Tariffs and Economic Welfare
- World Scholars Review
- 15 hours ago
- 15 min read
Authors: Yusuf Khan and Purvi Reddy
Mentor: Dr. Gerard Dericks (PhD, London School of Economics). Dr. Dericks is currently director of the Center for Entrepreneurship and Economic Education at Hawaii Pacific University.
Abstract
Tariffs remain one of the most controversial instruments of economic policy, with debate centering on whether they foster or hinder economic growth. Although global tariff rates have generally declined over the past half century in line with the dominant view that trade openness supports growth, recent policy reversals have revived scrutiny of their effects. This paper reviews the empirical literature to evaluate how tariffs influence GDP growth across varying national contexts. The evidence reveals that tariff impacts are not uniform: in developing or export-oriented economies, tariffs can bolster growth by protecting domestic industries, while in developed, import-dependent economies, they are more likely to slow growth and increase consumer costs. These findings suggest that tariff policy cannot be prescribed in a one-size-fits-all manner. Instead, countries must consider their development level, industrial base, and broader economic needs when determining whether tariffs or trade openness best support long-term growth.
Introduction
By definition, a tariff is a tax that a country places on imported goods. Tariffs are one of the most controversial policy tools in economics, with a great deal of debate on whether they exert a positive or negative effect on the economic welfare of a country. Tariffs have been part of national economic policy for centuries, dating back to ancient Greece and Rome, where governments imposed taxes on goods entering the city. To this day tariffs remain important, however over the past half century tariff rates have in general declined across countries of various income levels. This is shown in Figure 1 below.
Figure 1: The Decline of Tariff Rates by Country Income Level, 1989-2008
Source: Kwon (2013).
This general decline has reflected the common belief that trade openness supports economic growth. This data makes the sharp increase in tariffs under the Trump administration especially significant, as they are challenging the dominant economic paradigm of the past half century.
Figure 2: United States Average Tariff on Dutiable Imports, 1790-2019
Source: Irwin (2020).
This shift is illustrated by the administration’s implementation of tariffs, particularly on imported goods from China, Mexico, and Canada. These tariffs include a 50 percent tariff on steel and aluminum, a 25 percent tariff on imported cars, and a 50 percent tariff on copper. Several other tariffs are currently pending, including on pharmaceuticals and other sectors.
This policy change makes understanding the effects of tariffs on countries' economies extremely important and relevant. While some economists argue that higher tariff rates reduce GDP growth universally, others contend that the relationship is more complex and varies depending on certain country characteristics and their economic context.
This review will systematically investigate existing research to identify patterns in how tariffs influence economic performance, assessing whether they tend to improve or hinder GDP growth under various conditions, and help determine whether the recent Trump-era tariffs are likely to benefit the U.S. economy or if alternative tariff strategies might yield better outcomes.
Literature Review
Unconditional Relationship with Growth
This section presents an overview of the unconditional analyses of the relationship between tariffs and GDP growth. That is, it examines research that assesses the average relationship across all countries combined, without accounting for any differences in economic structure, income level, or other country-specific factors. An unconditional approach assumes that the effect of tariffs on growth is constant across countries, regardless of their particular circumstances.
A substantial body of economic research supports the notion that tariffs have a consistently negative impact on GDP growth. In one of the most comprehensive analyses to date, Furceri et al. (2020) analyzed the effects of tariffs on GDP growth in 150 countries from 1963-2014. When analyzed in this way they found that tariffs have a detrimental effect on GDP growth and that these negative effects persist over time for at least 4 years. In a similar longitudinal study, Choudhri and Hakura (2020) analyzed data from 82 countries between 1980 and 2014 and found that trade openness promotes GDP growth. They likewise found that trade barriers, such as tariffs, harm GDP growth. Similarly, Khoso et al. (2025) employed cross-country panel data from 1990 to 2020 and found a significant negative correlation between tariff rates and economic growth. This was especially apparent in countries with a high level of exports.
