Protectionism: Trade Barriers and Their Economic Effects
Protectionism refers to government policies that restrict free international trade in order to protect domestic industries from foreign competition.
Before you start
Make sure you're comfortable with these topics first:
Method
- Identify the type of trade barrier described in the question: tariff, quota, subsidy, or a non-tariff barrier.
- Use a supply and demand diagram (domestic supply and demand for the good, with a horizontal world price line) to show the effect of the barrier on the domestic price, the quantity domestic firms produce, and the quantity imported.
- For a tariff, identify the resulting changes in consumer surplus, producer surplus, government revenue and the deadweight welfare loss caused by the tax wedge.
- List the main arguments for protectionism: protecting infant industries until they can compete, protecting strategic or specific-sector jobs, preventing dumping of goods below cost by foreign firms, correcting a trade deficit, and raising government revenue.
- List the main arguments against protectionism: higher prices and less choice for domestic consumers, the risk of retaliation from trading partners sparking a trade war, inefficient allocation of resources into industries without a genuine comparative advantage, and reduced incentive for protected firms to innovate.
- Evaluate by considering whether the barrier is well-targeted and temporary (the infant industry argument is strongest when time-limited) versus at risk of becoming permanent political protection, whether trading partners are likely to retaliate, and the size of the effect, which depends on the price elasticities of demand and supply for the good and how large a share of total trade is affected.
Worked example
The world price of steel is 500 pounds per tonne. At this price, a country's domestic consumption is 800,000 tonnes and domestic production is 200,000 tonnes, so 600,000 tonnes are imported. The government imposes a tariff of 100 pounds per tonne, raising the domestic price to 600 pounds per tonne. At this new price, domestic consumption falls to 700,000 tonnes and domestic production rises to 300,000 tonnes. Calculate the new level of imports and the tariff revenue collected by the government.
- Calculate the new level of imports: new domestic consumption minus new domestic production = 700,000 - 300,000 = 400,000 tonnes.
- State the fall in imports compared with before the tariff: 600,000 - 400,000 = 200,000 tonnes fewer imports.
- Calculate the tariff revenue: tariff per tonne multiplied by the new quantity of imports = 100 x 400,000 = 40,000,000 pounds.
- State the answer: imports fall to 400,000 tonnes, and the government collects 40 million pounds in tariff revenue.
- Add the evaluative point: this revenue and the gain to domestic producers must be weighed against the higher price now paid by all domestic steel consumers, including firms that use steel as an input.
Practice questions
Try each question, then tap to reveal the answer.
Q1Define a tariff.Show answer
Answer: A tax imposed on imported goods, raising their price relative to domestically produced goods.
Q2Define an import quota.Show answer
Answer: A physical limit on the quantity of a good that can be imported into a country over a given period.
Q3Name one non-tariff barrier to trade.Show answer
Answer: For example, technical or safety standards, licensing requirements, or an embargo.
Q4A government places a tariff of 50 pounds per tonne on imports, and 20,000 tonnes are imported after the tariff. Calculate the tariff revenue.Show answer
Answer: 50 x 20,000 = 1,000,000 pounds.
Q5Explain the infant industry argument for protectionism.Show answer
Answer: It argues that a new domestic industry should be temporarily protected from established foreign competitors until it grows large enough to achieve economies of scale and compete on equal terms.
Q6Give one risk of a country imposing tariffs on another country's exports.Show answer
Answer: The other country may retaliate with its own tariffs, escalating into a trade war that leaves both countries' consumers worse off.
Exam-style questions
Written in the style of a A Level Economics exam paper, with a full mark scheme.
Explain two arguments in favour of a government using protectionist policies to support a domestic industry.
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Evaluate the case for a government introducing tariffs to protect a domestic industry from foreign competition.
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See real A Level Economics past-paper questions, with official mark schemes →
Free printable worksheet
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