A comprehensive analysis of tariff policy spanning 150 years indicates that the economic establishment may have fundamentally misunderstood the effects of tariffs on prices and employment. Researchers at the Federal Reserve Bank of San Francisco examined significant tariff changes from 1870 to 2020 in the United States, the United Kingdom, and France. Their findings challenge the prevailing belief that raising tariffs leads to increased prices, revealing instead that tariff hikes may actually lower prices and raise unemployment.

The authors, Régis Barnichon and Aayush Singh, state in their working paper that a tariff increase correlates with a decrease in inflation. This conclusion arrives at a politically sensitive time, as the Trump administration has implemented tariff increases averaging 18 percent on U.S. imports in 2025, prompting concerns from mainstream economists about potential inflationary effects. Federal Reserve officials have expressed reluctance to lower interest rates, citing anticipated price increases due to tariffs.

However, the historical evidence presented by the researchers suggests that these concerns may be based on theoretical assumptions lacking empirical support. The researchers utilized significant fluctuations in tariff policy over the centuries as a natural experiment to analyze cause and effect, revealing a consistent pattern: higher tariffs are associated with lower inflation and increased unemployment.

The study highlights a historical political divide in the United States regarding tariffs, with Republicans historically favoring high tariffs to protect industrial interests, while Democrats opposed them, viewing them as detrimental to farmers and consumers. This partisan divide created a unique environment for analyzing tariff effects without the influence of economic conditions.

The researchers found that a 4 percentage point increase in average tariffs resulted in a 2 percentage point decrease in inflation and a 1 percentage point increase in unemployment. This pattern persisted across various historical periods, suggesting that the relationship between tariffs and economic activity is more complex than traditional economic models indicate.

The findings challenge the long-standing consensus that tariffs are economically inefficient and detrimental to consumer prices. Instead, the research suggests that tariffs may operate through aggregate demand mechanisms, potentially redistributing economic activity towards domestic industries. This reframing of the debate over trade policy allows for a more nuanced discussion about the role of tariffs in protecting domestic production and addressing trade imbalances.

The study also raises questions about the Federal Reserve's response to tariffs, suggesting that if tariffs primarily lower inflation and increase unemployment, the Fed should consider cutting interest rates in response to tariff increases. However, the Fed's current approach has been to maintain steady interest rates, which may warrant reevaluation in light of these findings.