The United States is a Small Country in World Trade

Despite being the largest country in world trade and thus presumably having high optimal tariffs, the United States has long had low and declining levels of protection. This paradox suggests that the United States is failing to exploit its monopsony power by levying optimal tariffs. Using data on world output and trade flows, we find that the United States is a small country in world trade in that its trade policies have negligible impacts on world prices. In the median manufacturing industry, US tariffs reduce world prices by only 0.12%. United States optimal tariffs are also typically small (3.6% in the median industry) and are lower than existing US tariffs in most industries. It is no puzzle that the United States has been a champion of free trade since the 1930s—the United States, like other small countries, benefits economically from tariff reductions.