National Welfare Arguments Against Free Trade The Terms of Trade argument for a Tariff For a large country(that is, a country that can affect the world price through trading), a tariff lowers the price of imports and generates a terms of trade benefit This benefit must be compared to the costs of the tariff (production and consumption distortions) It is possible that the terms of trade benefits of a tariff outweigh Its costs Therefore, free trade might not be the best policy for a large country Copyright C 2003 Pearson Education, Inc Slide 9-11Copyright © 2003 Pearson Education, Inc. Slide 9-11 ▪ The Terms of Trade Argument for a Tariff • For a large country (that is, a country that can affect the world price through trading), a tariff lowers the price of imports and generates a terms of trade benefit. – This benefit must be compared to the costs of the tariff (production and consumption distortions). • It is possible that the terms of trade benefits of a tariff outweigh its costs. – Therefore, free trade might not be the best policy for a large country. National Welfare Arguments Against Free Trade