Increasing tariffs hurts productivity, employment, inequality, consumption, and welfare – robust, empirical studies prove.

A specter is haunting the international economy: the specter of a trade war. Well, the specter of a trade war is at least haunting economists. It is striking that the distaste for protectionism felt by the discipline is not shared by the wider public. Modern economics began over two hundred years ago in part as an intellectual exercise against mercantilism, so it is worrying that the profession has been unable to persuade the public of the merits of free trade. But perhaps some of the public’s mild views on protectionism stem from the fact that most economic analysis of protectionism is theoretical, microeconomic, or dated? In this paper, we examine the macroeconomic consequence of tariffs. We use impulse response functions from local projections on a panel of annual data spanning 151 countries over 1963-2014. The main analysis on aggregate data is complemented with industry-level data. Our results suggest that tariff increases have an adverse impact on output and productivity; these effects are economically and statistically significant. They are magnified when tariffs are used during expansions, for advanced economies, and when tariffs go up. We also find that that tariff increases lead to more unemployment and higher inequality, further adding to the deadweight losses of tariffs. Tariffs have only small effects on the trade balance though, in part because they induce offsetting exchange rate appreciations. Finally, protectionism also leads to a decline in consumption; this, together with our other findings, suggests that tariffs are bad for welfare. All this seems eminently sensible and bolsters the arguments that mainstream economists make against tariffs; our results can be regarded as strong empirical evidence for the benefits of liberal trade. And given the current global context, we take special note of the negative consequences when advanced economies increase tariffs during cyclical upturns.