Tariff Exposure Decomposition
Size tariff risk by tracing the affected share of the economy
- Difficulty
- Moderate
- Time to result
- ~days to results
- Steps
- 6
- Confidence
- 98%
Start with the size of the entire economy and progressively narrow the analysis to the activity tariffs can directly affect. Identify consumption's share of output, divide consumption into services and goods, and remove services that are largely untouched by goods tariffs. Next, determine how much goods consumption is imported and estimate realistic tariff revenue after substitution and exemptions. Express that burden relative to total economic activity or as an equivalent broad consumption tax. Finally, separate aggregate impact from distortion: a modest economy-wide burden can still hit particular products, firms, or trading partners severely. Comparing import dependence across countries also clarifies why the same policy may be manageable for a large, relatively closed economy but far more consequential for export-oriented economies.
Origin
Extracted from Masters in Business during Sonal Desai's numerical decomposition of the potential US tariff burden.
Core principles
- 01Start with the total economy rather than vivid imported products.
- 02Separate consumption from investment and other economic activity.
- 03Remove services that are largely outside the tariff base.
- 04Measure imported goods as a share of the whole economy.
- 05Translate projected tariff revenue into an economy-wide equivalent tax.
- 06Distinguish domestic exposure from the greater exposure of export-dependent countries.
How to run it
- 1
Establish the economic denominator
Record total GDP or another consistent measure of economic activity. This prevents highly visible imports from dominating the analysis.
Pro tip Use rounded figures initially to test the order of magnitude.
Watch out Do not begin with a list of imported consumer products and infer aggregate exposure from salience.
- 2
Isolate consumption
Calculate the portion of the economy represented by household consumption. Keep investment, government activity, and other components separate.
Pro tip Use the latest national-accounts data available for the scenario date.
Watch out Consumption's share may differ substantially across countries.
- 3
Separate goods from services
Remove services consumption that is not directly subject to goods tariffs. The remaining goods base is the more relevant starting point.
Pro tip Flag services with meaningful imported inputs for secondary analysis.
Watch out Treating all consumption as tariff-exposed materially overstates the direct base.
- 4
Measure imported goods
Determine how much of goods consumption comes from imports. Compare that amount with both the goods base and total GDP.
Pro tip Distinguish gross imports from domestic value added where data permit.
Watch out Import totals alone do not equal the final tariff burden.
- 5
Estimate collected revenue
Model plausible tariff revenue after accounting for different rates, exemptions, and changes in sourcing or demand. Convert the estimate into a percentage of total goods and services.
Pro tip Use low, central, and high revenue scenarios.
Watch out Multiplying every import by the highest announced rate is rarely realistic.
- 6
Separate scale from distortion
Compare the aggregate burden with a broad consumption tax, then identify industries and households facing concentrated effects. Contrast the result with more trade-dependent economies.
Pro tip Report aggregate, sectoral, and international effects separately.
Watch out A small aggregate percentage does not mean every affected business experiences a small shock.
In the wild
Using the transcript's rounded figures, an analyst starts with a roughly $30 trillion economy, narrows it to about $21 trillion of consumption, removes the service-heavy share, and identifies roughly $3.4 trillion of imported goods. A hypothetical $300 billion in tariff revenue is then compared with all goods and services rather than treated as a tax on the entire economy at the headline tariff rate.
→ The analysis frames the aggregate burden as much smaller than alarming product-level examples imply while preserving concern about distortions.
An investor applies the same decomposition to a large domestic economy and an export-oriented European economy. The domestic economy has lower import and export shares relative to GDP, while the European economy depends heavily on foreign demand.
→ The investor assigns materially different growth sensitivities to the same trade conflict.
Common mistakes
Using headline rates as the total burden
Announced tariff rates do not apply uniformly to all economic activity. Narrow the base and estimate actual revenue before drawing conclusions.
Ignoring concentrated damage
A modest aggregate burden can still create severe costs for specific products, firms, and consumers. Pair macro sizing with sector analysis.
Assuming every country has equal exposure
Trade dependence varies sharply across economies. Compare imports and exports with GDP before transferring conclusions internationally.
Is it for you?
Best for
It is best for analysts assessing tariff scenarios in large economies with substantial domestic consumption.
Not ideal for
It is not ideal as a complete estimate of sector-specific, supply-chain, retaliatory, or distributional consequences.
From the transcript
“Seventy percent of our economy is consumption.”
“Seventy percent of consumption is services. Guess what services aren't really impacted by tariffs?”
“I'm looking at three point four trillion against all of this huge economy size”
From the episode
Franklin Templeton's Sonal Desai on Fixed Income
Sonal Desai