A familiar excuse for protective tariffs and other trade restrictions goes like this: It would be all well and good for our government to follow a policy of free trade if other governments did the same. But other governments don’t do the same. Other governments use tariffs and subsidies to give producers in their countries unfair advantages over producers in our country. Unless and until other governments embrace complete free trade, our government must “retaliate” with its own protective measures to counter the protective measures imposed by foreign governments.
Every competent undergraduate who has passed a well-taught course in Econ 101 can identify a significant problem that lurks in this excuse for protectionism — namely, protective tariffs and subsidies are a net cost to the people of any country whose government intervenes in these ways. Tariffs and subsidies distort the allocation of resources in ways that reduce the overall wealth of the nation, a fact that is true regardless of the trade policies of foreign governments. “Why,” this undergrad will ask rhetorically, “should we let our government inflict harm on us just because other governments inflict harm on their citizens?”
The undergrad is wise and right to ask this question. But immediately after asking it, this undergraduate will be corrected by a first-year economics graduate student strutting his advanced knowledge of the subject.
“Silly girl,” the grad student tells the undergrad, “you fail to see the real benefit of retaliatory tariffs and subsidies. It’s true that the bulk of the burdens created by tariffs and subsidies fall on the people of any country whose government intervenes in these ways. But it’s also true that those of us in the home country also suffer some harm from those same interventions done by foreign governments. After all, trade is mutually beneficial, and in 2025 most of us are all part of one global economy. And this economy is distorted by those foreign tariffs and subsidies. So our government, in its wisdom, can use its own tariffs and subsidies to retaliate against foreign governments to pressure them to end those harmful interventions. When these interventions end, global trade is made freer and resources are more efficiently allocated. While our government’s retaliatory tariffs and subsidies impose net costs on us in the short run, by eventually making global trade freer this retaliation works to our net benefit in the long run!”
The undergraduate knows enough to realize that she cannot disagree in principle. The graduate-student’s hypothetical description of the operation of retaliatory protectionism is logical. It is indeed possible that such retaliation will work as described in the real world and redound to the benefit of almost everyone abroad and at home.
But is the graduate student’s case for retaliatory protectionism practical? No.
One practical obstacle to the success of retaliatory protectionism is that governments typically dispense tariff protection and industrial subsidies in response to interest-group pressures. Politically well-organized producer groups are usually the main drivers of such policies. Unless retaliatory tariffs by the home government neutralize the particular interest groups that are the motive force in foreign countries behind the foreign tariffs or subsidies, such retaliation will likely fail to pressure foreign governments into ending their protectionist interventions. Indeed, it’s not unlikely that foreign governments will respond by imposing their own retaliatory tariffs or subsidies against the home-government’s retaliatory measures, with the end result being a trade war.
A second practical obstacle is that special-interest groups in the home country will cunningly take advantage of any inclination to use retaliatory measures, resulting in overuse and abuse of such measures.
Opportunities for such cunning are especially numerous when talk turns to subsidies dispensed by foreign governments. Home-country tariffs and subsidies marketed to the public as well-meaning devices for pressuring foreign governments to end various subsidies will too often simply be protectionist measures meant to do nothing more than line the pockets of powerful producer groups in the home country.
Such subterfuge is too easy, not least because in the real world what is and isn’t a subsidy is often unclear. Not all subsidies are as straightforward as is the doling out of cash to European farmers through the EU’s Common Agricultural Policy. Far too many innocent policies pursued by foreign governments can be deviously portrayed by home-country protectionists as subsidies that justify retaliation.
Consider each of the following actions by a foreign government:
- it establishes and operates engineering schools
- it extends government-backed loans to students enrolled in engineering schools
- it spends more money training people to work in factories
- it increases the amount of money it spends to build and maintain infrastructure such as electrical grids and extensive networks of highways
- it changes the designation of some public land from protected wilderness to land available for economic development
- it dispenses more money to fund basic scientific research
Each of these foreign-government actions likely would be undertaken without much thought of the effect it would have on that country’s international commerce. Yet each of these actions also arguably does improve the ability of producers in the foreign country to churn out more and better outputs, and to export these outputs at lower prices.
So are these government actions subsidies to industry? Whatever your answer, you’d be naïve to think, if voters in the home country are groomed to tolerate protectionist measures as retaliation for foreign subsidies, that home-country producers will not portray such foreign-government actions as subsidies that justify home-country retaliation.
A consequence of the ambiguity of subsidies is that, if retaliatory protectionism is encouraged (or even just tolerated) as a response to foreign-governments’ subsidization of their exports, sightings of such subsidies by home-country producers, politicians, and administrative officials will be too numerous. Rent-seekers at home will routinely leap to the conclusion that foreign exporters’ gains in market share are the result of “unfair” subsidies allegedly enjoyed by these exporters. With no way to separate the vast majority of government expenditures into objectively agreed upon classes of “subsidies” and “not subsidies,” the best rule of thumb is a policy of free trade followed regardless of foreign-governments’ subsidization of producers within their jurisdictions.
