Tariffs and aggregate economic activity: Lessons from the Great Depression

We argue against the prevailing view that the macroeconomic role of tariffs during the Great Depression was small. To understand the economic channels through which tariffs could have large effects we build a multi-sector dynamic equilibrium trade model that captures key features of trade in the 1930s: A substantial share of trade was in material inputs, and the persistence of the tariff increases had the potential for significant effects on capital accumulation. Both of these features are important in generating the conclusion that, even when trade only represents st small share of output, tariffs can have a significant impact on GDP. Simulation of the model suggests that the global escalation of the tariff war precipitated the collapse of world trade, along with declines of several percent in international output and investment.