What are the economic benefits and costs of import tariffs? The economic impact can be examined in one of two ways: on an individual product basis (partial equilibrium, looking at supply and demand for a particular good), or on an economy-wide basis (general equilibrium, looking at many markets simultaneously). Let’s consider each approach in turn.
Suppose the U.S. government imposes a tariff on imported sugar. This tax discourages the importation of sugar and the domestic price rises. The higher price reduces the quantity of sugar that consumers demand but increases the quantity of sugar that domestic producers are willing to supply. As a result, imports fall, being squeezed by lower domestic demand and higher domestic supply. Because it increases domestic production of sugar and decreases domestic consumption, the tariff is equivalent to a production subsidy and a consumption tax.
In changing production and consumption, the tariff redistributes income. Domestic consumers lose from the higher price, which goes partly to domestic producers (in the form of higher prices) and partly to the government (in the form of tax revenue). However, consumers lose more than producers and the government gains, meaning that there are “deadweight losses” (economic inefficiencies) associated with the tariff. The production deadweight loss is the extra costs that are incurred in increasing domestic production (beyond what would have been produced at the world price) and the consumption deadweight loss is the lost benefits to consumers who used to purchase the good (at the world price) but no longer do so. These deadweight losses can be considered lost gains from trade as a result of reducing trade.
This is from Douglas A. Irwin, “Tariffs,” in David R. Henderson, ed., The Concise Encyclopedia of Economics.
With the huge role that tariffs have taken in economic policy in the last 2 months, Liberty Fund and I thought (and think) it made sense to have an article devoted to tariffs. I already have “Free Trade” by Alan S. Blinder, “Protectionism” by Jagdish Bhagwati, and “International Trade Agreements” by Doug Irwin.
The article on tariffs is the latest addition to the online Encyclopedia.
Additional excerpt:
Tariffs are sometimes proposed as a way of reducing a trade deficit. But trade deficits are determined by macroeconomic factors, such as the degree to which capital can move between countries, and the balance between a country’s national savings and investment. Tariffs tend not to affect these underlying determinants of trade deficits and are largely ineffective at reducing them.
For developing countries, tariffs not only reduce consumer choices but also can harm a country’s growth prospects. Countries that are behind the technology frontier need imports of foreign capital goods to help their producers become more efficient. Tariffs that restrict such imports are an obstacle to such countries catching up to the productive efficiency and higher income levels enjoyed by other countries (Irwin 2025).
For example, under its communist leader Mao Zedong, China was largely closed to international trade and remained one of the poorest countries in the world. In the late 1970s, China’s new leader, Deng Xiaoping, opened the economy to trade and foreign investment. For several decades thereafter, China’s economy grew at close to double digit rates, raising incomes dramatically and sharply reducing poverty. A similar process has been observed in countries such as India and Vietnam after they opened to trade. However, trade is an opportunity, not a guarantee of economic success, and other countries in Latin America and Africa have not seen such dramatic growth rates after they reduced their trade barriers.
Read the whole thing. It’s long but it doesn’t feel long. It’s like slicing a hot knife through butter.
