To assess the impact of the recent protectionist measures enacted during the Trump administration—most notably the imposition of high tariffs—on the welfare of American consumers, it is instructive to first revisit the sources of welfare gains from trade as identified in modern trade theory. The seminal work of
and Elhanan Helpman on monopolistic competition with homogeneous firms (Krugman, 1979, 1980; Helpman and Krugman, 1987) introduced two mechanisms through which trade liberalization enhances consumer welfare beyond the classical comparative advantage framework. First, trade enables an endogenous expansion in product variety. As markets open, consumers gain access not only to domestic goods but also to a wide array of imported varieties, improving their consumption possibilities and overall utility.Second, increased market integration under trade liberalization intensifies competition among firms. In a monopolistically competitive setting with non constant markups, trade reduces the market power of domestic producers by exposing them to foreign competitors. This pressure forces firms to lower their markups, thereby reducing consumer prices and improving allocative efficiency. These two effects—variety expansion and pro-competitive price reductions—jointly increase consumer welfare in a measurable and robust manner across multiple trade models.
A third source of welfare gain emerges from the introduction of firm heterogeneity in productivity, pioneered by Marc Melitz. In the Melitz (2003) model, trade liberalization induces a selection process whereby only the most productive firms are able to remain sufficiently price competitive to penetrate foreign markets, despite facing both fixed and variable trade costs. Less productive firms serve only the domestic, while the least productive domestic firms are forced to exit the market. This reallocation of market shares toward more efficient producers can be seen as a cleansing effect at the industry level raising average productivity, thus lowering average price and improving aggregate welfare. Thus, trade not only improves price and variety outcomes but also drives dynamic gains through enhanced resource allocation at the industry level.
The recent shift toward protectionism in the U.S., exemplified by the wave of tariffs under the Trump administration, effectively reverses these welfare-enhancing mechanisms. The imposition of high tariffs restricts access to foreign goods, thereby reducing the range of products available to American consumers and limiting the scope for variety-driven utility gains. Products that were previously accessible through global supply chains become scarcer or more expensive, reducing consumer choice and satisfaction.
Moreover, by limiting foreign competition, protectionist measures relaxes the competitive pressure that trade imposes on domestic producers. With fewer foreign competitors, domestic firms face less pressure to reduce their markups and prices. As a result, they raise their markups and set higher prices, and consumers are left facing higher costs for a narrower set of goods, and thus suffering from a lower purchasing power and limited consumption choices. The efficiency gains realized through intensified competition under trade are thus undone under protectionist policies.
Finally, the protective shield afforded to less efficient firms distorts the competitive selection mechanism central to the Melitz model. Firms that would have exited in a more open environment are instead sustained and entry of even less productive domestic producers is triggered, preventing the reallocation of resources toward more productive enterprises and leading to a decline in average productivity at the industry level. This impedes industry-level productivity improvement and leads to long-term inefficiencies in the domestic economy. In sum, the welfare gains identified in modern trade theory provide a clear analytical basis for understanding the multifaceted consumer losses that result from a return to protectionism.
References
Krugman, P. R. (1979). Increasing returns, monopolistic competition, and international trade. Journal of International Economics, 9(4):469–479.
Krugman, P. (1980). Scale economies, product differentiation, and the pattern of trade. The American Economic Review, 70(5):950–959.
Helpman, E. and Krugman, P. (1987). Market structure and foreign trade: Increasing returns, imperfect competition, and the international economy. MIT press.
Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6):1695–1725.