How can tariffs lead to a situation in which all parties to a trade lose?

Answer 1

In effect, a tariff amounts to government intervention to rig prices in favor of domestic producers. This technique works only as long as foreigners accept the tariff exploitation passively?which they rarely do. More often, they retaliate by imposing tariffs or quotas of their own on imports from the country that began the tariff game. Such tit-for-tat behavior can easily lead to a trade war in which everyone loses through the resulting reductions in trade. Something like this, in fact, happened to the world economy in the 1930s, and it helped prolong the worldwide depression. Preventing such trade wars is one main reason why nations that belong to the World Trade Organization pledge not to raise tariffs.