Protectionist Tariffs (Edexcel IGCSE Economics)

Explanation of Tariffs

• A tariff is a tax on imported goods/services (customs duty)

  • This increases the price of imports; therefore, domestic firms find it easier to compete and increase their market share as consumers switch from buying imports to buying domestically produced goods and services

  • Less efficient domestic firms can now continue to produce, but at the expense of more efficient international firms, which have a tax imposed on their products 

• A tariff increases the price of imported goods, which helps switch demand for that product/service from foreign businesses to domestic businesses

• American customers are more likely to purchase American cheese now the tariff has made British cheese more expensive
  

Diagram analysis

• The pre-tariff market equilibrium for cheese in the USA is seen at P₁Q₁

• After the tariff is imposed, less British cheese is imported, and the supply curve for cheese 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 of cheese increases from P₁  → P₂ 

An Evaluation of Tariffs

• The benefits of tariffs include:

  • They protect infant industries so they can eventually become more competitive globally

  • They increase government tax revenue, which can be used to provide essential services such as healthcare

  • 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 that 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