How to solve the tariff-growth paradox? Do higher tariffs relate to higher growth in the first globalization?

I analyze and resolve the tariff-growth paradox, a finding that in contrast to post WWII, during the first globalization pre WWI, there was a positive relation between tariffs and growth. More growth coincides with higher tariff levels. Using a novel and self-harmonized product-level dataset of tariffs and trade in the German Empire from 1880 to 1913, I decompose the average tariff into its two components: political-induced and market-induced tariff changes. The latter consists of price and composition changes. Average tariffs differ from political tariffs. Political tariff changes do not occur yearly. They vary in being higher, lower, and even directionally divergent from the average tariffs. Market fluctuations of price and composition contribute 92% of all changes while political tariff changes make up 8%. While these market fluctuations are not a direct result of tariff policy, empirical analyses so far suggest that average tariffs represent political tariff changes as a policy tool. I analyze this conjecture and can reproduce the tariff-growth paradox both with the average tariff from aggregated sources and with my new product-level data. In contrast to the literature that finds a positive relation between tariffs and growth, the relation turns either negative or is driven by market fluctuations from price and composition changes. The influence of political tariffs is insignificant in a combined setting with market-induced tariffs, and the tariff-growth paradox vanishes.

Working Paper