Protection (Cambridge (CIE) O Level Economics)

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

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

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

   
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

  
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

  
 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