If you want to introduce or increase tariffs in a 21st-century economy, how do you calculate the ideal level for these tariffs? Are there any methods for calculating this, or does it make sense to use a trial-and-error approach?
Hello Philippe
That’s certainly a topical question :-)
Generally speaking, low tariffs are best from a purely economic point of view. However, beyond purely economic considerations, there may be reasons to deviate from this. Political reasons may include national security or the protection of domestic production. However, these reasons may simply be used as a pretext by lobby groups.
Lack of empirical evidence
Empirically, your question is difficult to answer because, in recent years, tariffs have mainly been reduced. We can only approach an answer theoretically or through simulations. Under certain circumstances, it may make sense for larger economic areas such as the US or the EU to impose tariffs. If an economic area is capable of producing many goods itself and there is also some domestic competition, tariffs tend to be less of a problem. Under certain circumstances, they may even have positive effects. However, this only applies if they are not met with retaliatory tariffs.
One example of relevant literature is this paper by Costinot and Rodriguez-Clare (2014). Don’t be put off by the many equations and the abstract language, etc. On page 230, there is a table showing the positive effects for the US (but only if there are no retaliatory tariffs). A great deal of research is currently being carried out in this area. However, it is not yet clear which results will prove to be robust.
Protective tariffs
In certain circumstances, it may make sense to ‘protect’ an industry with tariffs for a period of time. This is currently being discussed, for example, in the context of semiconductor manufacturing or other ‘future technologies’. Protective tariffs can sometimes work, as was the case with South Korea or Taiwan in the past. However, there are also quite a few historical examples of tariffs that have failed, or only partially succeeded, in protecting domestic industries.
I therefore think that it is not possible to calculate an optimal tariff rate. It depends on the country and the specific situation.
I hope that’s reasonably clear? Otherwise, please do let me know.
Best regards
Guido
References:
Costinot, Arnaud and Rodríguez-Clare, Andrés. 2014. “Trade Theory with Numbers: Quantifying the Consequences of Globalisation”. Handbook of International Economics, Volume 4. online