Editing Tariff (section)

=== Basic economic analysis ===
[[File:Effect of Import Tariff - v1.png|thumb|upright 1.25|Effects of import tariff, which hurts domestic consumers more than domestic producers are helped. Higher prices and lower quantities reduce [[consumer surplus]] by areas A+B+C+D, while expanding [[producer surplus]] by A and government revenue by C. Areas B and D are [[Deadweight loss|dead-weight losses]], surplus lost by consumers and overall.<ref name="Krugman and Wells2005">{{cite book |author1=Krugman, Paul |author2=Wells, Robin |year=2005 |title=Microeconomics |publisher=Worth |isbn=978-0-7167-5229-5 |url=https://archive.org/details/microeconomics00krug}}</ref> For a more detailed analysis of this diagram, see [[Free trade#Economics]]. ]]

[[Economics|Economic analyses]] of tariffs generally find that tariffs distort the [[free market]] and increase prices of both foreign and domestic products. The welfare effects of tariffs on an importing country are usually negative, even if other countries do not retaliate, as the loss of foreign competition drives up prices for domestic goods by the amount of the tariff.<ref name="Radcliffe">{{cite web |last=Radcliffe |first=Brent |title=The Basics Of Tariffs and Trade Barriers |url=https://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp |access-date=2020-11-07 |website=Investopedia |language=en |archive-date=2020-11-12 |archive-url=https://web.archive.org/web/20201112020655/https://www.investopedia.com/articles/economics/08/tariff-trade-barrier-basics.asp |url-status=live}}</ref> The diagrams at right show the costs and benefits of imposing a tariff on a good in the domestic economy under the standard model of tariffs in a [[perfect competition|competitive economy]].<ref name="Krugman and Wells2005"/> Because of its importance, simplicity, and widespread applicability, this microeconomic model of tariffs is usually taught in introductory (first-year) [[microeconomics]] courses.

Imposing an import tariff has the following effects, shown in the first diagram in a hypothetical domestic market for televisions:
*Price rises from world price Pw to higher tariff price Pt.
*Quantity demanded by domestic consumers falls from C1 to C2, a movement along the demand curve due to higher price.
*Domestic suppliers are willing to supply Q2 rather than Q1, a movement along the supply curve due to the higher price, so the quantity imported falls from C1&minus;Q1 to C2&minus;Q2.
*[[Consumer surplus]] (the area under the demand curve but above price) shrinks by areas A+B+C+D, as domestic consumers face higher prices and consume lower quantities.
*[[Producer surplus]] (the area above the supply curve but below price) increases by area A, as domestic producers shielded from international competition can sell more of their product at a higher price.
*Government tax revenue is the import quantity (C2 &minus; Q2) times the tariff price (Pw &minus; Pt), shown as area C.
*Areas B and D are [[deadweight loss]]es, surplus formerly captured by consumers that now is lost to all parties.

The overall change in welfare = Change in Consumer Surplus + Change in Producer Surplus + Change in Government Revenue = (&minus;A&minus;B&minus;C&minus;D) + A + C = &minus;B&minus;D. The final state after imposition of the tariff has overall welfare reduced by the areas areas B and D. The losses to domestic consumers are greater than the combined benefits to domestic producers and government.<ref name="Krugman and Wells2005"/>

That tariffs overall reduce welfare is not controversial among economists. For example, the University of Chicago surveyed about 40 leading economists in March 2018 asking whether "Imposing new U.S. tariffs on steel and aluminum will improve Americans' welfare." About two-thirds strongly disagreed with the statement, while one third disagreed. None agreed or strongly agreed. Several commented that such tariffs would help a few Americans at the expense of many.<ref>{{cite web |url=http://www.igmchicago.org/surveys/steel-and-aluminum-tariffs |title=Steel and Aluminum Tariffs |date=March 12, 2018 |website=igmchicago.org |access-date=2019-10-07 |archive-date=2018-03-12 |archive-url=https://web.archive.org/web/20180312212826/http://www.igmchicago.org/surveys/steel-and-aluminum-tariffs |url-status=live}}</ref> This is consistent with the explanation provided above, which is that losses to domestic consumers outweigh gains to domestic producers and government, by the amount of deadweight losses.{{sfnp|Krugman |Wells|2005}}

Tariffs are generally more inefficient than [[consumption tax]]es.<ref>{{Cite journal |jstor=1910538 |title=Optimal Taxation and Public Production I: Production Efficiency |journal=The American Economic Review |volume=61 |issue=1 |pages=8–27 |last1=Diamond |first1=Peter A. |last2=Mirrlees |first2=James A. |year=1971}}</ref>

A 2021 study found that across 151 countries over the period 1963–2014, "tariff increases are associated with persistent, economically and statistically significant declines in domestic output and productivity, as well as higher unemployment and inequality, real exchange rate appreciation, and insignificant changes to the trade balance."<ref>{{Cite journal |last1=Furceri |first1=Davide |last2=Hannan |first2=Swarnali A |last3=Ostry |first3=Jonathan D |last4=Rose |first4=Andrew K |date=2021 |title=The Macroeconomy After Tariffs |url=https://doi.org/10.1093/wber/lhab016 |journal=The World Bank Economic Review |volume=36 |issue=2 |pages=361–381 |doi=10.1093/wber/lhab016 |issn=0258-6770 |hdl=10986/36630 |hdl-access=free}}</ref>

Tariffs do not determine the size of trade deficits: trade balances are driven by consumption. Rather, it is that a strong economy creates rich consumers who in turn create the demand for imports.<ref name="Economist 041123">{{cite news |title=Trade wars: episode II |newspaper=[[The Economist]] |date=4 November 2023 |author=Editorial |url=https://www.economist.com/leaders/2023/11/02/donald-trumps-tariff-plans-would-inflict-grievous-damage-on-america-and-the-world}}</ref> Industries protected by tariffs expand their domestic market share but an additional effect is that their need to be efficient and cost-effective is reduced. This cost is imposed on (domestic) purchasers of the products of those industries,<ref name="Economist 041123" /> a cost that is eventually passed on to the end consumer. Finally, other countries must be expected to retaliate by imposing countervailing tariffs, a [[lose-lose situation]] that would lead to increased world-wide inflation.<ref name="Economist 041123" />

[[Digital goods]] and [[Service (economics)|services]] generally do not pass through [[customs]], making monitoring and application of tariffs more difficult. [[Non-tariff barriers to trade]] of services can be higher than tariffs on goods.<ref name="i469">{{cite journal |last=Hoekman |first=Bernard |title=The General Agreement on Trade in Services: Doomed to Fail? Does it Matter? |journal=Journal of Industry, Competition and Trade |volume=8 |issue=3–4 |date=2008 |issn=1566-1679 |doi=10.1007/s10842-008-0036-z |pages=295–318}}</ref>