Protectionism (Edexcel A Level Business): Revision Note

Protectionism — tariffs

• Protectionism is when a government seeks to protect domestic industries from foreign competition

• A tariff is a tax placed on imported goods from other countries 

  • For example, tennis rackets imported into the UK from China have a tariff of 4.7%

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

How tariffs work

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

• The benefits of tariffs include:

  • Protects infant industries so they can eventually become more competitive globally

  • Increases government tax revenue 

  • 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, as they 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

Import quotas

• An import quota is a government-imposed limit on the amount of a particular product allowed into the country 

  • E.g. China has set an import quota on Cambodian rice of approximately 5.32m tonnes per year

• Restricting the physical amount of imports means that domestic businesses face less competition and benefit from a higher market share

  • More of the domestic demand is now met by domestic producers 

• The benefits of import quotas include: 

  • To meet the extra demand, domestic businesses may need to hire more workers, which reduces unemployment and benefits the wider economy

  • The higher price for the product may encourage new businesses to start up in the industry

  • Countries are able to easily change import quotas as market conditions change

  • Foreign countries view a quota as less confrontational to their business interests than tariffs

    • These countries' exporters can still sell their goods at the higher price in domestic markets (albeit a limited amount)

• The disadvantages of import quotas include:

  • Quotas limit the supply of a product, and whenever supply is limited, the price of the product rises

  • They may generate tension in the relationships between trading partners

  • Domestic firms may become more inefficient over time as the use of quotas reduces the level of competition

Other trade barriers

• Aside from tariffs and quotas, governments also choose to use legislation and subsidies to protect domestic businesses

The use of government legislation and domestic subsidies to protect domestic industries