The welfare consequences of import tariffs: A quantitative perspective

The quantitative trade literature often does not distinguish between tariffs and iceberg trade costs. This paper explores qualitatively and quantitatively how this distinction matters for the gains from trade. Most obviously, tariffs generate government revenues, while icebergs do not. In models of monopolistic competition, they may also affect entry. Finally, depending on whether they are modeled as cost or demand shifters, tariffs may have different implications on profits, entry, and, in turn, on the elasticity of trade flows and welfare. We show that the welfare formula by Arkolakis, Costinot, and Rodriguez-Clare (2012) requires qualification, even in the simple single-sector case. We find that the quantitative welfare consequences of cost- versus demand-shifting tariffs can be important. •We investigate the role of tariffs in the framework of Costinot and Rodriguez-Clare (2014).•We study the difference of import tariffs that act either as demand shifters or cost shifters.•We highlight the role of tariff revenue and selection for the welfare effects of this modeling choice.•The tariff modeling choice can have important quantitative consequences.