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What Can We Learn About the Costs and Benefits of Tariffs from a Trade Model?
In this article, we quantify the costs and benefits of tariffs based on a modern trade model. This model predicts that in the case of unilateral tariffs set by the U.S., a modest across-the-board increase in tariff rates can generate a net positive effect on consumption. This occurs when the tariff revenue collected exceeds the output losses caused by resulting distortions and higher domestic prices. The model predicts a peak net gain in consumption equivalent to 0.3% of real gross domestic product (GDP) with a 19.7% unilateral tariff increase, under the assumption that trade partners to the ...