Key takeaways
Over the course of U.S. history, policymakers have imposed tariffs on imported goods numerous times. A new study examines how these trade policy choices have impacted the U.S. economy, finding that tariffs tend to shrink the economy, depress manufacturing activity and wages, increase prices, and suppress exports.Monetary policies have played a key role in shaping how tariff shocks propagate throughout the U.S. economy, with the shift away from the gold standard in the late 20th century marking an inflection point in how tariffs affect workers and the broader economy.This paper makes an important contribution to the econometrics and economic history literature by using a structured, narrative-based method to identify tariff policy decisions driven by factors unrelated to economic conditions.
Overview
U.S. policymakers have enacted tariffs for a variety of reasons over the course of the country’s history. Motivated by economic pressures to raise federal revenues or address balance-of-payment issues, or by ideological support for protectionism or open trade, policymakers have revised tariff and trade policies dozens of times since the mid-19th century.
Today, import duties enacted by the second Trump administration have pushed U.S. tariff rates to levels unseen since the early 20th century and have renewed interest in the economic effects of trade policymaking. Evidence suggests the current tariff regime is pushing up prices for businesses and consumers and producing a drag on investments and hiring in impacted industries, while providing a modest additional source of revenue for the federal government. But how does the current tariff regime compare to trade policy actions in U.S. history, and what can we learn from the past?
The rich history of U.S. trade policy, featuring large swings in real tariff rates over time, is analyzed in a new working paper from Tamar den Besten and Diego R. Kanzig, both at Northwestern University, called “The Macroeconomic Effects of Tariffs: Evidence From U.S. Historical Data.” The authors find that, historically, tariff increases cause a drag on economic growth, resulting in an immediate reduction of imports and a lagged decline in exports while pushing down total Gross Domestic Product, including manufacturing activity and compensation for manufacturing workers.
The authors show that these tariff effects transmit through both supply-side and demand-side channels. On the supply side, they find that higher import and input costs cause an immediate decline in imports and put upward pressure on prices domestically. Tariffs also produce a decline in aggregate demand, causing U.S. exports to shrink and putting downward pressure on prices at home, offsetting the immediate inflationary impact of tariffs.
Overall, across the previous 185 years of U.S. history, the authors find that tariffs have, on average, caused prices to rise, though shifts in monetary policy conditions over time, such as the transition from a gold-backed to fiat currency, have muted the price effect.
A new historical tariff-shock dataset
To reach these conclusions, den Besten and Kanzig apply a well-established approach to analyzing policy changes that teases apart the motivations for past tariff policies, isolating only the policy shifts that are driven by ideological or other reasons unrelated to current or anticipated economic factors. This approach is used to address the problem of endogeneity—that is, the effects of an economically driven tariff that are are impossible to separate from the effects of the underlying economic reason itself. In other words, policymakers can establish tariffs for economic or ideological reasons, but only ideologically driven tariffs are truly exogenous and thus able to be studied.
To produce a dataset of only exogenous tariff policy changes, the authors parsed the historical record to determine the motivations of these trade policy choices from 1860 through the end of the first Trump administration, producing a novel “narrative tariff shock series.” The authors divide U.S. tariff history into three broad periods:
The revenue period: roughly 1790–1860, when tariffs were used mostly to shore up federal government finances
The protectionist period: 1861–1933, characterized by high and volatile tariff rates established to shield domestic industries
The reciprocity period: from 1934 onward, characterized by multilateral agreements reducing global trade barriers
This historical categorization is useful in understanding the motivations behind tariff increases. The protectionist era, for example, began around the advent of the U.S. Civil War, when the secession of 11 Southern states changed the political composition of the U.S. Congress, allowing protectionist Republicans to pass the Morrill Tariff in response to pressures on the federal budget. After the Civil War began, Congress enacted further tariff increases to shore up federal finances. And following the war, tariff policies shifted according to partisan control, with Republican administrations enacting or defending large protectionist tariffs and Democratic administrations pursuing tariff reductions.
As the authors note, these post-Civil War tariff oscillations illustrate “how similar economic conditions, marked by weak growth and high unemployment throughout much of the 1890s, led to opposite tariff responses depending on political majorities.” In short, the Civil War-era tariffs enacted in response to budget pressures are considered inextricably linked with economic conditions at the time, while the post-war tariff choices are considered motivated by ideological positions.
The role of monetary policy in attenuating inflation from tariffs
The two authors also draw a distinction between tariffs enacted before and after World War II to reflect a shift in monetary policy regimes across U.S. history. Before the war, the United States operated under a constrained monetary policy environment dominated by the gold standard. After the war, however, monetary policy became more autonomous and exchange rates more flexible, changing how tariff shocks propagated through the economy.
Under the gold standard, currency exchange rates were effectively fixed. This meant “real” exchange rates between countries could only change through shifts in relative domestic price levels. Under this paradigm, tariffs caused imports to fall and gold inflows to increase. This gold flow boosted the domestic money supply and pushed prices up.
Yet as countries shifted away from the gold standard and allowed exchange rates to float, tariffs began to impact their economies differently. Under this new regime, tariff increases caused the U.S. dollar to strengthen, weakening the competitiveness of U.S. exports and weighing on aggregate demand. These effects put downward pressure on prices, offsetting the upward price pressures caused by the tariffs themselves.
Splitting the narrative series between pre- and post-World War II tariff events shows a clear inflationary impact of tariffs in the gold standard era, compared to an insignificant price impact after the gold standard was abandoned in the late 20th century, due largely to a tariff-induced contraction in the U.S. economy.
Conclusion
Across the period of U.S. history studied in this paper, tariff increases caused an immediate and sharp reduction in imports followed by a lagged decline in exports, as GDP, aggregate demand, manufacturing activity, and production-worker compensation all contracted. Under some monetary conditions, the price effects of tariffs are muted, with higher import and input costs at least partially offset by the deflation caused by a tariff-induced economic contraction.
Across the entirety of U.S. history, however, tariffs have on average caused prices to rise for U.S. consumers. And tariff increases are generally ineffective at achieving their primary goal of protecting domestic industry and improving conditions for U.S. workers. Policymakers in the current environment should keep these historical lessons in mind as they navigate the current tariff regime.
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The post New research examines the historical macroeconomic effects of tariffs and sheds light on current U.S. trade policies appeared first on Equitable Growth.
