How Tariffs Affect Trade Deficits

We study the positive (not normative) effect of a permanent import tariff on trade deficits. We consider a two-period trade model with general preferences and technology. We first develop an aggregation result showing one can work with induced preferences over aggregate imports and exports. Our main results provide conditions under which tariffs are neutral as well as conditions under which they reduce deficits. A central theme is that the static Engel curve for aggregate imports and exports holds the key to this dynamic question.