Short-Term Tariffs, Long-Term Pain: How Trade Shocks Hurt the Economy Quickly

A new NBER study by economists from Stanford, Northwestern, and Harvard shows that even temporary import tariffs can cause recessions and inflation, especially when other countries retaliate. The research warns that the short-term economic pain from tariffs often outweighs any potential trade benefits.

In a new study from the National Bureau of Economic Research (NBER), economists Adrien Auclert (Stanford), Matthew Rognlie (Northwestern), and Ludwig Straub (Harvard) ask a simple but powerful question: What happens to an economy when the government suddenly slaps tariffs on imports? With the Trump Administration once again pushing for broad tariffs, some of the largest since World War II, the timing of this paper couldn’t be better. While most trade studies look at long-term effects, this one zooms in on the short-term damage, and the findings are eye-opening.

Their research shows that even short-lived tariffs can cause serious economic pain. And not just because they make things more expensive, though they do that too. Tariffs can actually push the economy into a recession, with falling output and rising inflation happening at the same time.

The Recession Formula Hidden in Trade Policy

The core of the paper is a simple condition that predicts whether a tariff will cause a recession. It looks at how open an economy is, how flexible consumers are about spending now versus later, how sensitive export demand is to prices, and how easily people can switch from imported to local goods.

The authors use real U.S. data to plug into this equation. They estimate that imports make up about 11% of GDP (α = 0.11), and that consumers are pretty responsive to price changes, especially for durable goods like cars and electronics. This responsiveness makes them more likely to delay purchases when prices go up, just what happens when tariffs hit.

In this setup, even a modest 10% tariff leads to a 0.66% drop in GDP. And if other countries retaliate with their tariffs, the damage nearly triples. The trade balance, which tariffs are supposed to improve, may get worse in those cases.

Why Tariffs Can Lead to Stagflation

Most of us think of tariffs as something that just raises prices. But this paper shows they also hurt production. When tariffs go up, import prices rise. Consumers pull back on spending, especially on big-ticket items. Exporters also suffer because their products become less competitive abroad.

Put together, these effects slow the economy. But since prices are still rising due to the tariffs, it’s not just a slowdown, it’s stagflation: slow growth plus high inflation. Central banks get stuck in a tough spot. If they cut interest rates to help growth, they risk making inflation worse. If they raise rates to fight inflation, they deepen the recession.

The study also busts the old idea that tariffs are basically the same as export taxes (a concept called Lerner symmetry). In the short run, with sticky wages and prices, they aren’t. Tariffs hurt differently and more unpredictably.

The Hidden Costs to Households and the Economy

The authors go beyond GDP and prices to look at how tariffs affect overall well-being, or welfare. Traditional economic theory says there’s a trade-off: tariffs may distort markets but improve a country’s terms of trade (by making imports more expensive relative to exports). But that old logic falls apart when you include the short-term fallout.

Auclert, Rognlie, and Straub show that the cost of a tariff-induced recession can easily outweigh any supposed benefits. When other countries retaliate, the harm is even greater. In most realistic scenarios, even small tariffs result in a net loss for the country imposing them.

Their simulations show that the optimal tariff, meaning the level that maximizes national welfare, is far lower than traditional models suggest. Once you factor in job losses, reduced spending, and trade retaliation, tariffs become much harder to justify.

Durables, Inventories, and Anticipation Make It Worse

The paper also explores how certain sectors and behaviors can make things worse. Durable goods like appliances and vehicles are especially vulnerable. When tariffs are announced, people rush to buy before prices go up. This creates a short-term boom followed by a sharp crash.

Firms respond similarly. If they know tariffs are coming, they stockpile imports. This messes with trade data and creates wild swings in demand. Once the tariffs hit, the boom turns into a bust.

The authors also factor in real-world complications, like households that live paycheck to paycheck, and limited ability for prices or wages to adjust quickly. In all these cases, the effects of tariffs are amplified. Recessions are deeper, recoveries are slower, and central banks have fewer tools to fix the damage.

A Cautionary Tale for Policymakers

The message of this paper is clear: tariffs aren’t just about trade, they’re about the whole economy. They hit consumers, businesses, and governments alike, and their impact can be fast, broad, and painful.

In theory, a well-placed tariff might help a country in the long run. But in practice, especially when other countries hit back, the short-term damage is too big to ignore. Before turning to tariffs as a solution for trade imbalances or political leverage, policymakers need to think twice. As this research makes clear, tariffs can be a risky gamble with real consequences for jobs, prices, and economic stability.