Protectionism (Edexcel A Level Business): Revision Note

What is protectionism?

• Protectionism is when a government uses policies to restrict imports and protect domestic industries from foreign competition

• Governments may use protectionism to:

  • Protect domestic jobs and industries from cheaper foreign competition

  • Support new or "infant" industries until they are able to compete internationally

  • Protect national security by reducing reliance on foreign suppliers for essential goods

  • Respond to another country's own trade barriers or unfair trading practices

• Common methods of protectionism include tariffs (taxes on imports), import quotas (limits on the quantity of goods that can be imported) and other trade barriers such as subsidies for domestic producers

The current global protectionism situation

• Global protectionism has risen sharply since 2025, largely driven by the trade policy of the United States under President Trump

• In April 2025, the USA introduced a wide range of new tariffs on imports from most of its trading partners

  • This prompted retaliation from countries including Canada and China

• By 2026, the USA's average tariff rate had reached around 6.6%, its highest level since 1969

  • This increased costs for the average American household by around $900 a year

• Several US tariffs have faced legal challenges in the US courts

  • However, new tariffs have continued to be introduced even while older ones are contested, creating significant uncertainty for international businesses

• New trade agreements reached during 2026 still involve substantial tariffs

  • For example, EU goods entering the USA face a 15% tariff, while the UK secured lower rates on some goods, such as a 10% cap on furniture

• This period of rising protectionism shows how quickly the global trading environment can change

  • Businesses trading internationally need to closely monitor government trade policy

Tariffs

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

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 

Example

China has set an overall tariff-rate quota on rice imports of approximately 5.32m tonnes per year, which Cambodian exporters compete for alongside suppliers from other countries

• 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

Legislation

• Governments can impose laws to restrict certain imports to protect customers and businesses

• Imports may need to meet strict regulations in order to be allowed into a country

Example

There is a UK ban on imported chicken from the USA due to the practice there of using chlorine to wash chicken carcasses

• Legislation may help domestic firms to grow, as they have limited competition from businesses abroad 

• However, it can lead to retaliation from countries facing the legislation

Domestic subsidies

• Payments are given to domestic businesses to help lower the costs of production

Example

In the post-Brexit period, the UK government has provided subsidies to its farmers in order to reduce their costs of production

• Reduced costs can lead to lower prices, making domestic firms more competitive in international markets, as their exports may be cheaper 

• Businesses remain competitive, which helps to protect jobs in the industry

• However, businesses may become inefficient, as they know their costs are being subsidised