What is the point of tariffs, in general? Lots of countries have them, to at least a small degree. It’s rarer that countries use them to a large degree. Why?
My understanding is that there are four main reasons tariffs get put in place:
(1) Special interests that benefit from tariffs lobby for them at the expense of everyone else. This is obviously a bad reason to have tariffs.
(2) Sometimes countries have an interest in building out capabilities in very specific industries as part of a long-term wealth/self-preservation plan, which can be rational and wise when narrow and well thought out (e.g., “in 20 years, we want to have a globally competitive automotive industry” or “we want to have a strong local industry in steel in case of war”). This can be a good reason to have tariffs, but it also requires a carefully thought-out, specific, long-term plan that is well executed. And these kinds of plans often fail.
(3) It is a punishment tool to retaliate or threaten other countries (though they cause self-punishment at the same time, so it’s a very costly form of punishment).
(4) Irrationality from leaders about the purposes and real effects of tariffs. In such cases, the tariffs mainly cause harm to all involved parties.
There are also some other special cases where tariffs get used, such as when a country subsidizes an industry and exports to another country. Still, the latter country wants its own producers to be able to compete on an equal playing field, so it puts in place tariffs. Or when a country can’t raise taxes for some reason, it can try to use tariffs as a substitute. Tariffs can sometimes be used as an attempt to increase local jobs in times of high unemployment. But this is a rare situation.
Trade is usually good because if A and B trade freely, it’s because they both believe they are better off making the trade than not. Hence, gains from trade. Tariffs distort this process and make the involved parties worse off. So unless a tariff is well justified, it’s very likely making things worse. That’s why I think that tariffs should be viewed as a special measure: something that countries should avoid by default but use when they have special reasons to do so.
This piece was first written on April 7, 2025, and first appeared on my website on April 22, 2025.
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