Know What's Happening in Industry

The US Is a Small Country

The article revisits the classic small‑country tariff model, contrasting it with the large‑country framework that allows an importer to affect world prices. It explains how a sufficiently small tariff could improve a large importer’s terms of trade, creating an "optimal tariff" that raises welfare. Empirical evidence from recent US‑China trade measures, however, shows China shifting exports to other markets, leaving American consumers to shoulder most of the cost. The piece argues that while the large‑country model is theoretically richer, the small‑country approximation remains a practical first‑order tool.