Tariff Revenue

Dean Baker makes a good point about trade: to the extent that trade liberalization comes in the form of tariff reductions, the amount of gain depends critically on how the government makes up the consequent revenue loss. Most likely, it will be made up by some other form of distortionary taxation, so that a tariff reduction merely substitutes one form of distortionary taxation for another. The “gains from trade” will be partly offset by the loss due to the distortionary effect of the new taxes. In principle, the gains could be fully offset, and the trade liberalization could have no net benefit. In practice, I think tariffs are probably quite a bit worse than the next alternative form of taxation, but the point is well taken that conventional estimates of the gains due to trade liberalization are overstated.