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A tariff moves the economy closer to the no-trade equilibrium and, like most taxes, has deadweight losses.

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  • It is "no-trade equilibrium", hyphenated modifier, the equilibrium of no trade, the balance that results from the absence of trade. It is a figurative usage, since that which does not exist cannot be in balance. But at least there is no trade imbalance. Instead of equilibrium the author might have used the word stasis.
    – TimR
    Commented Aug 11, 2017 at 14:46
  • Isn't this more of an Economics question? Commented Aug 11, 2017 at 19:50

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Since we're talking about tariffs, "economy" here probably refers to the economy of a particular country (or region, perhaps; for example, the European Union). Tariffs are typically set by governments, not individual companies.

So if the economy is that of a country, then a no-trade equilibrium likely refers to not having any imports or exports. An economy in a no-trade equilibrium would produce everything it needs itself, rather than trading with other economies.

In economic terms,

  • if country A can produce product X cheaply and quickly, but produces product Y more slowly and expensively, and
  • country B can produce product Y cheaply and quickly, but produces product X more slowly and expensively

given that both countries A and B need products X and Y, it's more efficient for both of them to specialize in one product and trade with each other than for each of them to make both X and Y themselves.

If country A would impose tariffs on exporting X and/or importing Y, then that would increase the cost of those products. An export tariff would disincentivize A's own people from selling X to country B, and an import tariff would disincentivize country B from selling Y to country A.

That's why adding tariffs would move country A's economy closer to a no-trade equilibrium: the higher the tariffs, the less trading there will be. (Maybe some companies could afford to produce X with the added costs of tariffs and still profit, but others might no longer turn a profit if a tariff was added.) Eventually, if the tariffs got to the point where X was just as expensive as Y, country A wouldn't bother to trade at all.

Tariffs come with a deadweight loss because adding them makes things more inefficient than simply trading would be. (But a country may decide to impose them anyway because it has some other objective that it's willing to give up efficiency to meet.)

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