Optimum Tariffs and Retaliation

Abstract

During recent years the proposition first advanced by Bickerdike, that a country can improve its welfare as compared with the free trade position by imposing a tariff on imports, has achieved general recognition in the literature of international trade theory. There is still, however, some confusion over what happens if other countries retaliate by imposing tariffs in their turn. Although Kaldor 1 in his classic revival of the Bickerdike proposition, referred explicitly to the possibility that a country might gain by imposing a tariff even if other countries retaliated—a possibility which is also indicated by considerations of general monopoly theory—the possibility is often overlooked: it being assumed, and argued against the “optimum tariff” theorem, that once retaliation occurs all parties are bound to lose as compared with the free trade position. The locus classicus of this error (and some others) is probably Professor Scitovszky’s analysis of retaliation in his “Reconsideration of the Theory of Tariffs.” 2