Podcast Summary: The Marginal Revolution Podcast

Episode: The Return of Tariffs - Unpacking Incidence, Retaliation, and the Return of Protectionism

Date: November 18, 2025
Hosts: Alex Tabarrok ("A") and Tyler Cowen ("B")

Main Theme

This episode dives into the recent resurgence of tariffs as a key policy tool in the United States and globally. Alex and Tyler unpack the economic theory and real-world outcomes of tariffs, explore their historical context, discuss who actually bears the burden (incidence), the ripple effects of retaliation, and how these developments reflect broader shifts toward protectionism. They also reflect candidly on the complexities and uncertainties in tariff economics, questioning earlier assumptions and highlighting new puzzles.

Key Discussion Points & Insights

1. Historical Context of Tariffs

• Post-WWII Consensus: Global leadership drove tariff rates down post-World War II; institutions like GATT, the WTO, and the EU played significant roles. By the 1970s, tariffs seemed a solved issue in economic policy ([00:21]–[01:40]).
• Resurgence: Under Trump’s presidency, "tariffs jumped to 50%, 100%, 25%, 10%, jumping all over and around." Average U.S. tariffs settled around 18%—a drastic shift from the long-term average of 2.4% ([01:06]–[02:29]).

  "Going from 2.4 to 18 [in tariffs], sure, in a matter of weeks is crazy." – Alex [01:46]

2. Who Actually Pays the Tariffs? (Incidence)

• Econ 101: Elasticities Rule: The burden of a tariff depends on the elasticity of supply and demand. "Elasticity is escape"—the more elastic side escapes the tax ([04:38]).

  "The side of the market which is more elastic can, to a greater extent, escape the tax." – Alex [04:39]

• U.S. Role Not as Dominant: The U.S. is a big market, but not indispensable for most goods (about 12–14% of global import demand), so suppliers often have alternatives ([05:50]–[12:08]).

• Variation by Sector: Tariff incidence varies. Some branded, high-margin goods (e.g., pharmaceuticals) can have the tax shifted to foreign suppliers. For unbranded commodities, U.S. consumers pay more ([06:27], [10:07]).

  "Pharmaceuticals are a great example... the price is so high in the US markets and you can't get that price anywhere else in the world." – Alex [07:47]

• Empirical Evidence: Most evidence from recent U.S. tariffs (e.g., washers, steel during Trump’s first round) shows price increases passed largely to consumers ([10:24]–[12:08]).

  "Trump won, you know, and most of those tariffs... the price ended up being passed through mostly to consumers." – Alex [10:24]

3. Complications: Exchange Rates & Pass-Through

• Exchange Rate Adjustments: Tariffs don’t always result in anticipated price changes due to movements in the exchange rate, which are hard to predict ([16:23]).

  "In most, but not all cases, if you put a lot of tariffs on a country you trade with a lot, the exchange rate adjusts." – Tyler [16:23]

• Exchange Rate as 'Veil': Differences between nominal and real effects, with pass-through often around 20-50% but highly variable ([16:23]–[19:44], [32:34]).

  "The exchange rate is a veil. Look beyond the veil toward real changes." – Alex [32:09]

• Timeliness: Pass-through to consumer prices takes about a year due to inventories and adjustment costs ([14:01]–[16:09]).

  "It does seem to take about a year for the price to pass through." – Alex [16:09]

4. Copycat and Retaliation Effects

• Contagion Argument: Wealthy nations’ adoption of tariffs encourages poorer nations to imitate, which can be even more damaging due to their smaller safety nets ([03:09]).

  "Simply that poorer countries will copy what the high status nations are doing." – Tyler [03:41]

• Retaliation Dynamics: Not all nations retaliate visibly. Some, like China, have been effective (e.g., ceasing soybean purchases and leveraging rare earths). Others might retaliate less obviously, such as through reduced cooperation ([33:11]).

  "There may be retaliations under the surface that we're not seeing..." – Tyler [33:23]

5. Theoretical Perspectives: Learner Symmetry & Macro Implications

• Learner Symmetry: A core economic theorem equates import tariffs and export tariffs: limiting imports also limits exports, and vice versa.

  "A tax on imports is equivalent to a tax on exports." – Alex [24:53]

• T-Bills and the Deficit: U.S. 'exports' of T-bills complicate trade symmetry, but ultimately, increases in imports must be balanced by increases in exports or later repayments ([25:19]–[28:38]).

