Title: Beyond welfare: how security concerns drive USA tariff policies

Authors: Octavio Martínez-Baltodano; Ranjeeva Ranjan

Addresses: Faculty of Administration and Business, Universidad Autónoma de Chile, 5 Poniente 1670 Talca, Chile ' Faculty of Educational Sciences, Universidad Católica del Maule, Avenida San Miguel 3605 Talca, Chile

Abstract: Why do USA tariffs persist despite known welfare costs? We develop a dynamic model in which tariffs expand domestic industrial capacity that supports military readiness. Policymakers trade off static price and distortion losses against future security gains and adjustment costs. We derive conditions for an interior optimal tariff that balances diminishing security returns with rising distortions and yields a nonmonotonic response to the effectiveness of industrial policy. Extending the framework to a bilateral game, we show how asymmetries in revenue efficiency, adjustment frictions, and national priorities generate higher tariffs in the USA than in China. Evidence from the 2018 to 2025 trade war connects the model to observed outcomes. Policy implications include limiting broad tariffs when direct industrial policy is effective and when baseline capacity is already high.

Keywords: welfare costs; USA tariff policies; industrial policy; security gains; optimal tariff.

DOI: 10.1504/IJTGM.2025.150089

International Journal of Trade and Global Markets, 2025 Vol.21 No.5, pp.581 - 605

Received: 28 Apr 2025
Accepted: 04 Aug 2025
Published online: 28 Nov 2025 *

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