The Effects of Protectionism on UK Economy

Readers Question: what are the possible consequences/effects of protectionism with regard to the UK and the rest of the world?

Protectionism involves placing tariffs and other barriers to trade. If there is a rise in protectionism we will experience a reduction in trade between the UK and the rest of the world. It is argued that if trade falls the UK will lose out on many benefits such as:

  • Exporters will see a fall in demand, causing less output and possibly unemployment
  • Consumers will have to pay higher prices for imports of goods (e.g. electronic goods from China, food from Africa)
  • There is less scope for specialisation and economies of scale.
  • Less competitive pressures for firms and economies to cut costs

For a more theoretical explanation look at the benefits of free trade that the UK will no longer have.

However, some argue, that the benefits of free trade ignore many good reasons to impose tariffs. In particular, it is argued free trade discriminates against developing economies. It is argued developing countries need an element of protection to enable new industries to grow and their economies to diversify. See arguments against free trade

In the case of the UK, many of these arguments don’t really apply. However, for developing countries carefully implemented protectionism may help develop their economies. There are also good environmental reasons for promoting an element of protectionism.

However, it depends on the type of protectionism. If it is just tariffs increased out of spite, then there may be very little benefit to anyone. Tariffs have to be carefully targeted and ideally only last for a couple of years.

Effect of tariffs on imports, domestic production and government tax revenue

effect tariffs

Conclusion

Since the UK relies on trade for much of its economy, a rise in protectionism will harm the UK economy (perhaps more than other economies). Higher tariffs will definitely lead to lower exports, lower imports and a lower rate of economic growth.

However, it is worth noting that 60% of UK trade is now with the EU. Therefore, if it is just protectionism about non-EU countries, the effect will be smaller and the impact not so severe.

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