6. Sectoral and Factor Incidence (Heckscher-Ohlin, Stolper-Samuelson)

• Investment Substituting Trade: Tariffs sometimes increase domestic investment (e.g., car plants in Kentucky post tariffs on Japanese cars), but it's unclear whether such shifts meaningfully benefit U.S. workers or which sectors ultimately lose out ([38:35]–[40:56]).

• Winners and Losers: Tariffs might benefit certain lower-skilled workers but harm others—especially those in high-skilled, high-technology export sectors ([43:36]).

  "It's perhaps pro a certain type of worker, but it's anti a different type of worker." – Alex [44:09]

7. Political and Security Dimensions

• Tariffs as 'Hostage' or Leverage: Trump and others suggest tariffs or encouraging foreign investment in the U.S. create leverage or 'hostages' for security. Hosts are skeptical—targeting is poor and often alienates allies ([45:44]–[48:11]).
• Friend-shoring vs. Alienation: An argument is made that tariffs could be strategically targeted (friend-shoring), but in practice, blanket tariffs damage alliances and erode U.S. security ([48:11]–[49:42]).

  "If we were going to unite [the democracies] in a democratic bloc, then I would have applauded... But to come out against our friends at the same time as being against our enemies... has been a negative for national defense." – Alex [49:23]

8. Reflections, Puzzles, and Prognosis

• Complexity & Uncertainty: The hosts recognize that the theories, empirical results, and real-world outcomes of tariffs are much messier and less predictable than standard models suggest ([49:51]–[53:21]).

  "Having had to rethink them so much over the last fraction of a year, I’ve realized that I understand them much less well than I used to think." – Tyler [52:09]

• Bottom Line for Consumers: The current tariff regime is expected to land heavily on American consumers, with little net benefit and growing retaliation ([52:26], [53:21]).

• Historical Lens: Neoliberalism and trade liberalization worked—but their successes paradoxically fueled the reactionary politics now driving protectionism ([51:05]–[52:04]).

  "Neoliberalism worked... and it worked not just for other countries, it worked for the United States... It is kind of amazing to me that somehow people have been convinced that of all the countries in the world the richest, most powerful country is the one which has been harmed by globalization. That’s crazy." – Alex [49:51]

Notable Quotes & Moments (selected with timestamps)

• "Elasticity is escape." — Alex [04:39]
• "Simply that poorer countries will copy what the high status nations are doing." — Tyler [03:41]
• "Pharmaceuticals are a great example...we could tax away some of those profits." — Alex [07:47]
• "Exchange rate, the real exchange rate, we don't understand." — Tyler [17:40]
• "A tax on imports is equivalent to a tax on exports." — Alex [24:53]
• "If only it were random. You might say." — Tyler, critiquing the arbitrariness of current tariffs [13:49]
• "Having had to rethink them...I understand them much less well than I used to think." — Tyler [52:09]
• "I think the American consumer is going to end up very unhappy, and we’re going, as you said, in the wrong direction." — Alex [52:26]
• "Neoliberalism worked... It is kind of amazing to me that...the richest, most powerful country is the one which has been harmed by globalization. That's crazy." — Alex [49:51]

Important Segment Timestamps

• [01:02] Historical context—postwar reductions in tariffs
• [02:41] Tariff 'incidence': Who actually pays?
• [03:09] "Contagion effect"—other nations copying protectionism
• [04:35] Econ 101 on incidence
• [06:27] Sectoral differences in burden
• [10:24] Empirical evidence on pass-through
• [16:23] Exchange rates and pass-through
• [19:42] Real exchange rates and macro uncertainty
• [24:53] Learner symmetry explained
• [33:11] Retaliation—invisible and visible
• [38:35] Heckscher-Ohlin, Stolper-Samuelson—investment/trade relationship
• [43:36] Sectoral/factor incidence—winners and losers
• [45:44] National security and 'hostage' argument
• [49:51] Final reflections on neoliberalism, trade, and confusion

Conclusion

Alex and Tyler provide a frank, nuanced exploration of tariffs, challenging conventional wisdom, exposing sector-specific details, and candidly confronting the limits of current economic understanding. While broad anti-tariff arguments remain strong, the real-world complexity, variance in effects, and political feedback loops mean that the Trump-era tariffs — and their global echoes — are both a puzzle and a warning. Despite theoretical confusion, the outcome for U.S. consumers is, unfortunately, rather clear: tariffs will hurt more than help.