The first half of 2025 brought with it a renewed focus on global trade wars, particularly as the United States government began to (again) question many long-standing global trade agreements — whether formally inked or traditionally observed. As a result, discourse about tariffs reached a fever pitch in the news and across social media.

So, let’s ask a simple question: are tariffs good or bad for an economy, and the people within it? 

There are two general opinions about tariffs that the public tends to hold. On the one hand, many people believe that tariffs are a good thing, as they can help boost the domestic economy by protecting domestic producers from foreign competition. It’s believed that this will result in more jobs for locals, and more money circulating amongst domestic hands. On the other hand, many people believe that tariffs are always a bad idea, because they make the prices of goods more expensive for everyday consumers regardless of whether those goods were imported or not.

As with many things in life and economics, both of these perspectives have quite a bit of truth to them, but neither paints the whole picture. In order to answer our simple question, then, we’ll need to dive deeper into these perspectives and the use cases of tariffs.

Tariffs make goods more expensive, create deadweight loss, and drive up prices

Tariffs are a form of trade barrier, where a domestic government “artificially” increases the prices of foreign goods. We’ve already written about trade barriers and detailed how they can lower overall welfare (by creating deadweight loss), increase the costs of goods, prop up inefficient firms, and prevent economies from utilizing their comparative advantage.

Thus tariffs are, from an economic perspective, inefficient for a number of reasons. An artificial price increase means that the market is forced away from its competitive equilibrium to one that has a higher price. Therefore, fewer consumers will participate in the market, and overall surplus to both producers and consumers is reduced. The deadweight loss created depends on how many consumers were pushed out of the market, which represents how many transactions were lost due to the government-induced price increase.

Let’s consider this from another angle. If foreign producers can make a specific product, ship it to a different economy, and still sell it for a lower price than the domestic producers can, then (almost certainly) those foreign producers are more efficient than domestic producers in producing that product. From a pure efficiency standpoint, those foreign producers should be tasked with producing those items, and domestic labor and capital should be redirected into more efficient areas. This would increase overall welfare in a scenario where countries can trade with each other. In fact, the idea of comparative advantage goes further by stating that countries should specialize in producing the goods that they are relatively more efficient at producing, not just absolutely.

But, if tariffs are imposed such that the price of foreign goods increases, it supports the relative inefficiency of domestic producers. Overall, both the foreign and domestic economies would be more productive and better off if domestic consumers could buy the cheaper foreign goods. Further, even the domestic economy would benefit (at least in the medium-to-long term) from more income if domestic labor and capital were redirected into a more efficient industry, where they could earn more than they would from producing goods that could be more cheaply imported. But the tariff prevents the “invisible hand” from correcting this misalignment. Overall welfare is reduced.

These economic outcomes are purely negative. As such, most economists would probably agree that tariffs are a net negative on an economy in most situations. However, real life is seldom as simple as theory, and real economic policy may differ from what’s theoretically optimal.

Tariffs are not a new invention — they’ve existed since ancient times — and nearly every country maintains a robust set of tariffs on foreign goods, even sometimes with close trading partners. This begs the question: if tariffs lower economic prosperity, why do nations and the economists that advise them continue to implement tariffs?

The use cases of tariffs (and other trade barriers)

Before we proceed, consider that today, almost every single country in the world implements a tariff on foreign goods. Most countries’ average tariff on imported goods falls between 3-5%, though some may have much higher average tariff rates, and specific products or industries often have higher or lower tariffs.

The World Bank and the World Trade Organization publish data on worldwide average tariffs in a few places: for example, in the World Bank’s World Development Indicators DataBank and the World Trade Organization’s World Tariff Profiles reports. These can be helpful places to learn about the typical size and scope of tariffs in modern society. Even a cursory glance at this data confirms the fact that tariffs are very widespread.

The fact that tariffs tend to lower economic prosperity, and the fact that (nearly) every nation implements them anyway, hints at an important truth: tariffs serve important functions that simple economic models of trade do not account for.

Let’s review several of the major reasons why a tariff can, in fact, be justified.

National security

First, trade barriers can help maintain national security. A nation might find it very much in their interest to limit their dependencies on critical goods that are connected to their rivals or enemies. Adam Smith himself points this out in the Wealth of Nations:

“If any particular manufacture was necessary, indeed, for the defence of the society, it might not always be prudent to depend upon our neighbours for the supply; and if such manufacture could not otherwise be supported at home, it might not be unreasonable that all the other branches of industry should be taxed in order to support it.”

