A crushing defeat for the economic establishment, which reveals the rotten foundations upon which economic policy has been built, is delivered by a new extensive analysis of tariff policy covering a period of 150 years, examining how inflationary pressures form in relation to tariff policy, and specifically how tariffs affect prices and employment.
This study fully vindicates the America First policy and the strategy for reclaiming economic sovereignty.
It is a finding with major implications for understanding the trade policy of President Donald Trump and the appropriate reaction that the Federal Reserve should adopt regarding interest-rate policy.
Economists at the Federal Reserve Bank of San Francisco examined significant changes in tariff policy from 1870 to 2020 in the United States, the United Kingdom, and France.
Their conclusion challenges the conventional wisdom that has dominated economic-policy discussions in recent years: when countries increase tariffs, prices actually fall — they do not rise.
“We find that an increase in tariffs increases unemployment and reduces inflation,” write the authors, Régis Barnichon and Aayush Singh, in the working paper they published this month.
“This contradicts the predictions of standard models, according to which CPI, the Consumer Price Index, should rise in response to higher tariffs.”
The finding comes at a politically charged moment.
The study of Régis Barnichon and Aayush Singh: Click here.
The interest-rate confrontation
As the Trump administration has implemented tariff increases averaging 18% on U.S. imports in 2025, mainstream economists warned of a significant inflationary explosion.
Officials of the Federal Reserve have repeatedly stated that they hesitated to cut interest rates because they expected tariffs to push prices upward.
More recently, several Fed officials have stated that they believe the central bank should not reduce interest rates further due to what they view as inflationary pressures from tariffs.
But historical data suggests these concerns may have been based on shaky theoretical foundations not supported by evidence.
The innovative approach
The researchers’ approach was ingenious.
Instead of attempting to analyze the limited fluctuations in tariffs of recent decades, they used the massive variations in tariff policy across centuries, treating these shifts as a natural experiment to understand causal relationships between variables.
The core finding emerged from American political history.
Throughout the 19th century and into the 1930s, Republicans and Democrats had fundamentally opposing views on tariffs.
The former, representing industrial interests in the North, supported high protective tariffs.
The Democrats, representing the rural South, opposed them as harmful to farmers and consumers.
This partisan divide created something economists rarely find: almost random variation in tariff policy.
When economic recessions occurred, the policy response to rising unemployment depended on which party was in power, not on any coherent economic logic.
Republicans raised tariffs to protect their voters.
Democrats lowered them for the same reason.
“Because recessions did not favor one party more than the other, there was no general relationship between the direction of tariff changes and the state of the economy,” the authors explain.
This meant they could use simple statistical methods to isolate the effects of tariffs without worrying that policymakers were adjusting tariffs in response to economic conditions.
They also identified eight major tariff changes clearly driven by long-term political considerations rather than cyclical pressures, from McKinley in 1890 to Trump’s recent tariffs in 2018, and analyzed them separately.
Both approaches yielded the same surprising result.
The inflation paradox
Using a standard economic model, the researchers estimated the impact of tariff shocks on inflation and unemployment.
They found that an increase of about 4 percentage points in average tariffs reduced inflation by about 2 percentage points, while simultaneously increasing unemployment by about 1 percentage point.
The results held across different eras.
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.
Conventional theory proven wrong
This causal relationship contradicts basic economic theory, which predicts that tariffs should raise costs for businesses and lead to higher consumer prices.
Instead, the researchers observe tariff increases associated with both lower inflation and higher unemployment, a combination that, as the authors note, is more consistent with a negative demand shock than a cost-push shock.
“These findings indicate that tariff shocks operate through an aggregate-demand channel,” the authors conclude.
However, the researchers do not identify the specific mechanism.
They note that when tariffs increased, stock prices fell and market volatility surged, something that could reflect uncertainty that weakens economic sentiment. But they stop short of proving that this is what actually occurs.
Alternative explanations remain possible: tariffs could increase the bargaining power of domestic workers, raising wages and slightly reducing hiring, while foreign competitors could simultaneously lower their prices to maintain market share.
