Editing Free trade (section)

==== Tariffs ====
{{Further|Tariff}}
[[File:EffectOfTariff.svg|thumb|upright=1.5|The light red regions are the net loss to society caused by the existence of the tariff.{{citation needed|date=November 2024}}]]
The chart at the right analyzes the effect of the imposition of an import tariff on some imaginary good. Prior to the tariff, the price of the good in the world market and hence in the domestic market is P<sub>world</sub>. The tariff increases the domestic price to P<sub>tariff</sub>. The higher price causes domestic production to increase from Q<sub>S1</sub> to Q<sub>S2</sub> and causes domestic consumption to decline from Q<sub>C1</sub> to Q<sub>C2</sub>.<ref name="stockman">Alan C. Stockman, ''Introduction to Economics'', Second Edition, Chapter 9.</ref><ref name="Mankiw">[[N. Gregory Mankiw]], ''Macroeconomics'', Fifth Edition, Chapter 7.</ref>

This has three effects on societal welfare. Consumers are made worse off because the consumer surplus (green region) becomes smaller. Producers are better off because the producer surplus (yellow region) is made larger. The government also has additional tax revenue (blue region). However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society.<ref name="stockman"/><ref name="Mankiw"/>

An almost identical analysis of this tariff from the perspective of a net producing country yields parallel results. From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers (there is no tax revenue in this case because the country being analyzed is not collecting the tariff). Under similar analysis, export tariffs, import quotas and export quotas all yield nearly identical results.<ref name="landsburg"/>

Sometimes consumers are better off and producers worse off and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Free trade creates winners and losers, but theory and empirical evidence show that the gains from free trade are larger than the losses.<ref name="landsburg"/>

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>