Protectionism

Economics AS · International economic issues. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

Protectionism means government measures that restrict international trade in order to shield domestic producers from foreign competition. It is the opposite of free trade.

The main tools are tariffs, import quotas, export subsidies, embargoes and excessive administrative burdens ('red tape'). A tariff is a tax on imports. It raises the price in the home market, so domestic firms supply more, consumers buy less and imports fall. The government also collects revenue. A quota limits the quantity of imports and gives the government no revenue.

Arguments for protection include helping infant industries, stopping dumping and saving jobs. Arguments against include higher prices, less choice, less efficient firms and retaliation by other countries.

Rules to remember

Tariff: a tax on imports. Price rises, domestic output rises, consumption falls, imports fall, government gains revenue.
Import quota: a limit on the quantity (or value) of a good that may be imported. No tax revenue for the government.
Export subsidy: a government payment to exporters that lowers their costs so they can sell abroad at lower prices.
Embargo: a complete ban on trade in certain goods or with a certain country.
Red tape: slow customs checks, heavy paperwork or strict standards that make importing costly.
Tariff revenue = tariff per unit × quantity imported after the tariff.
For: infant industries, anti-dumping, protecting jobs, strategic industries, improving the current account. Against: higher prices, less choice, inefficiency, retaliation, higher costs for firms that use imported inputs.

Common mistake

When working out tariff revenue, students multiply the tariff by the old quantity of imports or by total demand. Use only the imports that remain after the tariff: demand minus domestic supply at the new price.

Worked example

A good can be imported at a world price of $30. At $30, domestic demand is 500 units and domestic supply is 200 units. A tariff of $6 per unit is imposed. At $36, demand is 440 units and domestic supply is 260 units. Find the fall in imports and the tariff revenue.

Imports before the tariff = 500 − 200 = 300 units.
Imports after the tariff = 440 − 260 = 180 units.
Fall in imports = 300 − 180 = 120 units.
Tariff revenue = $6 × 180 = $1,080.

Answer: Imports fall by 120 units and the government receives $1,080.

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