Distinguishing between these competing mechanisms would require examining wage dynamics and sectoral pricing patterns, data the study does not analyze.
A re-examination of trade theory - Economic models are inadequate
The findings overturn decades of economic orthodoxy regarding the impact of tariffs.
Trade theory has long argued that tariffs are economically inefficient, raising consumer prices while reducing overall welfare.
However, this 150-year study of real-world tariff shocks suggests that the actual effects are far more complex than conventional models imply.
The research shows that tariff shocks operate mainly through mechanisms shaping aggregate demand, rather than through the simple cost-increase channel emphasized by trade models.
This distinction is enormous. It means that tariffs can be used as a policy tool without causing the inflationary price spirals economists have warned about for generations.
Although even here, the results are merely indicative.
It is not clear from the research why tariffs reduce inflation and employment, only that they do.
The authors highlight the striking lack of rigorous empirical research on the macroeconomic effects of tariffs.
“There is remarkably little empirical evidence on the aggregate macroeconomic effects of tariff changes,” they note, “with most studies focusing on partial-equilibrium effects.”
By basing their analysis on historical data rather than theoretical assumptions, Barnichon and Singh forced a reckoning with how much conventional thinking relied on faulty premises.
“The results are more uncertain” in the modern period, the authors acknowledge, because tariff volatility was so limited after World War II.
But the point estimates still point in the same direction: higher tariffs are associated with lower inflation and weaker activity.
A point estimate is a single numerical value used to approximate an unknown true value (e.g., the true population mean).
The wrong policy perception dominated
The study arrives at a moment when economic consensus is under growing scrutiny.
For decades, economists dominated policy discussions, and their models, which predicted significant consumer-price increases from the 2025 tariff hikes, shaped the expectations and decisions of the Fed.
But historical evidence shows these models were wrong.
The authors meticulously tested their findings against various alternative explanations and methodological approaches.
Each time, the core result remained: tariff increases reduce inflation and increase unemployment.
This consistency across centuries, countries, and strategies gives the findings significant credibility.
Rather than a blunt tool that raises prices and harms consumers, tariffs appear to operate through complex demand-and-supply mechanisms that reshape economic activity in ways economists are only now beginning to understand.
Tariffs in a new light
The findings fundamentally reshape the discussion on trade policy.
The long-run structural effects of tariffs may differ from short-run impacts on prices and employment, steering the economy toward more domestic production and less dependence on foreign manufacturers.
A long-neglected idea known as optimal trade theory has long argued that large economies can use tariffs to improve their terms of trade, forcing foreign producers to offer goods at lower prices.
And tariffs may productively reallocate economic activity toward domestic industries and manufacturing sectors that economists often overlook.
Even more importantly, the study removes the most powerful intellectual weapon from the free-trade arsenal: the claim that tariffs inevitably increase consumer prices.
For generations, that claim shut down policy debates before they even began. Policymakers considering tariffs faced accusations of imposing a regressive tax on consumers.
Kamala Harris, in her failed presidential campaign last year, repeatedly described Trump's tariff proposals as a national sales tax that would raise consumer prices.
Now that idea is in the trash!
With the consumer-price argument dismantled, the discussion on tariffs can proceed on foundations rooted more in economic history and in safeguarding economic sovereignty, which is the ultimate purpose of the policy.
Policymakers can weigh the benefits of protecting domestic industries, rebalancing trade relations, and rebuilding industrial capacity against the impacts on economic activity and employment.
They can consider whether tariffs might encourage productive investment and industrial development, issues that until now have been largely off-limits in mainstream economic discourse.
The study’s findings also challenge the Fed’s response to tariffs.
If the main effects are lower inflation and lower employment, monetary theory would suggest that the Fed should cut interest rates when tariffs are imposed.
Instead, the Fed this year followed the opposite course, keeping rates steady and lowering them hesitantly, moves that now resemble a major policy mistake.
And Donald Trump will likely be forced to drag it toward the correct path, even if he is accused of violating its independence.
www.bankingnews.gr
Σχόλια αναγνωστών