Protection (Cambridge (CIE) IGCSE Economics)
Revision Note
Reasons for Protection
Free trade aims to maximise global output through national specialisation
However, there are numerous reasons why countries would seek to limit free trade in order to protect themselves from certain outcomes
This is called protectionism and may take the form of import tariffs, export subsidies, the use of quotas or embargoes
Trading partners may retaliate to any methods of protectionism and they should be carefully considered before any implementation
Reasons for Protectionism
Reason | Explanation |
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Infant industries |
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Sunset industries |
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Strategic industries |
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Dumping |
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Employment |
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Current Account deficit |
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Labour/environmental regulations |
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Methods of Protection
The most commonly used forms of trade protectionism include tariffs, subsidies, quotas, embargoes and administrative barriers
1. Tariffs
A tariff is a tax on imported goods/services (customs duty)
With the price of imports higher, domestic firms find it easier to compete and increase their market share as consumers switch from buying imports to buying domestically produced goods/services
Less efficient domestic firms are now producing at the expense of more efficient international firms
Diagram analysis
The pre-tariff market equilibrium for plantains is seen at P1Q1
After the tariff is imposed, costs of production for domestic firms increase (as they pay the tariff when the plantains enter the country) - the supply curve shifts from S1 → S2
The new market equilibrium is seen at P2Q2
Following the law of demand, the quantity demanded contracts from Q1 to Q2
The price increases from P1 → P2
Tariffs are one of the most widely used forms of protectionism and their impact on stakeholders can be evaluated as follows
An Evaluation of the Use of Tariffs To Protect Domestic Firms
Stakeholder | Explanation |
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Domestic producers targeted by the government action e.g. steel manufacturers |
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Domestic producers who have to pay higher prices e.g. car manufacturers who use steel for production |
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Foreign producers |
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Domestic consumers |
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The Government |
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Examiner Tip
One of the most common misconceptions about tariffs is who pays them. The tariff is not paid by the foreign exporting firm. It is paid by any domestic firms that are importing. They pay the tariff to their own government when the goods cross the border.
Quotas, Subsidies, Embargoes and Administrative Barriers
2. Quotas
A quota is a physical limit on imports e.g. in June 2022 the UK extended their quota on steel imports for a further two years in order to protect employment in the domestic steel industry
This limit is usually set below the free market level of imports
As cheaper imports are limited, a quota raises the market price
As cheaper imports are limited a quota may create shortages
Some domestic firms benefit as they are able to supply more due to the lower level of imports
This may increase the level of employment for domestic firms
An Evaluation of the Use of Quotas To Protect Domestic Firms
Stakeholder | Explanation |
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Domestic Producers |
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Foreign Producers |
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Consumers |
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Government |
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Standards of living |
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Equality |
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3. Subsidies to domestic producers
A subsidy lowers the cost of production for domestic firms
They can increase output and lower prices
With lower prices their goods/services are more competitive internationally
The level of exports increases
The increased output may result in increased domestic employment
An Evaluation of the Use of Subsidies To Protect Domestic Firms
Stakeholder | Explanation |
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Domestic Producers |
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Foreign Producers |
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Consumers |
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Government |
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Standards of living |
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Equality |
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4. Embargoes
An embargo is a complete ban on trade with a certain country usually as the result of political fall out e.g. the USA ran an embargo for many decades on Cuban products
An Evaluation of the Use of Embargoes To Protect Domestic Firms
Stakeholder | Explanation |
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Domestic Producers |
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Foreign Producers |
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Consumers |
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Government |
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5. Administrative barriers
There are many strategies that can be used to create barriers to trade using less obvious methods than tariffs, quotas and subsidies
Health and safety regulations e.g. in 2017 the EU put a new health regulation in place regarding the permitted level of aflotoxins in nuts. Aflotoxin levels are naturally higher in southern hemisphere countries and it effectively blocked the import of southern hemisphere nuts
Product specifications e.g. Canada specified that all jam imported into Canada needed to be in a certain size of jar. Many countries do not usually manufacture jars in the required size
Environmental regulations e.g. in November 2021 new regulations were put in place in the EU and the USA to limit the amount of imports of 'dirty steel' - predominantly this is steel produced using coal fired power stations which are prevalent in China
Product labelling can be expensive for firms to apply and may limit their desire to sell into certain markets
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