What Is Retaliatory Tariff?

While many 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 game in self defense. We shall 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 1990s, 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.

While this argument seems sensible, it is not well grounded in economic analysis or history. As we have seen, when another country increases its tariffs, doing so is akin to increasing its transportation costs. But if France decided to slow down trade by putting mines in its harbors, should we mine ours? Few would think so. Similarly, if China violated trade agreements by pirating American CDs, how would the United States gain by putting 100 percent tariffs on Chinese skills and other textiles?