Beyond welfare: how security concerns drive USA tariff policies

Octavio Martínez-Baltodano and Ranjeeva Ranjan

International Journal of Trade and Global Markets, 2025, vol. 21, issue 5, 581-605

Abstract: Why do USA tariffs persist despite known welfare costs? We develop a dynamic model in which tariffs expand domestic industrial capacity that supports military readiness. Policymakers trade off static price and distortion losses against future security gains and adjustment costs. We derive conditions for an interior optimal tariff that balances diminishing security returns with rising distortions and yields a nonmonotonic response to the effectiveness of industrial policy. Extending the framework to a bilateral game, we show how asymmetries in revenue efficiency, adjustment frictions, and national priorities generate higher tariffs in the USA than in China. Evidence from the 2018 to 2025 trade war connects the model to observed outcomes. Policy implications include limiting broad tariffs when direct industrial policy is effective and when baseline capacity is already high.

Keywords: welfare costs; USA tariff policies; industrial policy; security gains; optimal tariff. (search for similar items in EconPapers)
Date: 2025
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