I’m reading for a quiz and I just ran into this point by an author:
“For a large country that can affect world price through trading, a tariff lowers the price of imports and generates a terms of trade benefit.”
How is this possible? How does it lower the price of imports?
In: 0
A tariff on imports increases the price of imports in the tariff nation. This decreases demand for the imported product in the tariff nation.
If that country is large and provides a substantial fraction of global demand, the decline in global demand will lead to a lower global price.
Since terms of trade refers to the ratio of export prices to import prices, and the tariff nation is a net importer of the tariffed good, the lower price on the global market of the tariffed good means that the overall ratio of export price to import price rises. That’s a terms of trade benefit.
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