Who gains and who loses from a tariff?
Tariffs impact the economy, businesses, and people in various ways. The conventional line of thinking is that if a government puts a tariff on products made in other countries, then people in the country with the protective tariff will benefit. For example, in the early days of the United States, the government placed tariffs on European products, which made those products more expensive to encourage people to buy products made in the United States. These tariffs helped American industries grow.
However, when a tariff is placed on a product from other countries, the governments of those other countries could retaliate by placing tariffs on products made in the first country. Currently, the president of the United States has said that the government will impose tariffs on aluminum and steel coming from other countries. This would be good for American workers and businesses in these industries. However, if other countries retaliate and put tariffs on other products made in the United States, workers in these other industries could suffer. For example, Wisconsin cranberry growers would suffer if the governments of other countries retaliated and placed tariffs on cranberries grown in Wisconsin. Plus, this process will end up making consumers paying more for various products that they will buy.
In reality, it can be argued that countries should make products that they can make cheaper than any other country. When tariffs are imposed, resources aren’t used most efficiently and people end up paying more for products. While there might be “winners” and “losers” in the job market in different industries, tariffs go against the principles of free trade.
Economically speaking, producers in a given country gain when their country imposes tariffs. Consumers in that country lose.
A tariff is a tax on imported goods. When a tariff is imposed, the price of those goods goes up because a higher tax must be paid in order to get them into the country. Economic theory tells us that an increase in the price of imported goods will lead to an increase in the demand for domestic goods. An increase in the price of a good always leads (all other things being equal) to an increase in demand for goods that compete with that good. Since domestic goods compete with foreign goods of the same type, a tariff increases demand for the domestic goods. This helps the firms that produce these goods and it helps their workers.
By contrast, a tariff hurts consumers. It does so because it raises prices on the things that they must buy. With a tariff in place, imported goods cost more. This decreases pressure on domestic producers to lower their prices. In both ways, consumers lose because prices are higher.
Thus, consumers lose but domestic producers gain when a tariff is imposed.