Few studies similarly compare a large sample of countries over many decades. Most other research looks at the effects of tariffs in a few countries or a single country. Nevertheless, the pattern continues in another study by Amiti et al. (2019), which analyzed trade data from just the U.S., China, the European Union, Mexico, Russia, and Turkey in 2018. They found that U.S. tariffs led to higher prices for imported goods, resulting in a $1.4 billion monthly drop in real U.S. income. Tariffs imposed by the other countries in response produced similar negative effects on their economies.
These conclusions are also apparent in studies examining a single country. Bandyopadhyay et al. (2025) provided empirical data from the U.S from 1989–2019. The results were that as import tariffs increased, real GDP growth decreased. In another study, Xu et al. (2025) supports these statements when analyzing the effects of carbon tariffs on China’s economy in 2025. It concluded that carbon tariffs harmed China’s economic growth. Furthermore, they failed to protect local businesses, harming China’s economy and worsening pollution. Similarly, York (2018) studied the U.S. from post-World War II to the present. The results were also that tariffs hurt employment and slow growth. Garcia-Santana et al. (2021) analyzed data from Spain between 1995-2019 and found that higher tariffs reduced economic growth by reducing imports. In another study, Boeters and Meijerink (2024) analyzed the impact of new U.S. import tariffs announced during Trump’s 2024 presidential campaign on the Dutch and European economy, and found that tariffs hurt specific industries, resulting in a negative overall impact on GDP. Most recently, Johnson et al. (2025) analyzed the increased U.S. tariff rates in early 2025 and found that U.S. real GDP declined as a result. In a meta-analysis of tariff rates and economic growth for 69 developing countries, Kwon (2013) likewise shows that overall tariffs appear to have a negative effect on growth. His findings are depicted graphically in Figure 3 below.
Figure 3: Scatterplot for Economic Growth and Tariff Rates, 1997-2007.
Source: Kwon (2013).
In sum, the evidence suggests that tariffs tend to exert a negative relationship with economic growth, as consistent with standard economic theory they can restrict trade, raise production costs, limit access to cheaper or higher-quality inputs, stifle innovation, and reduce overall efficiency in the allocation of resources.
Conditional Relationship with Growth
Although the prior studies examined found that tariffs negatively affect economic growth, this pattern does not appear to hold when developed and developing countries are examined separately (DeJong & Ripoll, 2006; Yanikkaya, 2003). When researchers investigate the historical data in this way, they find that it is primarily the developed countries which do worse with tariffs, whereas developing countries do better. Researchers Rodriguez and Rodrik (2000) share this view stating that they “are in fact skeptical that there is a general, unambiguous relationship between trade and openness and growth waiting to be discovered…[instead], the relationship is a contingent one, dependent on a host of country and external characteristics (p.266).”
In the 18th and early 19th century the United Kingdom, the wealthiest and most technologically advanced country in the world, did well with free trade. Bairoch (1972) showed that during this time Britain grew very quickly, but for the less developed countries Germany, France, and Italy, the results were not as favorable. Free trade often slowed their economies, lowered investment, and reduced innovation. Instead of helping them grow, their economies slowed down. During this time, countries that added tariffs grew faster. For instance, O'Rourke (2000) studied 10 developing countries from 1875 to 1914 and found that higher tariffs often led to faster growth. Jacks (2006) studied 10 countries between 1870-1914 and similarly found that higher tariffs were connected to faster economic growth in developing countries. Research from this era generally supports the argument that by limiting foreign competition, developing countries could grow their industries faster and create more productive jobs.
Other research from the period between the World Wars has generally found similar results. For instance, Vamvakidis (2002) showed that from 1920 to 1940, the relationship between trade openness and growth was negative. That means that countries that traded more often grew slower. This happened because many developing countries didn’t have strong industries or good technology yet, so trading globally made it harder for their economies to compete and industrialize.
It wasn’t until 1970 that free trade appeared to have a positive effect on the majority of countries. Before that, it mostly helped wealthier countries because developing countries lacked the infrastructure, technology, and industrial support to compete with rich countries. However, after 1970 many formerly low-income countries improved their economies and were able to trade, grow their industries, and compete more effectively in global markets. On the same token, Nunn and Trefler (2010) found that between 1972-2000 tariffs were especially helpful in countries where industries were still growing. In countries that worked on skill-based jobs and spent money on education and technology, tariffs gave businesses time to compete with richer countries. Only later did these countries with freer trade.
