Briefing

When Are Tariffs Optimal?

Abstract: Economic theory and historical evidence demonstrate that tariffs typically distort markets, lead to inefficient resource allocation, create deadweight losses and trigger harmful trade conflicts. While tariffs might improve a large country's terms of trade under strict theoretical conditions (market power, no retaliation), empirical evidence and real-world dynamics typically invalidate these assumptions. Repeated tariff impositions can escalate into trade wars, reducing economic welfare for all involved nations and emphasizing the importance of cooperative trade agreements.

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Richmond Fed Economic Brief

Publication Date: 2025-05-28

Volume: 25

Issue: 21