Tariffs, like any tax, cause deaths in the economy. Deadweight losses fall into two categories: the consumption effects of tariffs and the protective effects of tariffs.
The consumption effect of tariffs is the lost profits from trade that occurred before tariffs, but now it is best noted that tariffs have raised the price of goods. In customs duties, people pay more and buy fewer units (or pay more for the same amount).
Here at Econlog, we spend a lot of our time focusing on the consumption effects of tariffs. In fact, many reports (and claims) were about consumption effects. That is, it focuses on the prices consumers pay. However, I would like to highlight the protective effect here.
The protective effect arises from the loss of productivity caused by tariffs. Domestic producers have increased production, but are less efficient at producing those additional units than foreign producers. “They are less efficient” is another way to say that they need to consume more resources than they are consumed in free trade. Furtermore discourages businesses from pushing for increased productivity as protection tariffs protect domestic producers from foreign competition.[1]
First, there is a chart from the Council of Foreign Relations. On March 6, 2025, since Trump’s 2018 tariffs, post entitled Steel Productivity has plummeted. BennSteil and Elizabeth Harding provide sub-implementation data on productivity and productivity for all workers. As the title suggests, steel workers’ productivity has been declining since 2018. Before 2018, steel workers’ productivity was generally in line with other industries. Since 2018, the Oher industry has been improving productivity, but steel is not. Of course, these data do not give us any cause. A more detailed analysis is needed to determine whether a reduction in steel workers’ productivity is tariffs or merely contingent. However, this trend is consistent with theory and empirical evidence from past tariff episodes (for example, in the working papers of Alexander Klein and Christopher Meisner, did tariffs make American manufacturing a lot? Tariffs reduce productivity by requiring high-cost resources to make goods.
Second, there is a recent report from Cleveland Cliffs, a steelmaker in Cleveland, Ohio. On June 4th, Cleveland-Cliffs cancel plans for a new explosion furnace with one of the plants, reducing costs while maintaining power. Why did Cleveland Cliff cancel these plans? “The rise in tariffs on steel imports… forced the Cleveland Cliff to prioritize short-term profitability.” As the pricing model predicts, we evaluated Cleveland Koiriff on Cleveland Island as it increases its renewal and competitiveness with steel plants in Europe and Asia. Protective effects lead to increased marginal costs, and companies are protected from competition, thus weakening the incentive to reduce costs.
Free trade is the first best option. And you’ll find that in many cases it’s the second best, the third best, the fourth best option. Many times, protectionist policies fail to achieve their stated goals. A little economics (and a little political theory) can help you understand why.
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[1] If it’s helpful to show these effects on a graph, take 7 7.18 here. Area B is the loss of death due to protective effects, and Area D is the loss of death due to consumption effects. Area A is the reallocation effect (redistribution of consumer welfare to producers), and Area C is the profit effect (redistribution of consumer welfare to the government).
