What happened
A Federal Reserve economic model indicates that a permanent 10 percent tariff on non-oil goods could leave U.S. real GDP about 0.28 percent higher after ten years, even if foreign producers absorb only a small share of the tariff cost.
The analysis relies on the Federal Reserve Board’s large-scale model, known as FRB/US. Under the model’s standard equations, business investment also rises.
Harvard economist Jason Furman previously used the same model to simulate a permanent 10 percent tariff on non-oil goods. His version showed real GDP about 0.22 percent lower after ten years and business investment down 3.51 percent.
Furman’s scenario assigned the entire tariff burden to American consumers and businesses and modified the model’s investment-price equation to hold the relevant relative price on its baseline path.
Restoring the standard equation while keeping a surcharge on imported equipment changed the results. Even with foreigners absorbing none of the tariff bill, ten-year GDP moved from about 0.22 percent below baseline to 0.27 percent above it.
When foreign equipment suppliers absorbed four percent of the duties on their goods through lower pre-tariff prices, ten-year GDP rose 0.282 percent above baseline, and investment moved slightly into positive territory.
The gains persisted over time. After 30 years, GDP was about 0.21 percent higher and investment roughly 0.42 percent higher.
The simulations did not include additional investment from companies building American factories, reshoring, or expanded export opportunities won through trade negotiations.