Retaliatory Tariffs

While people Would agree that a world of free trade would be the best’ of all possible worlds. they note that this is not the world we live in. They reason. “As·long as other countries impose import restrictions or otherwise discriminate against our products. we have no choice but to play the protection self defense. Well go along with free trade only as long as it is fair trade -,But we insist on’ a level playing field.” On several occasions in the l000 s. the United States went to the brink of trade wars.with japan and China. threatening high tariffs if the other country did not stop some objectionable trade practice.

Those who advocate this approach argue that it can beat down the walls of protection in other countries. This rationale was described in an analysis of protection in the Economic ~ of the President: Intervention in international trade even though costly to the u.s. economy in the short run, may, however, be justified it serves the strategic purpose of increasing the cost of interventionist policies by foreign governments. Thus, there is a potential role for carefully targeted measures aimed at convincing other countries to reduce trade distortions.

While potentially valid, this argument should be used with great caution. Just as threatening war leads to armed conflict as often as to arms control, protectionist bluffs may end up hurting the bluffer as .well as the opponent. Historical studies show that retaliatory tariffs usually lead other nations to raise their tariffs still higher and are rarely an effective bar gaining chip for multilateral tariff reduction.

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