Similarly, other more recent studies have likewise shown that tariffs can contribute to economic growth. For example, Nguyen (2019) looked at how tariffs affected China, Japan, and South Korea from 1998 to 2017. He found that both higher tariffs and more trade helped those countries grow their economies. They used tariffs to protect local businesses while still trading with other countries, had strong governments, and focused on building their high value-add industries.
Consistent with these results, other studies also found that tariffs can help create more manufacturing and industrial jobs and increase production (Krueger & Tuncer, 1982; O’Rourke, 2000; Clemens & Williamson, 2004; Kwon, 2013). However, over time if a country doesn’t keep improving, tariffs can begin to slow down its economy. So countries need to be careful about how long they use tariffs. If they keep tariffs too long without making improvements, their growth can slow down again (Nunn & Trefler, 2010; Krueger & Tuncer, 1982).
Interpretation
This evidence shows that free trade does not appear to work the same way for all countries as is frequently assumed in many broad-based analyses of the subject. Data is more readily available for developed countries like the United Kingdom, Western Europe, and the United States which had advanced industries and technologies earlier. When developing countries removed their tariffs at the encouragement of developed countries and early international trade theory, developed countries were able to sell more products and grow richer. Their factories could make goods faster and cheaper than the ones in poorer countries, so free trade helped their economies grow even more, especially with the decline in transportation costs associated with the industrial revolution.
By contrast, low-income countries didn’t have strong industries yet. When they started free trade, their small businesses had to compete with richer countries. Because the goods from rich countries were cheaper or better made, people stopped buying products from developing countries. This caused problems for local businesses and caused many of them to shut down. That meant fewer jobs in the most productive industries, less money spent inside the country, and a slower economy overall. Instead of growing because of free trade, these countries often grew faster when they used tariffs.
The research shows that free trade and tariffs affect countries in different ways. For developed countries free trade often leads to more growth. But for low-income countries, it’s often better to start with tariffs to help their industries grow. Once those industries are strong enough to compete with richer countries, the country can slowly open up to free trade.
Discussion
This review of the academic literature has found that, contrary to ‘one-size-fits-all’ unconditional analyses of tariffs prevalent in many studies, tariffs can actually benefit economic growth under certain circumstances. In particular, tariffs appear to be a useful if a not necessary condition for allowing developing countries to ultimately attain levels of income on par with the developed world. Anecdotally, all developing countries which have achieved the most rapid levels of economic growth have done so with the benefit of tariffs - countries like Japan, South Korea, Taiwan, Singapore, and China.
These facts reflect what’s known as the infant-industry argument - that industries which are just starting out need protection from more dominant foreign rivals due to both higher costs and potentially inferior quality (Myrdal, 1957). The infant-industry argument is one of the oldest economic theories, dating back to the ideas of Alexander Hamilton (1913 [1791]) and prominent economist Frederick List (1856) who both helped formulate successful industrial policies for the United States and Prussia, respectively, against the first-industrialized and economically dominant British. Later economist Raul Prebisch (1959) additionally argued that it is not enough for countries to simply become more productive in order to develop, they must also industrialize. The reason being due to the empirical reality that the prices for commodities and primary products tend to deteriorate over time relative to more complex products (Simon, 1980). Therefore without industrialization, sustained development is not possible. In this way and following these broad policy prescriptions, a large number of developing nations began to experience rapid growth using Prebisch’s dual model of industrialization and protectionism (Baldwin, 2004).
