A new study provides modern-day evidence for what economists have long said: tariffs are bad, and international trade should be free. The International Monetary Fund (IMF) paper finds that tariff increases have negative effects on output and productivity that are magnified "when tariffs rise during expansions, for advanced economies, and when tariffs go up." This evidence does not bode well for the protectionist measures the United States is currently pursuing.
The research looks at tariff changes across 151 countries from 1963 to 2014 and the effects on output, productivity, employment, inequality, exchange rates, and trade balances. Here are some of the key takeaways and charts I pulled from the paper:
Output and Productivity
- Tariff increases lead to declines of output and productivity in the medium term
- Why does output fall after a tariff increase? The wasteful effects of protectionism eventually lead to a meaningful reduction in the efficiency with which labor is used, and thus output
- Tariffs encourage the deflection of trade to inefficient producers in order to avoid tariffs, along with encouraging smuggling to evade tariffs; such distortions reduce welfare [by reducing economic output, efficiency, etc.]
- Consumers lose more from a tariff than producers gain, so there is "deadweight loss"
- The longer‐term consequences of tariffs are likely higher than the medium‐term effects
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