How would tariffs on foreign goods strengthen a country’s economy? Conversely, how does another country imposing tariffs cost the target country money?

Question

I read an example recently where the Obama administration imposed tariffs on tires from China and in response China imposed tariffs on chicken from the U.S. Both were said to have ‘cost’ the U.S. (in tire prices passed to consumers and … it wasn’t clear). How does this work?

In: Economics

Answer 1

Trade barriers dont strengthen economies at all, quite the opposite. You basically use them as punishment as it injures both economies. One reason you might do that is for long term economic health: if the other country is practicing unfair tactics like high subsidies, you want to deter this as it will distort the market (driving down prices below costs, running otherwise good companies out of the business). However, this might not have the fully intended impact since you only control your own tariffs.

Realistically though, tariffs tend to be used very haphazardly as there is no real way to know what the “right” tariff is. Even if you did, it’s a decision made by politicians and therefore probably has less to do with economic optimization and more to do with dealmaking and currying favor. You also get very bizarre combinations of situations like the USPS essentially subsidizing shipping for small businesses in china while the rest of the federal government tariffs them.