Bhagwati Theorem

The Bhagwati Theorem states that when countries impose tariffs (taxes on imports) to protect their industries, the overall global efficiency declines, even if there's some domestic benefit. This is because tariffs cause resources to shift away from their most productive uses internationally, leading to increased costs and reduced total welfare worldwide. In essence, tariffs distort market signals and resource allocation, making everyone worse off in the long run, despite potential short-term local gains. The theorem highlights the economic downside of protectionist policies, emphasizing the importance of free trade for maximizing global efficiency.