A sweeping new analysis of tariff policy spanning 150 years suggests that the economic establishment may have fundamentally misunderstood how tariffs affect prices and employment, a finding with profound implications for understanding President Donald Trump’s trade policy and the proper response by the Federal Reserve.
Researchers at the Federal Reserve Bank of San Francisco examined major tariff changes from 1870 through 2020 across the United States, the United Kingdom, and France. Their conclusion challenges the conventional wisdom that dominated economic policy debates in recent years: when countries raise tariffs, prices actually fall, not rise.
“We find that a tariff hike raises unemployment and lowers inflation,” the authors, Régis Barnichon and Aayush Singh, write in their working paper released this month.”This goes against the predictions of standard models, whereby CPI inflation should go up in response to higher tariffs.”
The finding arrives at a politically charged moment. As the Trump administration has implemented tariff increases averaging 18 percent on U.S. imports in 2025, mainstream economists warned of a significant inflationary spiral. The Federal Reserve officials have repeatedly said they have hesitated to cut interest rates because they expect tariffs to push up prices.
More recently, several Fed officials have said that they think the central bank should not cut interest rates further due to what they believed would be inflationary pressures from tariffs.
But the historical evidence suggests those concerns may have rested on shaky theoretical foundations not backed by evidence.
The Tarifflation Story Was Upside Down
The researchers’ approach was ingenious. Rather than trying to parse recent decades of limited tariff variation, they exploited massive swings in tariff policy across centuries, using these shifts as a natural experiment to understand cause and effect.
The key insight came from American political history. Throughout the 19th century and into the 1930s, Republicans and Democrats held fundamentally opposite views about tariffs. Republicans, representing industrial interests in the North, favored high tariffs for protection. Democrats, representing the agricultural South, opposed them as harmful to farmers and consumers.
This partisan divide created something economists rarely find: quasi-random variation in policy. When recessions hit, the political response to higher unemployment depended on which party was in power—not on any consistent economic logic. Republicans would raise tariffs to protect their constituents. Democrats would lower them for the same reason.
“Since recessions did not favor one party over another, there was no general relation between the direction of tariff changes and the state of the economy,” the authors explain. This meant they could use straightforward statistical methods to isolate tariff effects, without worrying that policy makers were adjusting tariffs in response to economic conditions.
They also identified eight major tariff changes explicitly motivated by long-term political considerations rather than cyclical pressures—from the McKinley Tariff of 1890 to the recent Trump tariffs of 2018—and analyzed those separately. Both approaches yielded the same surprising result.
The Inflation Puzzle
Using a standard economic model, researchers estimated the effect of tariff shocks on inflation and unemployment. A roughly 4 percentage point increase in average tariffs lowered inflation by about 2 percentage points while raising unemployment by about 1 percentage point, they found.
The results held across different time periods. Whether examining the first wave of globalization before 1913, the interwar period, or the modern post-World War II era, the pattern remained consistent: higher tariffs correlated with lower prices and weaker economic activity.
“These findings point towards tariff shocks acting through an aggregate demand channel,” the authors conclude.
In other words, tariffs appear to work like a demand shock rather than a cost-push shock. Standard economic theory predicts that tariffs should raise costs for businesses, which then pass higher prices to consumers. But the historical record suggests something different: tariff increases lower demand that exerts downward pressure on prices.
The researchers found evidence supporting this mechanism. When tariffs increased, stock prices fell and market volatility spiked—consistent with an uncertainty shock dampening economic sentiment.
A Reconsideration of Trade Theory
The paper’s findings overturn decades of consensus among mainstream economists about tariff effects. Trade theory has long held that tariffs are economically inefficient, raising consumer prices while reducing overall prosperity. Yet this study of 150 years of actual tariff episodes suggests the real-world effects are far more complex than textbook models suggest.
The research reveals that tariff shocks operate primarily through aggregate demand mechanisms—affecting confidence, investment, and spending patterns—rather than through the simple cost-push mechanism that trade models emphasize. This distinction matters enormously. It means that tariffs can be used as a policy tool without triggering the consumer price spirals that economists have warned about for generations.
The study’s authors note the surprising scarcity of rigorous empirical research on tariff effects. “There is surprisingly little empirical evidence on the aggregate macroeconomic effects of tariff changes,” they observe, “with most studies focused on partial equilibrium effects.”
By grounding their analysis in historical evidence rather than theoretical assumptions, Barnichon and Singh have forced a reckoning with how much the policy consensus rested on untested premises.
“The results are more uncertain” in the modern period, the authors acknowledge, because tariff variation has been so limited since World War II. But the point estimates still point in the same direction: higher tariffs are associated with lower inflation and weaker activity.
A Challenge to the Establishment Consensus
The paper comes at a moment when the economic consensus faces increasing scrutiny. For decades, mainstream economists have dominated policy debates, and their models—which predicted significant consumer price increases from 2025 tariff hikes—shaped expectations and Fed decisions.
Yet the historical evidence suggests those models were wrong.
The authors meticulously tested their findings against various alternative explanations and methodological approaches. Each time, the core result persisted: tariff increases lower inflation and raise unemployment. This consistency across centuries, countries, and identification strategies gives the findings substantial credibility.
What emerges is a picture of tariffs far different from what opponents have typically portrayed. Rather than a crude tool that raises prices and harms consumers, tariffs appear to operate through sophisticated demand-side mechanisms that reshape economic activity in ways economists are only beginning to understand.
Tariffs in a New Light
The findings reframe the debate over trade policy fundamentally. Long-term structural effects of tariffs may differ from short-run price and employment impacts, reorienting the economy towards more domestic production and less dependence on foreign manufacturers. A long-neglected idea known as optimal trade theory has long suggested that tariffs can be used by large economies to improve their terms of trade, forcing foreign producers to offer goods at lower prices. And tariffs may productively redistribute economic activity toward domestic industries and manufacturing sectors that economists might otherwise overlook.
More importantly, the study removes the most potent intellectual weapon from the free-trade arsenal: the claim that tariffs inevitably raise consumer prices. For generations, this assertion ended policy debates before they could begin. Policymakers considering tariffs faced the accusation that they were imposing a regressive tax on consumers. Kamala Harris, in her failed bid for the presidency last year, repeatedly described Trump’s tariff proposals as a national sales tax that would increase consumer prices. Now that idea lies in tatters.
With the consumer price argument dismantled, the debate over tariffs can proceed on grounds better rooted in economic history and national purpose. Policymakers can weigh the benefits of protecting domestic industries, rebalancing trade relationships, and rebuilding manufacturing capacity against the effects on economic activity and employment. They can consider whether tariffs might encourage productive investment and industrial development, questions that have been largely off-limits in mainstream economic discourse.
The paper’s findings also call into question the Fed’s response to tariffs. If the main effects are lower inflation and higher lower employment, monetary theory would suggest that the Fed should cut interest rates when tariffs are imposed. Instead, the Fed this year took the opposite course, holding interest rates steady and only cutting hesitantly—moves that now look like a major policy mistake.
Read the full article here