Aspects of the Theory of Tariffs (Collected Works of Harry Johnson)

2.    A Generalized Theory of the Effects of Tariffs on the Terms of Trade*

Traditional analysis of the effect of a tariff on the terms of trade of the protecting country draws a distinction between two cases: (1) where the tariff revenue is spent by the government; and (2) where the tariff revenue is redistributed as an income subsidy to the private sector. In both cases the conclusion reached is that the terms of trade of the protecting country will improve or deteriorate according as the country’s elasticity of demand for imports is greater or less than the marginal propensity to consume importables (of the government or the private sector, as the case may be). By splitting the elasticity of demand for imports into the sum of the compensated ...