New Study Highlights Economic Risks of Trump’s Tariff Plans

With Donald Trump's anticipated return to the presidency, global markets are bracing for an era of high tariffs that could rival protectionist policies from the 1930s.

A recent study from the National Bureau of Economic Research sheds light on how similarly high tariffs shaped U.S. industries from 1870 to 1900. During this period, tariff rates averaged around 35%, a stark contrast to Trump’s proposed 20% across-the-board levy.

Researchers Alexander Klein and Christopher Meissner meticulously analyzed industry-level data from the late 19th century, revealing that high tariffs often stifled productivity. Protectionism helped inefficient companies survive, similar to how modern policies of low interest rates are criticized for enabling “zombie” firms. Additionally, in sectors with few domestic competitors, heavy tariffs reduced firms’ motivation to innovate. The petroleum industry, for example, saw a drop in both production and exports, possibly due to tariff-induced constraints.

High tariffs led to an increase in low-cost businesses like textiles, where smaller firms flourished, creating jobs but not necessarily improving wages. This trade-off suggests that while more jobs were created, living standards did not improve as much as they could have with higher productivity.

READ MORE:

Republican Party Set for Congress Takeover with Trump’s Triumph

The auto industry provides a modern-day parallel: Klein and Meissner point out that in the early 20th century, U.S. firms lagged in innovation largely due to a 45% protective tariff, a concern now relevant as the U.S. competes in the electric vehicle sector.

Separately, research from Oxford Economics highlights the economic boosts in former Soviet states benefiting from Russia’s geopolitical tensions. These nations, from Belarus to Kyrgyzstan, have seen economic growth as regional manufacturers fill gaps left by Western companies withdrawing from the Russian market. As Russian firms shift investment to neighboring countries outside the Western sanctions framework, local economies are seeing increased trade and investment, with remittances from workers in Russia also contributing to wage growth in these countries.

Alexander Stefanov