WHAT IS THE IMPACT OF AN IMPORT TAR

WHAT IS THE IMPACT OF AN IMPORT TARIFF?
Let's focus for simplicity on the impact of an import tariff on a certain economy, and let's consider initially the case of a small country, where by small country we mean the case of a country that cannot affect the world price of the imported good.

Case of a small country
Suppose initially that there are no tariffs. Then, consumers in this country pay the world price to consume. Suppose that the government decides to levy a tariff on the imports of rice, for example. The imposition of a tariff will, first of all, increase the domestic price of the imported good. People who want to consume rice will now have to pay the world price plus the tariff. Domestic consumers of rice will, therefore, be worse off, as they will have to pay more, if they want to consume the same quantity of rice as before. On the other hand domestic producers of rice will gain, because they will be able to sell rice at a higher price. And the government will also gain, as it will be able to collect tariff revenue. Overall, in the case of a small country, international trade theory shows that the country as a whole will lose and national welfare will be reduced by the imposition of a tariff.
Case of a large country
Different is the case of a large country. Notice that here, by large country we do not mean a country that is large in terms of its geographical size, but rather a country whose import demand for a certain good is so large that it can affect the world price of the imported good. What happens if a large country imposes a tariff on the import of a good, let's say rice? Like in the case of a small country, first of all, the domestic price for rice will increase. This will reduce the demand for imports of rice. But, now, in the case of a large country, the lower demand for imports will lead to a reduction in the world price of rice. In other words, by imposing a tariff on an imported good, a large country is able to affect the price of the good to its own advantage! Economists refer to this gain as "terms of trade gain" (TOT gain). This gain stems precisely from the ability of the country to affect the world price of the imported good. It is because of the possibility of terms-of-trade gain that in the case of a large country the impact of the imposition of a tariff on national welfare of a country is ambiguous, i.e., it can be eithr positive or negative. What is important to highlight at this stage is that terms-of-trade effects only occur in the case of a large country. In the case of a small country, the imposition of a tariff is unambiguously welfare decreasing!
WHY DO GOVERNMENTS IMPOSE IMPORT TARIFFS?
International trade theory clearly asserts the benefits of free trade and highlights the inefficiency losses of imposing a tariff. In reality, very few countries have adopted total free trade. An exception is probably the one of Hong Kong. There are various reasons for this.
The political economy justification
Often it is a question of political economy. Saying that there is a political economy justification behind the imposition of a tariff means that protectionist policies are the consequence of the lobbying activity of industries in the import-competing sectors that wish to be protected against competition from the rest of the world. There are also some theoretical arguments that can justify the use of protection from a national welfare point of view.