The Impact of Import Tariffs on Inflation---A Cross-Country Panel Data Analysis

Youyi Lei

Co-Presenters: Individual Presentation

College: Hennings College of Science Mathematics and Technology

Major: BA.MATH/DATA/ANA

Faculty Research Mentor: Durmaz, Nazif  

Abstract:

In recent years, many countries have imposed new tariffs to protect domestic industries or respond to geopolitical tensions. Since inflation has always been a concern for governments and central banks worldwide, the empirical question is raised that to what extent do tariffs contribute to domestic inflation. This study utilizes cross-country panel data from both World Bank’s World Development Indicators (WDI) and International Financial Statistics (IFS) that include inflation rates, tariffs, GDP, and real effective exchange rate (FEER) of over 80 countries from 1980-2024. By applying the fixed-effects panel regression model, unobserved and time-invariant characteristics are controlled by country fixed effects, while time fixed effects capture global inflationary shocks. The lagged tariff rates are also used to reduce reverse causality and address potential endogeneity. The results suggest that higher tariffs are associated with higher inflation, especially in countries with greater exposure to international trade. However, the magnitude of the effect between tariffs and inflation is moderate even though economically meaningful, reflecting the other completed and jointly contributed factors such as policy responses and firm pricing behavior. As trade policy has become a central tool in economic policy making, this study further provides insights into predicting and analyzing purchasing power of consumers, implications for policymaking, and the macroeconomic consequences of protectionist trade policies.