Could Trump’s tariffs actually work? There might be a chance—here’s how

President Donald Trump’s unleashing of tariffs on the world economy has generated substantial uncertainty and chaos, fueling a roller coaster ride on world stock markets as well as fears of a recession. The economics profession has long maintained that tariffs are welfare reducing, given they are a tax on imports that increases their prices for consumers, reduces prices received by producers, and generates a deadweight loss from lower consumption of imports.

Yet, Donald Trump insists that tariffs are a “beautiful” word and that the imposition of tariffs will make America “rich as hell.”

The chaotic mathematics of Trump’s tariff formulas aside, the question that arises is whether Trump’s tariff policy may be able to achieve some of the goals he has set. At minimum, can broad-based tariffs on the rest of the world boost American prosperity and create the American trade surpluses that seem to dominate Trump’s view of world trade as a zero-sum mercantilist game? Can those tariffs also boost economic activity?

The answers to such questions can best be found in a recourse to historical data, given that tariffs have a long history in the United States.

To start, Figure 1 takes data compiled from Visual Capitalist and Historical Statistics of the United States and plots the average effective tariff rate on imports to the United States from 1870 to 2024, with an estimate for 2025. The average effective tariff is not the average of the actual dutiable rates on goods but the ratio of tariff revenues to the total value of imports rather than tariff revenues to the value of dutiable goods. Since 1870, the average tariff rates on dutiable imports have been higher than the average effective rate, but it is the latter that is probably more useful a measure.

In 1870, the average effective tariff rate was almost 45 percent, and while the actual duty rates on imports seldom went below 40 percent from 1870 to 1913, the average effective rate declined and by 1918 stood at about 6 percent. Average effective rates increased after the First World War, spiking up to about 20 percent with the Smoot-Hawley tariffs of 1930, and then began to decline in the post-Second World War period, reaching a low of 1.2 percent by 2008. They then began growing, reaching over 2 percent by the eve of the COVID-19 pandemic.

For 2025, estimates of the anticipated average U.S. effective tariff rate have varied, given the on-again, off-again nature of the process to date, but have included numbers like 14 percent, 17 percent, and 22.5 percent.

Notwithstanding whether a trade surplus is something modern trade policy should aim for, does the historical evidence for the United States support the proposition that higher effective tariff rates can generate the larger trade surpluses President Trump craves?

Figure 2 takes the average effective tariff rate and data since 1870 on exports, imports, and GDP from the Jordà-Schularick-Taylor Macro-history database (supplemented by FRED for 2021 to 2024) to calculate the trade surplus to GDP ratio and plots the two series against each other. Furthermore, given the variability of the scatter plot points, an effort at data smoothing is made to better discern the trend.

Like all good economics answers, the result depends on how high the effective tariff rate is. Going from 0 to 5 percent effective tariff rates reduces trade deficits. As the effective rate rises from 5 to 10 percent, trade surpluses continue to grow as a share of GDP, levelling off at just over 1.5 percent.

Beyond that, ever higher tariffs do not do anything to increase the trade surplus, which is not surprising given that as U.S. tariff rates rise, imports will decrease, but as the likelihood of retaliation rises, exports will also decrease. Overall, the chart suggests that an effective tariff rate beyond the 5 to 10 percent range is not going to do much more in boosting trade surpluses.

Next question. Will higher effective tariff rates make Americans richer? Using real per capita GDP data from the previous macro-history database (and supplemented by FRED), the average annual growth rate of real per capita GDP is calculated and plotted against the average effective tariff rate in Figure 3 with data smoothing trend. The result shows that as the effective tariff rate rises from 0 to 10 percent, there is actually a small increase in real per capita GDP growth rates, bringing growth from about 1 percent to nearly 2.5 percent. However, beyond that, real per capita GDP growth rates are flat at best and indeed start to decline.

This evidence is based on past performance and does not control for any confounding factors that might also affect trade relationships. However, all other things given, one can reach two simple conclusions. First, an increase in the effective tariff rate that reduces imports and does not necessarily harm one’s exports can generate a trade surplus—if that is your goal. However, the size of the surplus relative to GDP does not grow beyond a 10 percent effective tariff rate for reasons as simple as the appreciation of your currency or tariff retaliation from your trade partners.

Second, tariffs that boost domestic production are correlated with real per capita GDP growth—presumably through the increased domestic production activity—but again, any benefits that might accrue pretty much stop after the effective tariff rate moves beyond 10 percent.

So, can Trump’s love of tariffs work to meet his objectives? Only if they are pursued in moderation, with moderation defined as an average effective tariff rate in the 5 to 10 percent range. Given that the average effective U.S. tariff rate in 2024 was 2.5 percent, eventually settling for something closer to 5 percent in the wake of the gargantuan tariffs that have been announced, will enable Trump to claim a win as well as quell the uncertainty that has unsettled world financial markets.

We can only hope.