Tariffs always cause a net welfare loss”

The world more and more needs trade. The question is which way it should be done. Free trade, which is a kind of “laissez faire” policy where government do not impose any regulation that would impede or encourage free exchange of goods, or autarky, where the government impose such restrictive regulations that eliminates all incentives for international trade. These are the extremes which, in the real world, are difficult to exist. However all nations impose some form of trade policies and, since most countries are somewhere in the middle, the discussions are more focus on which direction, free trade or autarky, they should move. So “tariffs” is one of the ways to control the trade and, as we are going to explain, “they always cause a net welfare loss”. Although, as we are going to evaluate, “always” is a very strong word for such a complex problem that all countries have to face.

Protectionism is defined as a trade policy imposed by governments to benefit domestic industries by reducing international competition. They can have several forms: “tariff” when a fixed tax is imposed on a good; “ad valorem tariff” when a percentual tax is imposed; “quota” when the quantity of that good is restricted; “subsidy” either to the production or the export of that good. All these are forms to restrict or impede free trade, which, at least since Adam Smith's publication of The Wealth of Nations, many economists have been strong supporters of free trade among nations.

In autarky a good is sold at price P0 and the quantity demanded is Q0 as shown in Fig.1. However the world price is lower at P1, which means that the domestic supply is Q1 but the demand is Q2, so the difference is imported from abroad. However if the government wants to help the domestic suppliers which are face with a lower price, can impose a tariff (T). Supposing it is a small country in the world market the domestic price will be P1+T as in Fig.1. This means that the domestically produced quantity rises to