A new extensive analysis of tariff policy spanning 150 years shows conclusively that the economic establishment may have fundamentally misunderstood how tariffs affect prices and employment, a finding with deep implications for understanding President Donald Trump’s trade policy and the appropriate response from the Federal Reserve regarding interest-rate decisions.
Researchers at the Federal Reserve Bank of San Francisco examined major tariff-policy shifts from 1870 to 2020 in the United States, the United Kingdom, and France.
Their conclusion challenges the conventional wisdom that has dominated economic-policy debates in recent years: when countries raise tariffs, prices actually fall, not rise.
“We find that an increase in tariffs raises unemployment and reduces inflation,” write the authors, Régis Barnichon and Aayush Singh, in the working paper published this month.
“This contradicts the predictions of standard models, according to which CPI inflation should increase in response to higher tariffs.”
The finding arrives at a politically explosive moment.
The study of Régis Barnichon and Aayush Singh, click here.
The interest-rate confrontation
As the Trump administration has implemented tariff hikes averaging 18% on U.S. imports in 2025, mainstream economists warned of a major inflationary spike.
Federal Reserve officials repeatedly stated they were hesitant to cut interest rates because they expected tariffs to push prices upward.
Recently, several Fed officials have argued that the central bank should not lower rates further due to what they believed to be inflationary pressures stemming from tariffs.
But historical data suggests these concerns rested on shaky theoretical foundations not supported by evidence.
The innovative approach
The researchers’ strategy was ingenious.
Instead of examining the small tariff fluctuations of recent decades, they exploited massive swings in tariff policy over centuries, using these shifts as a natural experiment to identify causal relationships.
The key insight came from U.S. political history.
Throughout the 19th century and up to the 1930s, Republicans and Democrats held fundamentally opposing tariff views:
1) Republicans, representing Northern industrial interests, favored high protective tariffs.
2) Democrats, representing the rural South, opposed them.
This partisan divide created something economists rarely find: near-random variation in policy.
During recessions, political responses to rising unemployment depended on which party held power, not on any coherent economic logic.
Republicans raised tariffs.
Democrats lowered them.
“Because recessions did not favor one party over the other, there was no systematic relationship between the direction of tariff changes and economic conditions,” the authors explain.
This allowed the researchers to isolate the effects of tariffs without worrying that policymakers were adjusting tariffs because of underlying economic trends.
They also identified eight major tariff shifts driven clearly by long-term political priorities rather than cyclical factors, from the McKinley Tariff (1890) to Trump’s 2018 tariffs, and analyzed them separately.
Both approaches produced the same surprising result.
The inflation paradox
Using a standard macroeconomic model, the researchers estimated the effect of tariff shocks on inflation and unemployment.
They found:
1) +4 percentage points in tariffs -> −2 percentage points inflation
2) +4 percentage points in tariffs -> +1 percentage point unemployment
These effects were consistent across eras:
1) The first wave of globalization (pre-1913)
2) The interwar period
3) The modern era after World War II
The pattern remained the same: higher tariffs correlated with lower prices and weaker economic activity.
Conventional theory proved wrong
This causal relationship contradicts basic economic theory, which predicts that tariffs raise business costs and therefore consumer prices.
Instead, the researchers observe a pattern consistent with negative demand shocks, not supply-side cost increases:
higher tariffs -> lower inflation + higher unemployment.
“These findings suggest that tariff shocks operate through an aggregate-demand channel,” conclude the authors.
Yet the researchers do not identify the precise mechanism.
They note that when tariffs rose, stock prices fell and market volatility surged, perhaps reflecting uncertainty that weighs on economic sentiment, but they cannot conclusively prove this mechanism.
Other explanations remain possible:
1) tariffs might increase workers’ bargaining power, raising wages and slightly reducing hiring;
2) foreign competitors may lower prices to preserve market share.
Distinguishing among these requires wage and industry-level pricing data not analyzed in the study.
A re-examination of trade theory
The findings overturn decades of economic orthodoxy regarding the effects of tariffs.
Trade theory has long argued that tariffs are inefficient, raise consumer prices, and reduce overall welfare.
But this 150-year empirical study suggests real-world effects are far more complex than mainstream models imply.
The study shows that tariff shocks work mainly through demand-dynamic mechanisms, not the simplistic cost-push mechanism emphasized by trade models.
This distinction is enormous: it means tariffs can be used as a policy tool without triggering runaway inflation, contrary to what economists warned for generations.
Even so, the results are indicative, not definitive:
the study shows that tariffs reduce inflation and employment, not why.
The authors highlight the astonishing lack of rigorous empirical research on macroeconomic effects of tariff changes:
“There is a strikingly small body of empirical evidence on the aggregate macroeconomic effects of tariff changes,” they note, “with most studies focusing on partial-equilibrium outcomes.”
By grounding their findings in historical data, Barnichon and Singh challenge the theoretical assumptions that economists relied on for decades.
While the results are less certain in the modern period, because tariff variation has been much smaller, point estimates still show the same direction:
higher tariffs -> lower inflation, weaker activity.
A point estimate is a single numerical value used to approximate an unknown true value (e.g., the true population mean).
A challenge to the conventional narrative
The study arrives as economic consensus is under rising scrutiny.
For decades, economists dominated policy discussions, and their models, predicting massive consumer-price spikes from the 2025 Trump tariffs, shaped expectations and Fed decisions.
But historical evidence shows these models were wrong.
The authors rigorously tested their findings against alternative explanations and methods.
Every time, the core result persisted: tariff increases reduce inflation and raise unemployment.
The consistency across centuries, countries, and policy regimes gives the findings exceptional credibility.
Instead of a blunt tool that raises prices, tariffs appear to operate through complex supply-and-demand mechanisms that reshape economic activity in ways economists are only now beginning to grasp.
Tariffs in a new light
The findings fundamentally reshape the debate on trade policy.
Long-term structural effects of tariffs may differ from short-term impacts on prices and employment, redirecting the economy toward more domestic production and less dependence on foreign manufacturers.
A long-neglected concept, optimal tariff theory, suggests that large economies can improve their terms of trade by imposing tariffs, forcing foreign producers to lower prices.
Tariffs may also reallocate productive activity toward domestic industries that mainstream economists often overlook.
Most importantly, the study destroys the most powerful argument in favor of free trade:
the claim that tariffs inevitably raise consumer prices.
For generations, this claim ended policy debates before they began.
Policymakers proposing tariffs faced accusations of imposing a regressive tax on consumers.
Kamala Harris, during her failed presidential run last year, repeatedly described Trump’s tariff proposals as a national sales tax that would raise consumer prices.
Now that argument is in the trash bin.
With the price-worry dismantled, the tariff debate can shift to foundations rooted in economic history and national-economic sovereignty — the ultimate purpose of policy.
Policymakers can weigh the benefits of protecting domestic industries, rebalancing trade relations, and rebuilding industrial capacity against impacts on activity and employment.
They can consider whether tariffs might encourage productive investment and industrial development, topics long excluded from mainstream economic discourse.
The findings also challenge the Federal Reserve’s reaction to tariffs.
If the main effects are lower inflation and lower employment, monetary theory would suggest the Fed should cut interest rates when tariffs are imposed.
Instead, the Fed has done the opposite this year, holding rates steady and lowering them reluctantly, moves that now appear to be a major policy mistake.
And Donald Trump may now be positioned to push the Fed toward the correct course.
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