts and the associated staff report.

Let me now offer two key features of the pandemic-era disruptions through the lens of the GSCPI:

1. Magnitude: The size of the shock was extreme—unprecedented in the period covered by the index.

2. Persistence: The disruption lasted for several quarters, generating sustained inflationary pressure.

This kind of extreme, persistent shock had strong implications for the propagation across different inflation measures (e.g., CPI, PPI, and import prices), and in ongoing research with Ozge Akinci, Hunter Clark, and Marius Koechlin, we are investigating this transmission mechanism.

One manifestation of the transmission mechanism was the synchronized rise in producer prices across major economies. For instance, U.S. and Chinese producer price indices move in near-parallel fashion during the peak disruption period, highlighting the global nature of the supply-side inflation impulse.

The shock also quickly passed through into U.S. import prices (see below), amplifying domestic price pressures. This transmission underscores how global supply disruptions, unlike tariffs, directly affect upstream costs and ripple through the pricing chain with little delay—an important contrast when evaluating their respective inflationary footprints.

How Tariffs Work (and Don’t Work Like Supply Shocks)

Let us now turn our attention to tariffs. Unlike global supply disruptions, tariffs are policy-induced price instruments. They operate not by limiting supply chains outright, but by raising the cost of imported goods through a tax that, strictly speaking, is paid by importers. This is in theory; in practice, the tax can be split and absorbed at different levels (transferred to the consumer, absorbed by the importer or by the producer, and/or through price adjustment (i.e., the exchange rate)).

In terms of framing how a tariff shift works, a useful framework comes from the work of Bergin and Corsetti (2023), who distinguish tariff shocks from standard supply shocks:

• A supply chain shock reduces the physical ability to source or move goods (think: factories closing or port congestion).

• A tariff shock increases the relative price of foreign goods, without directly impairing marginal costs (see below for this channel).

Import Prices and Tariffs

One might therefore expect that tariffs automatically show up in the data as higher import prices. But in the U.S., import price indices (compiled by the BLS) exclude tariffs by design. This means tariff effects are not captured at the level of import prices.

Even with recent tariff hikes, import prices have not surged significantly at the aggregate level, while as we focus on individual categories, we see a mixed behavior with some categories showing price increases and others no significant changes.

In interpreting these data, several factors need to be taken into account:

• Exchange rate movements: The depreciation of the U.S. dollar may have contributed to rising prices in selected import categories, independent of tariff effects.

• Foreign producer behavior: Exporters may have adjusted their pricing or sourcing strategies in response to U.S. tariffs, partially absorbing the cost increases.

• Trade diversion: U.S. importers may have shifted sourcing toward countries or goods subject to lower or no tariffs, dampening the observable price effect in some categories.

Tariffs and Producer Prices: An Indirect Relationship

To better understand the transmission mechanism of tariffs, it is helpful to turn to producer prices. Unlike supply chain shocks, tariffs tend to affect producer prices through indirect and often offsetting channels. Two main forces are at play:

• Domestic Substitution Effect:
  When firms substitute away from tariffed imports toward domestically produced goods, foreign producers may lower prices to remain competitive. This dynamic can push down foreign producer prices—and, conditional on exchange rates, import prices as well. In turn, domestic producers may also face downward price pressure, depending on how substitutable their goods are.

• Foreign Input Cost Effect:
  If U.S. producers rely on imported intermediate inputs that are subject to tariffs, their production costs rise (more on this below). This may translate into higher domestic producer prices, particularly in sectors heavily dependent on foreign inputs.

The net effect of these opposing forces depends on the structure of domestic production and the extent of reliance on imported intermediates. To explore this further, the table below presents the top 40 U.S. industries ranked by imported share of intermediate inputs, based on the BEA’s 71-sector Input-Output classification. This provides a first-pass mapping of which sectors—based on their exposure to foreign inputs—may experience upstream cost pressures. In some cases (e.g., BEA sector 3361MV – Motor Vehicles), a direct match with PPI industry codes is possible. For others, classification differences make a precise alignment with PPI data more challenging.

The above table provides a first pass attempt at identifying which industries might be facing cost pressures at the level of producer prices.

Summing Up: Tariffs vs. Supply Chain Disruptions

Here’s a quick summary of why tariffs and supply chain shocks are quite different from the perspective of the U.S. economy, which imposes tariffs with limited to no retaliation.

As we can see, tariff-induced price pressures are conditional and mediated, while supply chain shocks are immediate and hit the producer directly.

What Do We Currently Observe in Terms of Inflation?