While a substantial amount of research has found that tariffs are beneficial for economic growth for developing countries, this result is not universal. Many studies have also found that higher tariffs can hurt developing countries. In Sudan, Elsheikh et al. (2015) also found that increasing tariffs in 2004 slowed down economic growth. A more recent study by Abilio (2025) showed that from 2002 to 2023, tariffs in Angola reduced investment within the country, which made the economy grow more slowly. On a larger scale, Dollar (1992) studied 95 developing countries and found that using tariffs and limiting trade made it harder for countries to grow their exports and economies. Dollar and Kraay (2001) found that countries that became more open to trade and lowered tariffs saw faster growth and less poverty. Other researchers, like Clemens & Williamson (2004), Edwards (1992), Nunn & Trefler (2010), and Kwon (2013) also agree that high tariffs can slow down growth by reducing competition and making countries less productive. Amin and Fatima (2019) examined five developed and 5 developing countries from 1998 to 2015. The developed countries are Australia, Japan, Canada, Turkey, and the United States. The developing group of countries is Pakistan, Sri Lanka, India, Bangladesh, and Thailand. The results showed that tariffs alone cannot increase GDP growth. The country needs support of infrastructure enhancement, technological advancement and education in order to fully reap the benefits of protection provided to the industries.
Tariffs are additionally scrutinized by critics given their potential for generating higher levels of inflation, as protectionist policies tend to drive up the price of imported goods. More important is that these inflationary trends in the price of consumer goods can generate a decrease of domestic consumption, leading to a stagnant economy and lower overall levels of social welfare (Johnson 1965; Baldwin 1969). In addition, others argue that protectionism obstructs the advancement of more industrious production techniques, given that inefficient industries are rewarded with high profit levels that are artificially induced by favorable tariff policies (Turvey 1963; Buchanan 1966; Plott 1966).
Notwithstanding these useful results produced by economic literature, accurately measuring the effect of tariffs and protectionist policies more broadly remains challenging. On one the hand, tariff barriers are almost universally multi-faceted, varying across goods and trading partners. As such, it is difficult to try to summarize a country's tariffs policy with a single measure that can be used for statistical analysis, and even when this is attempted the accuracy and relevance of the measure so produced is often questionable. A further difficulty is that in many developing countries tariffs often do not represent the only or even the most important form of trade barrier. Non-tariff barriers such as quotas and import licensing, for instance, represent a common form of protectionism that is often not simultaneously assessed. Research by Laird and Yeats (1990) and Nogues et al. (1986) for instance have shown that the developing countries often depend primarily on non-tariff trade barriers. This has additionally made it difficult to isolate how much of an impact tariffs actually have.
Recommendations
Based on the findings of this paper, trade policy should be tailored to a country’s stage of economic development and strategic priorities. For developed economies, reducing tariffs on low-value primary goods and essential production inputs can support efficiency and competitiveness in higher-value industries. At the same time, both developed and developing countries may benefit from selectively applying tariffs to protect and nurture high value-added goods and services that they aim to cultivate domestically.
For the United States, optimal industrial policy from a purely economic standpoint would likewise entail selectively imposing tariffs on high value-added goods, while removing all tariffs on primary goods and low value-added goods. However, current policy is in fact targeting all foreign produced goods. While this could suggest an ignorance of the empirical research discussed in this paper, it could also reflect a use of tariff policy as a bargaining chip with our trading partners to negotiate lower tariffs applied to American products. Since tour trading partners would know that much of our current tariff policy goes against our economic interests, this policy may be an attempt to appear irrational and thereby improve our bargaining position. Time will tell if this policy is indeed their primary aim and if it will be successful.
Conclusion
In conclusion, the relationship between tariffs and GDP growth remains complex and context-dependent. While most mainstream economic theories have generally urged countries to reduce tariff rates and promote trade openness, empirical evidence presents a more nuanced picture. Overall, the effects of tariffs depend on a country's specific economic situation. Data has shown that tariffs can increase GDP growth in developing or export-driven countries by protecting domestic industries from foreign competition. However in developed and import-heavy countries, tariffs can hinder GDP growth and increase consumer prices. Therefore, countries must assess their own specific economic conditions to determine which trade policy would best benefit them. Factors such as level of development, industrial strength, and economic needs must be taken into account. A single, uniform approach to trade policy is unlikely to work for every country. Instead, the decision to implement tariffs or pursue trade openness should be tailored to each country's unique context, recognizing that the effects of tariffs on economic growth can vary widely.
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