Another paper finds tariffs depress economic activity

After the Supreme Court ruled President Trump’s emergency tariffs unlawful, he immediately implemented a 150-day 10 percent tariff under another authority, temporarily replacing about half the revenue the emergency levies would have brought in. Over the coming weeks and months, we’ll see new investigations into products, trading practices, and countries, as the administration puts together a patchwork system of replacement tariffs. At this point, we do not know what that patchwork will look like, but we do have a clear idea of the effect the tariffs will have on the economy.

In February, economists Tamar den Besten and Diego R. Känzig published a new NBER working paper on the macro effects of tariffs. They use a narrative approach to identify “exogenous” tariff shocks that were motivated by ideological or political reasons (as opposed to revenue or business cycle reasons) and applied widely enough across the economy to have a macroeconomic impact.

From 1840 through today, they identified 35 major tariff reforms, of which 21 were exogenous, made up of six tariff increases and fifteen reductions. Then they estimate the dynamic, causal effects of those 21 tariff shocks on 10 different indicators, including real GDP, real manufacturing production, imports, exports, and prices.

What do they find happens when tariffs are imposed?

First, imports fall immediately. Then exports fall (sometimes more gradually) as the dollar appreciates and makes US goods less competitive. As trade declines, so does real economic activity: a 1 percentage point increase in the average tariff rate leads to a peak decline in real GDP of 0.9 percent, and it remains below trend for eight years. Manufacturing production also declines. The authors note: “higher trade barriers coincide with a broad-based weakening of industrial activity, underscoring the importance of general-equilibrium effects that offset any partial-equilibrium gains from reduced import competition.”

The price impact is more nuanced, as I’ve written about before. Tariffs push up import costs, but they also reduce economic activity, which has an offsetting effect on overall prices. Monetary policy, especially in the post-war period, has also explained some of the muted effect of tariffs on the overall price level.

The bottom line: “These estimates suggest that tariffs do not succeed at protecting domestic industry in the aggregate… Across historical periods, the real effects of tariff shocks are remarkably robust. Tariffs consistently reduce trade volumes and depress economic activity, regardless of the sample considered.”

This paper provides even more evidence that while tariffs can provide benefits to protected sectors, the economy-wide costs they impose will dominate, leading to aggregate losses.