What Is a Tariff Shock? Insights from 150 years of Tariff Policy

A recent study analyzing 150 years of tariff policy in the US and abroad found that tariff hikes consistently lead to increased unemployment and reduced economic activity, while simultaneously lowering inflation. This research, robust across different historical periods and countries, suggests that tariffs primarily operate through an aggregate demand channel, indicating a detrimental impact on economic growth and disinflationary pressures for investors.

Analysis

A recent Federal Reserve Bank of San Francisco working paper, analyzing 150 years of tariff policy, robustly concludes that tariff hikes lead to increased unemployment and reduced economic activity. This research, spanning US and international data, demonstrates a consistent negative impact on economic growth across various historical periods and identification strategies.

Crucially, the study also indicates that tariff increases consistently lower inflation, suggesting a disinflationary pressure alongside economic contraction. This dual effect points towards tariffs primarily operating through an aggregate demand channel, where higher tariffs reduce overall spending and investment. The quasi-random nature of historical tariff variations strengthens the causal inference of these findings.

The overall sentiment derived from these findings is moderately negative, reflecting the detrimental implications for economic growth and employment. This research underscores the potential for trade policy to directly influence key economic aggregates, with a market impact score of 0.6 indicating significant macroeconomic relevance.

Key Decisions for Investors

• Investors should closely monitor global trade policy developments, as robust evidence suggests tariff hikes lead to reduced economic activity and increased unemployment, while also lowering inflation.
• Consider adjusting portfolio allocations to sectors less sensitive to aggregate demand contractions or those that may benefit from disinflationary pressures.
• Incorporate potential tariff policy changes into macroeconomic models and risk assessments, particularly concerning their impact on corporate earnings and consumer spending forecasts.