Protectionism occurs when countries place restrictions on imports into the economy. This can involve higher tariffs (a type of tax on imports) or quotas and embargoes. Other forms of protectionism can be less obvious, such as domestic subsidies to give industries unfair advantages.
Different types of protectionism
- Tariffs – This is a tax on imports.
- Quotas – This is a physical limit on the quantity of imports
- Embargoes – This is a total ban on a good, this may be done to stop dangerous substances
- Subsidies – If a govt subsidises domestic production this gives them an unfair advantage over competitors. This is quite common
- Administrative barriers Making it more difficult to trade, e.g. imposing minimum environmental standards. These are sometimes known as non-tariff barriers.
Arguments for Protectionism
Countries may impose tariffs on goods because:
- Infant industry argument – protect new industries against free trade
- Diversify the economy – tariffs and protectionism can help develop new industries to give more diversity to economy
- Raise revenue for government.
- Protect certain key industries from international competition to try and safeguard jobs.
Arguments against protectionism
- Protectionism leads to retaliation and therefore higher import prices and higher consumer prices
- Higher prices lead to lower overall demand causing job losses in other industries
- Protectionism can encourage inefficient firms to stay in business.
- Protectionism can keep smaller national firms which can’t benefit from the same economies of scale.
- Benefits of Free Trade
Diagram of tariff protectionism
This diagram shows the welfare effect of placing a tariff on imports.
Losers from tariffs
- Domestic consumers who pay higher prices (P1 to P2). There is lost consumer surplus of areas (1+2+3+4)
- Foreign exporting firms. Exports fall from (Q4-Q1) to (Q3-Q2)
- Domestic exporting firms hit by retaliatory tariffs (not shown in above diagram)
- There is a net welfare loss to the domestic economy of (2+4)
- Other firms in the economy who see lower demand. Becuase prices rise for this good, consumers have less disposable income to spend on other goods. Therefore, other firms see a decline in demand.
Winners from Tariffs
- Government gains tariff revenue of area (3)
- Domestic producers who are able to sell a higher quantity to the domestic market. Domestic supply increases from Q1 to Q2. There is an increase in producer surplus of area (1)