(What’s Left of) Our Economy: The Case for Tariffs is (Slowly) Getting More Respectable Academically

Frankly, this is getting ridiculous – in a good way for trade policy realists (like me).  The vast bulk of the economics profession continues treating orthodox trade theory as unassailable dogma, insisting that the freest possible global flows of goods and services inevitably produces win-win situations for everyone on this planet.  As a result, any obstacles – especially unilateral tariffs – can only screw the pooch and cause devastating economic damage.

And yet, even as the Trump 2.0 tariffs persist and could be heightened as the administration seeks to replace the invalidated “Liberation Day” levies, leading lights of the economics profession keep assailing the dogma – or at least key alarms being sounded on its behalf.

The latest example:  a new report by former senior World Bank economist Caroline Freund largely supporting Mr. Trump’s frequent claim that a tariff is “a tax on another country”. 

According to Freund, “data for the 50 largest US trading partners…show that foreign exporters absorbed roughly 40–50% of the 2025 US tariff increases through lower export prices – much more than earlier studies suggested.”

That’s why, she explained, although “most economic forecasters predicted a sharp rise in consumer prices and significant import disruption….retail prices rose modestly and import-dependent sectors held up.”

For good measure, Freund added that “The aggregate result vindicates optimal tariff theory.”  That’s the (entirely mainstream but largely neglected) economic notion that there’s “a specific set of conditions under which a country could, in principle, enhance welfare with tariffs….”  

Further, these conditions “include situations where countries have enough market power to influence international prices to their advantage or when temporary protection is necessary for important industries to develop and mature.”*  (See here.)  Like…uh…the United States?   

This doesn’t make Freund a full-throated “tariff woman.”  She noted that her findings do “not mean the tariffs made America better off.”  But RealityChek has spotlighted more than enough data to make clear  that they have.  (See, e.g., here, here, and here.)   

And as mentioned above, Freund has hardly been alone in her  heresy 

There’s been former U.S. Treasury Secretary and prize-winning former Harvard economist Larry Summers dissing former Federal Reserve Chair Jerome Powell’s blaming tariffs for worsening inflation:

“Yes, maybe it’s true that if you take out tariffs, the [inflation] numbers will look good.  But because people are spending more money on tariffed goods, they’re spending less money on other goods whose price is lower, and that should be taken out as well.  So I don’t think cherry-picking the components that have risen is a particularly good way of doing the analysis.”  (See here.)   

There’s been a new paper from the prestigious National Bureau of Economic Research (NBER) demonstrating that U.S. manufacturing’s productivity stopped growing after 2010 because of a “cessation of output growth in 2000” largely stemming from an “invasion of imports that closed domestic plants, destroyed jobs, and squeezed profits. Then followed a chain of causation that ultimately undermined productivity growth – from falling capacity utilization, to lower investment in fixed capital and R&D, and to an erosion of innovation.”   

Moreover, the reverse also could be true reports another new study – this from the Boston branch of the Federal Reserve system. It found that “In 2025, the sectors that were more affected by [U.S.] tariffs relative to other sectors experienced significantly greater labor productivity growth, mitigating the cost increases induced by the new trade policy.

There’s a popular joke that academic economics has become so abstract that its practitioners have a habit of asking “That may be true in fact, but is it true in theory”?  The above examples certainly don’t prove this profession is ready en masse to give the empirical data on Trump’s tariffs and tariffs in general their proper due.  In other words, as Churchill famously said, we’re surely not at “the beginning of the end.  But it is, perhaps, the end of the beginning.”

*As a result, optimal tariff theory is closely linked with another venerable economic proposition:  “Infant industry argument” for providing new industries with “require protection from international competitors until they become mature, stable, and are able to be competitive.”  (See here.)  This view was developed by U.S. Founding Father Alexander Hamilton and supported to an extent by the 19th century English political economist John Stuart Mill.