Tariffs deck the economy---Best studies prove

Using aggregated annual data for 151 countries (34 advanced and 117 developing) over 1963–2014, we find that tariffs have economically- and statistically-significant adverse effects on output growth. The impact is persistent and increases with the magnitude of the tariff change. Our baseline econometric model suggests that a one standard deviation increase in the tariff rate (corresponding to a 3.6 percentage points) leads to about a 0.4% decline of output five years later. The estimated decline in output seems related to reduced efficiency in the use of labor across sectors, an appreciation of the real exchange rate which hampers competitiveness (and undercuts possible improvements in the trade balance), higher imported input costs which raise production costs, and intertemporal effects as anticipated tariffs bring forward consumption and output, only to see these macro variables collapse once the tariff is actually imposed. These different channels are fleshed out in a companion paper (Furceri et al., 2019); here, we focus mainly on the headline response of GDP growth. We use two approaches to evaluate the effect of tariffs on output (growth): (i) some simple stylized-fact charts that show the evolution of growth following tariff hikes; (ii) more formal econometrics using a VAR methodology, so that we can trace the GDP (growth) response of tariffs over time (we explore alternative approaches in our 2019 paper). We then explore some of the possible underlying channels at work. The message from the findings in this section is loud and clear: tariffs have a sizeable negative effect on output growth, with detrimental effects persisting over years. The findings suggest that tariffs have a detrimental effect on output, with the negative effect larger for higher tariff increases and persisting over time, at least over the next four years or so. The residualized growth tends to be in negative territory in all four years following an increase in protectionism. For example, after the second year, the residualized output growth is −0.4/−0.8 for one/three standard deviation(s) increases in tariffs, respectively. After four years, tariff increases are associated with an annual negative output growth of 1.5 percent when tariff increase is above three standard deviations. shows the estimated dynamic response of output to a one-standard deviation rise in the tariff rate (around 3.6 percentage points). The results suggest that a one standard deviation tariff increase leads to a decline in output growth within the first year. While the effect is not initially statistically significant, output continues to decline in the next few years, and this effect becomes both economically and statistically significant within four years. Ultimately, a one standard deviation tariff increase leads to about a 0.4% decline in output five years later. In an effort to be conservative, we end our analysis at the five-year horizon: the longer-term output-effect of tariffs are actually higher than the estimated medium-term effects.