San Francisco Fed Challenges Common Tariff Beliefs
For a long time, economists and the media have warned about the impacts of customs duties, particularly that they increase prices. This has been a key point in lawsuits against President Donald Trump’s trade policies. The common understanding is that higher tariffs result in higher costs for consumers at checkout — a straightforward economic principle, they argue.
A recent paper from the Federal Reserve Bank of San Francisco, however, flips this narrative on its head.
Economists Regis Barnichon and Aayush Singh conducted a study on significant tariff changes in the US, UK, and France over the past 150 years. Their conclusion? Increasing tariffs may actually lead to lower inflation. While unemployment tends to rise, the anticipated consumer price spike suggested by many economists just isn’t reflected in the data.
This doesn’t mean tariffs don’t exist. In other words, lawsuits against them will be based on different aspects beyond the claim of increased expenses.
Tariffs May Lower Inflation
To grasp what the paper presents, it helps to look at the established trends.
Barnichon and Singh gathered annual data on tariffs and inflation since 1870, examining the aftermath of notable tariff hikes. The results were remarkably consistent across different time periods and countries. Data before World War II indicates that a permanent 4 percentage point rise in tariffs typically results in a 2 percentage point drop in inflation, with unemployment ticking up by 1 percentage point. Post-war estimates suggest similar trends, though accuracy declines, particularly as tariffs generally decreased during that time.
This pattern has been evident through various historical events, from the globalization boom prior to 1913, through the 1930s upheaval, and into the contemporary era. This was consistent in the US, France, and the UK, with the authors confirming two separate statistical methods led to the same conclusion.
The empirical evidence is clear: for over 150 years, higher tariffs correlate with lower inflation alongside rising unemployment rates. Econometrics backs this up.
Mechanisms Behind Inflation Reduction
Things get more complex here, and some recent discussions around the paper appear to misinterpret the findings.
The authors suggest that this correlation resembles situations in standard economic models where demand decreases. When consumers and businesses cut back on spending, we often see a rise in unemployment coupled with falling prices. Barnichon and Singh theorize that tariffs may influence demand, perhaps by creating uncertainty that deters business investments and consumer confidence.
It’s a reasonable hypothesis, but it’s critical to view it as just that — a hypothesis, not a definitive finding.
The paper doesn’t prove that households reduce spending due to feeling poorer. It doesn’t clarify the demand factors versus other possible explanations. The authors recognize this, noting that understanding the underlying theoretical mechanisms is “a vital area for future research.”
In simpler terms, they have documented a consistent pattern but haven’t fully explained why.
Tariffs and Economic Recession
This distinction matters, especially in light of recent commentary. Some critics have mischaracterized the paper’s implications, suggesting it indicates that tariffs “shrink the economy” or induce a recession. However, this is not what the paper shows — far from it. While they acknowledge the reality of rising unemployment, they don’t claim it equates to an economic recession.
Similarly, some assert that the paper validates the idea of demand destruction as the cause of declining inflation. Again, this is an interpretation. While there is a correlation suggesting demand destruction, it does not irrefutably prove that such destruction is happening. Other factors, like tighter credit or shifts in the bargaining power between labor and capital, could result in the same correlation.
Moreover, the paper doesn’t assess long-term implications. It only describes short-term effects following a tariff change. We still lack clear insight into whether the economy will be better or worse years down the line. Those who argue that tariffs weaken the economy can’t use this paper to substantiate their viewpoint. It doesn’t address productivity, wages, manufacturing output, or the overall economic health. Those are entirely different discussions.
What’s Being Reconsidered?
What this paper decisively challenges is the notion that tariffs inherently cause inflation. This belief has underpinned anti-tariff positions for years. The assertion that raising tariffs raises prices follows a seemingly straightforward cost-driven logic.
Yet, data spanning 150 years suggests otherwise, coming from a respected institution rather than politically charged perspectives.
This is significant. In effect, policymakers can no longer rely on the claim that “tariffs will raise prices” as a blanket reason to dismiss trade protection. That argument lacks empirical support now.
This doesn’t imply that tariffs are appropriate in every scenario. It merely indicates that legal challenges to tariffs will have to tackle different issues. Topics such as whether tariffs foster productive investment or strengthen trade positions can now be discussed without assuming that raising tariffs will inevitably lead to higher consumer costs.
Historical evidence reveals that tariffs do not drive inflation. This constitutes a significant win for supporters of President Trump’s trade policies.
