If increasing trade has these effects, then reducing trade by erecting
protectionist trade barriers can have the opposite effects. Protectionist
policies may raise the incomes of unskilled Canadian workers, giving
them a larger share of a smaller total GDP. The conclusion is that trade
restrictions can improve the earnings of one group whenever the
restrictions increase the demand for that group’s services. This benefit for
one group is achieved, however, at the expense of a reduction in overall
national income and hence the country’s average living standards.
Social and distributional concerns may lead to the rational adoption of protectionist policies.
But the cost of such protection is a reduction in the country’s average living standards.Improving the Terms of Trade
Tariffs can be used to change the terms of trade in favour of a country that
makes up a large fraction of the world demand for some product that it
imports. By restricting its demand for that product through a tariff, it can
force down the price that foreign exporters receive for that product. The
price paid by domestic consumers will probably rise but as long as the
increase is less than the tariff, foreign suppliers will receive less per unit.
For example, the current 25 percent Chinese tariff on the import of U.S.
automobiles might raise the price paid by Chinese consumers by 15
percent and lower the price received by American suppliers by 10 percent
(the difference between the two prices being received by the Chinese
government). This reduction in the price received by the U.S. suppliers is
a terms-of-trade improvement for China (and a terms-of-trade
deterioration for the United States).