So where do we stand now in terms of the effects of tariffs on the key inflation indexes in the U.S.? As noted earlier, there is a marginal effect on import prices:

• China’s producer prices are declining, suggesting deflationary pressures from one of the world’s largest exporters. (China June-25 CPI Report)

• U.S. PPI is also softening, despite the tariff news. This indicates that tariffs are not currently causing an inflationary producer price impulse (US June-25 CPI Report)

In this respect, conditional on the transmission mechanism that we laid out earlier, we should see the impact of tariffs when we look at matched goods categories between CPI and PPI prices. This first pass analysis would suggest that a growing gap between import prices and corresponding consumer prices could potentially reflect the pass-through of tariffs at the consumer level. In the following panel graph, the apparel and electronics categories seem to be consistent with this pattern.

Of course, there might be delayed effects of the tariff shocks as inventory runs down, but considering the different layers at which tariffs operate, suggest that we might observe sectoral swings with limited aggregate effects at the level of import prices, producer prices, and goods consumption prices.

When we translate all this at the level of aggregate CPI, we also need to take into account the fact that the U.S. economy is relatively closed (import share are just above 10%) so that the direct effect might be muted and possibly counterbalanced by the ongoing disinflation at the service sector level (the relative closeness of the U.S. economy is indeed central in the mechanism described in the Dollar’s Imperial Circle).

Policy Challenges and Considerations

Since the beginning of the year, the Federal Reserve has adopted a wait-and-see approach in its monetary policy deliberation. While acknowledging the complexities of the policy challenges from the combination of fiscal, immigration, regulatory, and trade policies, it is fair to say that the debate has been dominated by tariffs, and less so by the other elements of the policy combination.

Tariffs seem to be settled on the higher end of what was initially expected when the new administration took over, but lower than the reciprocal tariffs announced on Liberation Day.

As discussed earlier, the most consequential effects, in my view, will depend on whether these tariffs evolve into a broader decoupling from China—either directly or indirectly (Tariffs as Financial Events and Geoeconomic Fractures). Such a shift could exert deflationary pressure on global producer prices, particularly through Chinese manufacturing channels.

With that in mind, let me now outline a tentative monetary policy playbook for navigating supply chain disruptions versus tariff shocks.

Global Supply Chain Shock: affects both real activity (by reducing supply) and inflation (by raising prices of goods, especially tradables).

Key considerations for monetary policy:

• Nature of the Shock: Real-side, adverse supply shocks. Raising interest rates in response doesn’t resolve the bottlenecks. Monetary policy cannot reopen ports or restaff factories (capacity constraint shock).

• Inflation Pass-Through: The pass-through is strong—especially via producer and import prices. If firms expect persistent bottlenecks, these shocks can become embedded in inflation expectations.

• Policy Dilemma: Central banks face a trade-off:

  • Act too slowly, and expectations may unanchor.

  • Act too aggressively, and the result is demand destruction on top of constrained supply.

• Possible Response:

  • Clear communication: Emphasize the temporary nature of the shock while maintaining inflation credibility.

  • Data-dependence: Look for signs that bottlenecks are easing and inflation is reverting.

  • Gradual tightening: When warranted, move gradually but signal readiness to respond to second-round effects (e.g., wage pressures).

Tariffs are policy-induced distortions, not natural supply shocks. Their inflation impact is typically localized, rather than broad-based. Critically, their pass-through into CPI is usually not too big and transitory and depends on the share of imports in the consumption basket.

Key considerations for monetary policy:

• Nature of shocks: shocks that have an inflationary component that might manifest more at the consumer level, but not direct capacity disruptions.

• Limited Transmission: Because tariffs often do not affect PPI or import prices directly, and pass-through to core inflation is muted, they may not require immediate tightening.

• Exchange Rate Channel: Tariffs can trigger currency movements. If the dollar depreciates, inflationary pressure at the goods level may emerge.

• Asymmetric Sector Effects: Tariffs can create relative price distortions—raising prices in specific sectors while leaving others unaffected. A broad monetary response to sectoral inflation may be inappropriate.

• Possible Response:

  • Monitor core inflation and expectations closely.

  • If inflation remains anchored, look through the first-round effects.

Conclusions

In this blog, I offer an initial comparison between global supply chain disruptions and tariff shocks, with a focus on their differing roles in recent inflation dynamics. Global supply chain disruptions were a major contributor to the surge in inflation during and after the pandemic, and understanding how tariffs differ in nature and transmission is essential as trade tensions re-emerge.

Although the full effects of recent tariff measures may take time to materialize, I argue that their inflationary impact is likely to be narrower and more sector-specific, rather than broad-based. To make this distinction clearer, I outline how tariffs affect different measures of inflation (e.g., import prices, producer prices, and consumer prices) depending on sectoral exposure and supply chain integration.

The current inflation data seem more consistent with the targeted effects of tariffs—concentrated in specific product categories—than with the kind of widespread price pressures caused by global supply chain disruptions.

From a policy perspective, this analysis supports a measured, “look-through” approach to tariff-driven price increases. Central banks should distinguish between temporary, sector-specific shocks and broad, persistent inflationary trends when setting policy.

---