Tariffs as a Macroeconomic Tool

Tariffs as a Macro Economic Management Tool

Trade Policy Is the New Monetary Policy

The new San Francisco Fed paper on tariffs that we’ve been discussing this week opens the door for using customs duties in a way that the economics profession has almost never considered: as a macroeconomic policy tool.

Over 150 years of history in the U.S., U.K., and France, Régis Barnichon and Aayush Singh find that a tariff hike raises unemployment and lowers inflation. In other words, tariffs work the way we think tax hikes and monetary policy work. Which means we should start to think of them as part of the toolkit for keeping the U.S. economy from going awry.

What’s more, it means we should rethink how tariffs are managed by the government. If tariffs reliably move inflation and unemployment, then they should be data-dependent, dynamic, and discretionary. And that implies that tariffs should sit primarily in the hands of the executive.

The Tariff Tool Kit

Start from the San Francisco Fed’s bare facts. A sizable tariff hike historically raises unemployment and lowers inflation, across multiple countries and regimes. That alone tells you two things. First, tariffs are not just “sectoral distortions” off in relative-price land. They show up in aggregate variables in a consistent way. Second, they have the same sign pattern as monetary or fiscal tightening: prices cool, joblessness ticks up.

If you saw the same impulse responses after a rate hike, nobody would say, “Rates are immoral and must never change.” You’d say, “Okay, rates are a macro instrument. The question is how to use them.”

Tariffs should be treated the same way. Not as a taboo, not as an identity statement about whether you’re a free trader, but as one more knob that moves inflation and employment. Once you see them that way, three design principles follow naturally.

Tariffs Should Be Data-Dependent

If tariffs have macro effects, they shouldn’t be frozen into a 20-year schedule negotiated by trade lawyers. They should respond to the state of the economy.

Barnichon and Singh’s estimates imply a simple, almost Taylor-rule logic: When unemployment is very low and inflation is high, tariffs behave like a disinflationary tool with only a modest employment cost. When unemployment is high and inflation is soft, higher tariffs are counterproductive—they push in the same direction as the slump.

So, from the point of view of workers who both earn wages and buy goods, a simple rule of thumb emerges: If unemployment is low and inflation is high, tariffs are too low.

If unemployment is high and inflation is low, tariffs are too high.

That is exactly what “data-dependent” means. You don’t fix the tariff schedule in Geneva and walk away. You look at unemployment and inflation and adjust tariff policy to the state of the cycle.

We let the Fed move rates meeting by meeting. Why should tariffs be locked in stone regardless of whether the economy is booming or in a slump?

Tariffs Should Be Dynamic

The paper’s other important contribution is historical: tariff changes over 150 years are not tightly tied to the business cycle. Different parties raised and cut tariffs for political reasons at all points in the cycle. In other words, the world accidentally ran a lot of tariff experiments at random times. That’s what lets the authors estimate causal effects in the first place.

The lesson is not “never touch tariffs again.” The lesson is: stop doing this accidentally.

If tariffs move inflation and unemployment, they should be moved on purpose, and more often. Raise tariffs when the labor market is extremely tight and prices are running hot. Cut tariffs when unemployment is elevated and you need all the demand and hiring you can get.

Dynamic tariffs are not some radical innovation. We already adjust interest rates every six weeks, regulations in response to crises, energy policies after price shocks. We just pretend tariffs are sacred and must be set once per trade agreement and then treated as permanent. The SF Fed paper is a giant flashing sign saying, “Tariffs are macro-relevant. Stop pretending they’re static.”

Tariffs Should Be Discretionary

Once you say “tariffs should respond to current data,” you’re also saying: Tariff policy needs discretion, not just rules.

You cannot hard-code into statute: “If unemployment is below four percent and CPI is above three percent, raise the average tariff by X.” Real-world shocks are messy. You need judgment about how broad the tariffs should be, which countries and sectors are involved, and how tariffs interact with immigration, tax, and monetary policy.
That kind of real-time, cross-cutting judgment is exactly what we elect a president to exercise.

Congress is not built to do this. Legislating tariffs is slow, infrequent, and larded with logrolling and parochial interests. International agreements are even worse as macro tools—they lock the U.S. into multi-year schedules negotiated under totally different economic conditions.

If tariffs are going to be data-dependent (responsive to unemployment and inflation), dynamic (adjusted as conditions change), and discretionary (used with judgment alongside rates, taxes, and immigration), then they almost by definition have to be controlled by the executive branch—subject to statutes and oversight, but with real day-to-day authority in the White House.

In practice, that means making peace with something like what Trump has already done de facto: broad delegated authority over tariffs under existing laws, used in response to perceived macro and geopolitical conditions, rather than as a once-a-generation tweak to the WTO schedule.

The Fed and Tariffs Should Work Together

If tariffs reliably lower inflation and raise unemployment, they are not competitors to monetary policy—they are inputs to the Fed’s reaction function.

A sensible division of labor would look like this: The president uses tariffs (and immigration and tax policy) to shape the structure of production and the distribution of gains. The Fed sets interest rates using tariffs as data. If the White House has just imposed a disinflationary, growth-dampening tariff shock, the Fed should lean a bit easier, not tighter.

But that only works if we stop pretending tariffs are “just about trade,” and we stop pretending the sign is unknown. The San Francisco Fed has told us: tariffs, historically, are disinflationary.

Once you know that, the only rational response is to treat tariffs as part of the macro toolkit and put them where real-time, data-dependent, discretionary tools belong: under the control of the executive, guided by economic conditions, not locked away in a museum case labeled “Smoot-Hawley—Never Touch.”

https://www.breitbart.com/economy/2025/11/19/breitbart-business-digest-tariffs-as-a-macro-economic-management-tool/