You Better Hope The Tariffs Are Transitory

By Veronique de Rugy

Sunday, August 10, 2025

 

Over at Marginal Revolution, Tyler Cowen points to the result of a new NBER working paper by Stephanie Schmitt-Grohé and Martín Uribe:

 

We estimate transitory and permanent import tariff shocks in the United States over the postwar period. We find that transitory tariff increases are neither inflationary nor contractionary, and are not associated with monetary tightening. In contrast, permanent tariff increases trigger a temporary rise in inflation (a one-off increase in the price level) and a brief tightening of monetary policy. Consistent with the intertemporal approach to the balance of payments, transitory tariff increases reduce imports and improve the trade balance, whereas permanent increases leave both largely unchanged. Transitory shocks account for approximately 80 percent of tariff movements. Overall, tariff shocks are estimated to be a minor driver of U.S. business cycle fluctuations on average and even during episodes of substantial tariff hikes, such as Nixon 1971, Ford 1975, and Trump 2018.

 

The findings relevant to protectionist politicians elected with a mandate to lower prices, expecting rapid interest rate cuts, and anticipating a shrinking trade balance are as follows:

 

·        Transitory tariff increases have no significant effect on inflation, economic activity, or monetary policy.

·        Permanent tariff increases cause a one-time rise in prices and a short period of monetary tightening.

·        Permanent tariffs have little effect on imports and the trade balance.