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

In general tariffs of any kind are an economic distortion and will cause market inefficiencies. It is always consumers in the country with the tariff that pays for it. They are generally to be avoided. However they can be important tools for some special cases:

– To fight against predatory dumping by another country, usually funded by a foreign government through subsidies with the intention of harming domestic producers.
– To ease the transition of a sector that is moving from one region of the world to another. You would start out with a protective tariff and slowly lower it as the domestic industry winds down.
– As a retaliatory measure against a country that has enacted trade barriers.