Why Governments Use Tariffs — and What Tariffs Actually Do

Why Governments Impose Tariffs

Revenue: For most of the nineteenth century, customs duties were the principal source of U.S. federal revenue, and they remain significant for governments with limited tax administration.
Infant industry protection: Hamilton’s and List’s argument that emerging domestic industries need shelter to reach competitive scale.
Protecting existing employment: Politically the most powerful motive, because affected workers and firms are concentrated and identifiable.
National security: Maintaining domestic capacity in sectors judged strategically essential.
Retaliation and leverage: Tariffs imposed in response to another country’s restrictions, or as bargaining pressure in negotiations.
Anti-dumping and countervailing duties: Levies aimed at imports sold below cost or supported by foreign subsidies, permitted under WTO rules subject to procedure.

The domestic price rises from the world price to the world price plus the tariff, for imported and domestically produced units alike.
Domestic production increases as the higher price makes marginal domestic producers viable, raising producer surplus.
Domestic consumption falls because the higher price pushes some buyers out of the market, reducing consumer surplus.
Imports shrink from both directions at once — more supplied at home, less demanded overall.
The government collects revenue equal to the tariff per unit multiplied by the remaining quantity of imports.
Deadweight loss appears as two triangles: a production distortion from shifting output to higher-cost domestic producers, and a consumption distortion from purchases that no longer happen.

Retaliation: Trading partners frequently respond with their own duties, often targeted at politically sensitive export sectors, so the protecting country’s exporters bear part of the cost.
Higher input costs: Many imports are intermediate goods, so a tariff on steel or components raises costs for domestic manufacturers that use them, which can cost more jobs downstream than it protects upstream.
Trade diversion: Restrictions aimed at one source often shift purchases to a third country rather than to domestic producers.
Rent seeking: Because protection is valuable, firms invest real resources in lobbying for it — a cost additional to the deadweight loss triangles.
Regressive incidence: Tariffs fall disproportionately on lower-income households, which spend a larger share of income on traded goods.