The smaller the polity, the less practical it is to produce everything. Most towns aren't going to be growing wine grapes or olives at all, so tariffs would just raise local prices and lower imports rather than shifting local production. But they could also induce people to drive to the next town over for shopping.
Ah yes, Paul "Inflation has slowed down (but not reversed) if you ignore all the things people actually need to live" Krugman. That man is a dishonest, partisan hack and if he said the sky was blue I'd go outside to make sure:
Presumably the same effect applies if it were tariff between towns, then counties, then states, and finally countries.
Then what, we are missing interstellar trades to lower the prices on earth?