Tariffs are contractionary

A tariff is a tax on imports, and recent research says higher tariffs shrink trade and overall output rather than lift growth. (nber.org) A new National Bureau of Economic Research working paper released in April 2026 studied U.S. tariff changes from 1840 to 2024. The authors found tariff increases were “contractionary”: imports fell sharply, exports declined with a lag, and output and manufacturing activity dropped persistently. (nber.org) That result lines up with earlier National Bureau of Economic Research work using data from 151 countries from 1963 to 2014. That paper found tariff increases led to lower domestic output and productivity, more unemployment, and only small effects on the trade balance. (nber.org) The mechanism is straightforward: a tariff raises the cost of imported inputs and finished goods, which can squeeze factories and households at the same time. The April 2026 paper says the shock moves through both supply and demand channels, meaning businesses face higher costs while buyers cut back. (nber.org) That debate has intensified as inflation expectations have moved up in fresh survey data. The University of Michigan’s preliminary April 2026 results showed year-ahead inflation expectations jumped to 4.8% from 3.8% in March, while long-run expectations rose to 3.4% from 3.2%. (umich.edu) Those expectations matter because the Federal Reserve watches them when judging whether price increases will fade or spread. In its March 17-18, 2026 projections, Fed officials published updated paths for growth, unemployment, and inflation, and recent Fed research has focused on measuring tariff effects on consumer prices in real time. (federalreserve.gov) Federal Reserve staff said on April 8, 2026 that “major changes in U.S. trade policy last year” had increased interest in tracking tariff pass-through into consumer prices. Governor Christopher Waller said on February 23, 2026 that tariffs affect inflation temporarily and that he focuses on underlying inflation for policy decisions. (federalreserve.gov 1) (federalreserve.gov 2) Another recent National Bureau of Economic Research paper adds a second condition: retaliation. It found unilateral tariffs can improve the trade balance, but if other countries answer with their own tariffs, the trade balance worsens and the contraction deepens. (nber.org) The current argument over tariffs is not just about customs revenue or factory protection. The latest academic work and April 2026 inflation-expectations data both point to the same risk: higher tariffs can hit growth directly and complicate the inflation outlook at the same time. (nber.org) (umich.edu)