Do tariffs work?
Executive summary
Tariffs "work" for specific, limited goals—raising government revenue quickly and protecting targeted domestic producers—but they often do so at the cost of higher prices, economic distortions, supply‑chain disruption, and risk of retaliatory escalation that can slow growth; empirical evidence from 2025–26 shows meaningful revenue gains and industrial protection while also flagging larger macroeconomic and political costs [1] [2] [3] [4] [5].
1. Tariffs deliver revenue and narrow trade deficits in the short run
Recent U.S. tariff measures produced a sharp jump in customs revenue and effective tariff rates: researchers at Penn Wharton document mechanical and behavioral revenue effects from updated USITC data, showing that part of the increase is real revenue while part is lost when importers change sourcing [1], the New York Times reports a drastic increase in tariff revenue after a year of sweeping changes [2], and the Tax Foundation estimates large decade revenue gains even after accounting for economic feedbacks [3]; the Congressional Budget Office likewise projects substantial deficit reduction from tariff changes, though its estimates exclude broader macroeconomic impacts [6].
2. Protection and industrial strategy: selective success, strategic ambiguity
Tariffs can protect or nurture particular industries and are being deployed explicitly for industrial and strategic policy — UNCTAD finds governments used tariffs in 2025 to pursue manufacturing and strategic objectives [4], and legal and regulatory moves (Section 232, IEEPA) signal continued use as an industrial tool [7] [5]. Corporations and trade professionals are responding: many firms are reworking supply chains and some are absorbing tariff costs to preserve market share [8], demonstrating that tariffs can reshape industrial decisions even if they do not always revive large-scale domestic employment as promised.
3. Price rises, pass‑through, and who ultimately pays
Economic research and WTO analysis show that tariffs usually raise domestic prices—studies of earlier U.S. tariffs found full short‑term pass‑through to consumers, though standard models allow for some cost‑shifting to foreign producers in the medium run [9]. Market reports and surveys indicate firms face higher input costs and regulatory complexity [8], and the Tax Foundation calculates a significant per‑household tax equivalent from recent measures [3]; where firms absorb costs, margins shrink, and where consumers bear them, purchasing power falls.
4. Trade diversion, limited re‑shoring, and mixed evidence on reshaping trade patterns
Tariffs can cause importers to re‑source from other countries or accelerate trade agreements among other partners — analyses show partners like Canada and Mexico remained advantaged under USMCA while some global trade shares held steady despite tariff shocks [10], and commentators note tariff threats have hastened new deals and realignments in 2026 [11]. But trade models and the IMF warn that unilateral tariffs plus retaliation lower GDP: a modeled 10% U.S. tariff rise with reciprocation could cut U.S. GDP by ~1% and global GDP by ~0.5% through 2026 [5], and the IMF identifies tariffs as a material drag on global growth forecasts [12] [13].
5. Retaliation, escalation risk, and the limits of “optimal tariff” thinking
The classical “optimal tariff” claim—that a large country can shift some tariff burden onto foreign producers—is real in theory but fragile: WTO analysis cautions that retaliation can erase gains and trigger mutually harmful trade wars [9], and multiple sources warn of a spiral of escalation and heightened uncertainty that suppresses investment and growth [12] [13]. Policy heterogeneity, exemptions, and legal challenges (notably over IEEPA authority) add uncertainty about the permanence and legality of many measures [7] [5].
6. Bottom line: tariffs work for narrow, political and fiscal goals but are blunt, costly tools for long‑term prosperity
If the objective is quick revenue, targeted protection, or signaling geopolitical resolve, tariffs are effective; if the objective is sustainable higher growth, broadly shared wage gains, or efficient industrial transformation, the evidence is mixed to negative because of price effects, supply‑chain frictions, retaliation risk, and uncertainty that dampens investment—an outcome reflected across IMF, WTO, UNCTAD, CBO, and private analyses [12] [9] [4] [6] [5]. Alternative viewpoints persist: some trade economists emphasize short‑run consumer pain and long‑run losses [9] [5], while political actors frame tariffs as leverage and domestic revival [2]; the true test is whether tariffs are paired with coherent industrial policy and legal stability, which current reporting shows remains uneven [7] [8].