Protectionism (Edexcel A Level Business)
Revision Note
Written by: Jennifer Aryiku
Reviewed by: Steve Vorster
Protectionism - Tariffs
Protectionism is when a government seeks to protect domestic industries from foreign competition
A tariff is a tax placed on imported goods from other countries
For example, tennis rackets imported into the UK from China have a tariff of 4.7%
A tariff increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses
When the USA places a tariff on imported cheese from Britain, the price of British cheese in the USA rises
American customers are more likely now to purchase American cheese as the tariff has now made British cheese more expensive
The benefits of tariffs include
They protect infant industries so they can eventually become more competitive globally
An increase in government tax revenue
Reduces dumping by foreign businesses as they cannot sell below the market price
The disadvantages of tariffs include
Increases the cost of imported raw materials which may affect businesses who use these goods for production, leading to higher prices for consumers
Reduces competition for domestic firms who may become more inefficient and produce poor quality products for their customers
Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them
Examiner Tips and Tricks
Students are often confused about who pays the tariff. It is not the foreign company, but the domestic company who pays the tariff. In our cheese example above, any retailers in the USA who import cheese from Britain have to pay the tariff (import tax) when it crosses the border into the USA. This policy may help cheese manufacturers in the USA but it harms any other business that imports and sells foreign cheese as it raises their costs of production.
Import Quotas
An import quota is a government imposed limit on the amount of a particular product allowed into the country
E.g. China has set an import quota on Cambodian rice of approximately 5.32 million tonnes per year
The quota on rice imports from Cambodia to China helps to protect rice farmers in China
Restricting the physical amount of imports means that domestic businesses face less competition and benefit from a higher market share
More of the domestic demand is now met by domestic producers
The benefits of import quotas include
To meet extra the demand, domestic businesses may need to hire more workers which reduces unemployment and benefits the wider economy
The higher prices for the product may encourage new businesses to start up in the industry
Countries are able to easily change import quota as market conditions change
Foreign countries view a quota as less confrontational to their business interests than tariffs
Their exporters can still sell their goods at the higher price in domestic markets (but a limited amount)
The disadvantages of import quotas include
Quotas limit the supply of a product and whenever supply is limited, the price of the product rises
They may generate tension in the relationship with trading partners
Domestic firms may become more inefficient over time as the use of quotas reduces the level of competition
Other Trade Barriers
Aside from tariffs and quotas, governments also choose to use legislation and subsidies to protect domestic businesses
The use of Government Legislation & Domestic Subsidies to Protect Domestic Industries
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Drawbacks |
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Examiner Tips and Tricks
In Paper 1, you need to be able to evaluate the effects of protectionism on a business. You should also be able to assess the short term and long term effects of protectionism on foreign and domestic businesses. Depending on the nature of the business, the effect of protectionism can be immediately felt. It may take some time for other firms to feel the effects. Read the case study carefully to determine the context.
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