For example, in late May 2025, the European Union approved new tariffs against Russian and Belarussan agricultural goods, in part due to the ongoing conflict in Ukraine. The EU had the following justification when announcing these new trade barriers:

“Imports into the EU of urea and nitrogen-based fertilisers from Russia…reflect a situation of economic dependence on Russia. If left unchecked, the situation could harm EU food security and, in the case of fertilisers in particular, leave the Union vulnerable to possible coercive measures by Russia.”

Clearly, the EU currently views dependence on Russian agricultural goods as a potential security threat. While a tariff on these goods will lower EU consumers’ welfare, it will also reduce the EU’s vulnerability to potential threats. In this case, the EU seems to have decided that accepting some deadweight loss is worth the added security.

Protecting domestic industries

Often, the public may believe that having domestic producers of a good is better than importing those goods from foreigners. After all, domestic industries hire domestic workers, and invest in domestic areas, so implementing tariffs to protect domestic industries ought to grow the economy.

But this train of logic misses an important concept: tariffs not only insulate domestic firms from foreign firms, they also insulate domestic firms from competition. Unfortunately, limiting competition reduces efficiency and can often result in increased prices, reduced consumer choices, or inferior product quality.

It’s well-known that, given the right market conditions, perfect competition produces a Pareto efficient outcome (in fact, this is the “First Welfare Theorem” of economics) — and in a global economy, perfect competition requires open trade. Therefore, protecting a company from the force of competition is very often not recommended.

There can be times when protecting a domestic industry is a justified decision, as was seen in the EU example above. But protecting domestic industries is not, in itself, a good enough justification for tariffs as it will reduce economic prosperity. It’s true that domestic jobs might be saved, and money might remain in domestic hands, but these “benefits” come at the cost of lower prosperity overall.

Garnering political support

Nevertheless, politicians who hope to garner support among voters (particularly those connected to specific industries) often promise to increase protection of domestic firms from foreign competition. This promise is usually seen as a positive thing by voters, and it can be difficult for the public to draw the connection between protectionism and the reduced prosperity that it often brings.

The success of Donald Trump’s “America First” slogan among US-American voters is a recent example of this sort of promise, and how powerfully it can resonate with the voting public. It also hints at an underlying truth: whether or not a policy makes strict economic sense or is economically justified is not always the main issue that voters and politicians are concerned with.

This doesn’t necessarily mean that voters are always behaving irrationally — it merely suggests that certain hard-to-measure attributes, like a sense of nationalism, may sometimes be more important to the public than the cold calculus of economics.

Levelling the playing field

Sometimes tariffs may be justified by governments on the basis that other countries are producing a good more cheaply than the free market would normally allow. For example, if a foreign government is subsidising one of their industries through direct subsidies, tax breaks, or other benefits, that support will enable cheaper production and therefore cheaper products. This could allow those foreign producers to (unfairly) undercut prices in other countries.

In this scenario, the foreign product is more competitive in a domestic market to which it is imported. Allowing a domestic market to be flooded by foreign-subsidised goods may result in cheaper goods in the short term, but if it results in the disappearance of domestic or foreign producers who are, in fact, more efficient when subsidies are taken out of the equation, then in the long term competition will be (unfairly) removed and the remaining (previously subsidised) foreign firms will be able to set higher prices.

In order to level the field, a domestic government may impose tariffs to offset the advantage the foreign producer gains from subsidies from their own government.

Protecting human rights

Sometimes, trade barriers are implemented on moral or safety grounds. If a country abuses human rights, other countries often impose strict sanctions until those rights are restored.

For example, North Korea currently exists as a pariah state — very many countries and economic organizations around the world have levied significant sanctions on North Korea, with the aim of limiting its economic prosperity. This situation is due to a mix of factors, including North Korea’s authoritarian government and lack of cooperativeness with other nations. But human rights abuses contribute significantly to this status.

Unfortunately, although it is one of the most impoverished nations in the world (partly due to these trade barriers), North Korea has stayed its course. Still, there’s little doubt that the country would be more prosperous if it had acquiesced to the demands of neighboring countries and restored further human rights to its people.

While it might otherwise be possible for consumers to purchase certain products made in North Korea, for most nations preventing this trade as much as possible is an acceptable cost in order to maintain pressure on the North Korean government.

