Are there any positive effects of applying tariffs?

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Question: 

Are there any positive effects of applying tariffs? Everything I hear in the news makes them seem like they are an objectively bad idea and are always a poor choice. If they’re so bad, why does China retaliate with their own tariffs when we apply tariffs to them? Would it not be better to just shrug them off and ignore them? Or respond in some other way?

Answer: 

Tariffs, like many government policies, have both costs and benefits.  As your questions points out, we have heard much about the costs of tariffs in the ongoing trade disputes.  But there are also benefits that accrue.  For example, the U.S. steel and aluminum industries will benefit from the tariffs imposed by the Trump administration, as some U.S. companies shift some of their steel and aluminum needs to U.S. suppliers due to the tariffs and the impact the tariffs have on the relative costs of U.S. versus imported steel and aluminum.  The federal government also benefits from tariffs as they are an additional source of tax revenue (tariffs are import taxes).  In general, the benefits of a tariff are captured by the domestic producers of the product that has the tariff placed upon it and the government imposing the tariff.  The costs of a tariffs are captured by the domestic users and the international producers of the product.  This split between the benefits and costs of a tariff can also explain why countries sometimes use tariffs as a tool or negotiating tactic in international trade disputes.   A tariff can be a policy to exert selective economic pain and political pressure on another country during trade discussions or disputes.  In the case of the ongoing trade tensions between the U.S. and China, one of the reasons President Trump gave for the imposition of tariffs was to spur China to change its laws and regulations on intellectual property rights.  China responded with tariffs of its own, to put economic and political pressure on the U.S. in hopes that the Trump administration might reverse course.  For both sides, tariffs are tools to reinforce their trade policy stances.  There are other ways to settle trade policy differences, such as direct negotiation, but tariffs are a crude, but effective, way to indicate the size and severity of trade issues and can force trade negotiators back to the negotiating table.

Answered by:
Dr. Chad Hart
Associate Professor
Last updated on September 19, 2018