Tariffs and debt

Tariffs influence trade, production, consumption patterns and welfare of not only the countries that impose them, but also the welfare of their trading partners. They do so through both the absolute levels of protection they impart and through distortions associated with their structure. Tariffs create a wedge between domestic and world prices pushing demand towards domestically produced substitutes. A large body of empirical research indicates that countries with low policy-induced trade barriers tend to enjoy rapid growth. On the other hand, theoretical models suggest that the relationship between trade barriers and growth may be contingent on the level of development. One of the current US president’s most prominent policy actions since taking office has been to raise tariffs. Most of his Administration’s recent trade policy proposals focus on implementing a set of new tariffs and quotas on select imports from select countries. The president promised to eliminate the entire national debt by the end of his second term by using tariffs in order to increase government revenue. So how plausible is the assertion that tariffs will help the containment of debt? The aim of this paper is to investigate whether tariffs affect the debt of a country. The study presents empirical data and preliminary econometric testing for this relationship. The methodological approach employs linear regression, tested for heteroskedasticity and robustness, using a dataset relevant to 30 countries. The data come from the World Bank, the Organization or Economic Cooperation and Development (OECD) and the National Statistical Services of the countries under investigation, for the years from 2007 and onwards. The goal of the paper is to derive proposals for the policy to be followed, supported by the aforementioned quantitative evidence, which is one step ahead of existing literature that simply identifies the problem, without necessarily coming forward with ways to overcome it.