Accounting for externalities

In a simplified trade model, some factors that have value for an economy may not be accounted for. An example of this could include the benefit to the climate from importing fewer fossil fuels and subsidizing cleaner forms of energy instead. Climate deterioration is a negative externality, and markets that degrade the environment often don’t properly account for the full cost of their production because of this. Therefore, a tariff or other trade barrier in those markets (such as the market for oil) could be justified.

There may also be positive externalities to a specific community for having a local industry that the community was historically built around. For example, the city of High Point, North Carolina, USA is known as the “furniture capital of the world”. This small city reportedly produced 60% of all furniture made across the entire USA by the 1950s. But High Point’s prosperity did not last forever; it’s now surrounded by vacant lots where furniture manufacturers packed up and left after cheaper, more efficient foreign competition eroded its grip on the industry.

Furniture is a source of pride for residents of High Point and neighboring areas. Even for residents of North Carolina who have never been to High Point, the fact that a city in N.C. was the furniture capital of the world can provide its own sort of pride. It may very well be that a local or even national government decides that the history and sense of community that a situation like this provides is worth a trade barrier in favor of the community’s industry.

In High Point’s case, the city has successfully pivoted from being a center of furniture production to one of furniture showcasing, which has allowed the city to retain some of its furniture pride and allowed it to remain relevant in the eyes of the furniture industry, even without major subsidies or trade barriers to help it remain (artificially) competitive.

While it may seem rather silly to implement a trade barrier just to support local pride, these and similar scenarios are increasingly drawing the interest of economists. Happiness is sometimes thought of as the ultimate goal of economic growth, and if local pride is a significant source of it, perhaps it’s worth protecting (or at least studying). Further, there may be tangible benefits to protecting a specific community’s major industry, such as a lower crime rate than there would be otherwise.

Geopolitical retaliation and game theory

In game theory, an infinitely repeated game is one where players interact strategically forever; there is not an end to the game. The system of international trade can be viewed as a game in this way, where in each period (say, every year) nations choose a production mix and choose amounts to trade with one another. Each nation’s goal is to maximize their own economic outcomes, and free trade is necessary to achieve the greatest prosperity possible.

So, if one country decides to impose tariffs on another — or causes an offense in some other manner — then other countries may decide to punish that country by retaliating, imposing their own tariffs with the sole purpose of damaging the offending country. This damage isn’t merely punishment for the sake of punishment: it’s intended to incentivize that country to return to their “good behavior”, to the benefit of their neighbors.

For the sake of illustration, suppose that ancient Sparta chose to impose tariffs on ancient Athens. Athens, and other neighboring city-states, may then have imposed tariffs on Sparta as punishment. They’d likely have explicitly warned Sparta to remove their tariffs, or face worse backlash. This type of punishment ensures that it’s in Sparta’s best interest to remove its tariffs on Athens and continue to give Athenian commerce free access into Spartan markets.

In game theory (particularly with infinitely repeated games) this is known as a “tit-for-tat” strategy, and it has been shown to be very effective at incentivizing the “correct” behavior in other players. In fact, this very situation can be likened to the mechanism of how Bertrand Competition results in a perfectly competitive market outcome.

Thus, tariffs may be used simply as a threat or retaliatory punishment that aims to induce another country to cooperate. In this case, tariffs would theoretically be removed as soon as the offending party corrected their bad behavior, allowing everyone to benefit from free trade once again.

Conclusion: tariffs have their place

Let’s return to our simple question: are tariffs good or bad for an economy, and the people within it?

Tariffs worsen market outcomes and introduce deadweight loss, making everyone worse off on average. But, sometimes, this loss can be worth the value that reducing trade in a certain good (or with a certain trading partner) can bring.

Since nearly every nation in the world from ancient times until today has utilized tariffs, and have continued to do so through generations of great leaders and brilliant economists, it seems quite likely that tariffs have value that a cursory appeal to efficiency doesn’t appreciate. Still, in general, tariffs are hardly a panacea for societal problems, and they should not be levied carelessly — they do cause deadweight loss, after all.

The simple answer to our simple question, then, is clearly “it depends”. While this answer isn’t a very snappy sound bite or headline, it does show that often — in both life and economics — there is a significant amount of nuance that must be considered before universally praising or condemning a concept such as the humble tariff.

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