👋 Welcome to the World of Protectionism!

International trade seems simple: countries buy what they can't produce efficiently and sell what they can. But sometimes, governments decide to interfere with this free flow of goods. This is where Protectionism comes in.

This chapter (6.2 in your syllabus) is crucial because it explores the reasons why governments restrict trade and, more importantly, the economic consequences of these actions. We will look at the tools they use and evaluate whether their intentions actually lead to good outcomes.

Don't worry if international trade diagrams look confusing at first—we'll focus on understanding the mechanisms and the real-world effects, which is what the examiners are really looking for!

SECTION 1: Defining Protectionism (Syllabus 6.2.1)

What is Protectionism?

Protectionism refers to any measure taken by a government to restrict international trade, usually with the goal of protecting domestic industries from foreign competition.

It is the opposite of Free Trade (or trade liberalisation), where goods and services move across borders without government interference (like taxes or quotas).

Analogy Alert! 🚨

Think of free trade as an open sports competition where the best team (the most efficient producer) wins. Protectionism is like giving your local team special rules, thicker padding, or making the foreign team jump through hoops just to level the playing field (or tilt it in your favour).

Key Takeaway: Protectionism uses barriers to reduce imports and shield local businesses.

SECTION 2: The Tools of Protectionism (Syllabus 6.2.2)

Governments use various methods to restrict imports or boost exports. These are known as protectionist measures or trade barriers.

1. Tariffs (Customs Duties)

A tariff is a tax imposed on imported goods or services.

  • Mechanism: The tariff increases the cost of buying the imported good. This shifts the foreign supply curve upwards (or inwards) for the domestic market.
  • Impact:
    • The price for consumers increases (from Pw to Pw + Tariff).
    • The quantity of imports falls.
    • Domestic producers increase their production, earning higher revenue.
    • The government earns revenue from the tax (a key difference from quotas).
    • Consumer surplus falls, and deadweight welfare loss occurs.
Did You Know?

If a large country imposes a tariff, it might be able to force the foreign producer to lower their price, meaning the importing country benefits from a slightly lower price than before the tariff (this is called the Terms of Trade benefit, though this is a complex A Level concept).

2. Import Quotas

An import quota is a physical limit on the volume or value of a specific good that can be imported over a given period.

  • Mechanism: Unlike a tariff (which allows unlimited trade if consumers are willing to pay the higher tax), a quota physically stops imports once the limit is reached. This makes the supply curve vertical at the quota limit.
  • Impact:
    • The domestic price rises, sometimes even higher than with a tariff.
    • Domestic production increases, and imports fall.
    • Crucially, the government does not earn revenue. The extra profit from the higher price (known as quota rent) often goes to the foreign producer or the domestic firms licensed to import.

Quick Tip: Both tariffs and quotas restrict supply and raise the domestic price, but tariffs generate government revenue while quotas generate 'quota rent' for those who hold the license to import.

3. Export Subsidies

An export subsidy is a payment made by the government to domestic firms to encourage them to sell their goods abroad.

  • Mechanism: The subsidy lowers the effective production cost for firms exporting their goods. This shifts the supply curve outward in the international market.
  • Impact: Domestic firms can sell their products at a lower price internationally, making them more competitive against foreign producers.
  • Cost: Subsidies are expensive and funded by taxpayers, leading to a welfare loss for the subsidising country.

4. Embargoes

An embargo is a total ban on the import or export of a specific good or all goods from a particular country.

  • Usage: Embargoes are often used for political reasons (e.g., sanctions against countries whose policies a government disagrees with) or health/safety reasons (e.g., banning beef imports due to disease).
  • Impact: Complete elimination of trade in that specific sector.

5. Excessive Administrative Burdens ('Red Tape')

These involve making import processes deliberately complicated, lengthy, or expensive. They are often called non-tariff barriers.

  • Examples: Requiring imports to meet very specific and unique health and safety standards, complex customs procedures, or burdensome documentation requirements.
  • Impact: This increases the fixed and variable costs for the foreign exporter, discouraging them from entering the domestic market.
Quick Review: Protectionist Tools

Tariffs: Tax on imports.
Quotas: Quantity limit on imports.
Subsidies (Export): Payment to local exporters.
Embargoes: Total ban.
Administrative Burdens (Red Tape): Complex rules.

SECTION 3: Arguments FOR Protectionism (Syllabus 6.2.3)

Protectionist policies are rarely implemented without a stated reason. Here are the most common justifications used by governments, followed by the counter-arguments (which is critical for evaluation).

1. The Infant Industry Argument

  • Justification: New domestic industries (infants) cannot compete immediately with large, established foreign firms that benefit from economies of scale. Protection (e.g., a temporary tariff) allows the infant industry time to grow, achieve economies of scale, and eventually become competitive globally.
  • Evaluation/Limitation:
    • Governments often fail to remove the protection once the industry matures.
    • Protection can remove the incentive for the 'infant' to become efficient.
    • It is difficult to identify which industries will truly succeed (picking winners).

2. Anti-Dumping Measures

  • Definition of Dumping: Dumping occurs when a foreign firm sells goods in another country at a price below their cost of production. This is usually done to drive out domestic competitors and then raise prices later.
  • Justification: Protectionism (like imposing a tariff equal to the dumping margin) is required to prevent unfair competition and protect local employment.
  • Evaluation/Limitation:
    • It is very hard to prove that dumping is actually occurring (is the low price due to high efficiency or predatory behaviour?).
    • In the short run, consumers benefit from the lower prices provided by dumped goods.

3. To Protect Domestic Employment

  • Justification: If foreign imports flood the market, domestic industries may decline, leading to mass unemployment. Trade barriers keep local production higher, thus safeguarding jobs.
  • Evaluation/Limitation:
    • Protectionism only saves jobs in the protected industry, but it destroys jobs in other unprotected sectors (especially export industries, due to retaliation, see below).
    • It leads to a misallocation of resources (keeping workers in inefficient industries instead of allowing them to move to growing, efficient sectors).

4. To Correct a Balance of Payments (BOP) Deficit

  • Justification: If a country has a persistent deficit on the current account (too many imports relative to exports), tariffs or quotas reduce the demand for imports, improving the trade balance.
  • Evaluation/Limitation:
    • Foreign countries might retaliate by imposing their own barriers, cancelling out the initial benefit.
    • It is a short-term fix. It does not address the underlying causes of the deficit (like low productivity or high inflation).

5. To Protect Strategic Industries (National Security)

  • Justification: Certain industries (e.g., defence manufacturing, essential food production, energy) are vital for national security. Relying on imports for these items makes the country vulnerable during conflicts or crises.
  • Evaluation/Limitation:
    • This argument is often overused to justify protecting industries that are simply inefficient.
    • It can still lead to higher consumer costs in exchange for security.

Key Takeaway: Arguments for protectionism usually focus on fairness, short-term stability (jobs), or long-term growth (infant industries). However, these benefits often come with significant costs and practical limitations.

SECTION 4: Arguments AGAINST Protectionism (Syllabus 6.2.3)

Economists generally favour free trade because protectionism leads to inefficiency and reduces overall global welfare.

1. Misallocation of Resources (Inefficiency)

  • Concept: Free trade allows countries to specialise according to their comparative advantage. Protectionism distorts market signals, leading to domestic resources being kept in inefficient, protected industries instead of flowing to sectors where the country is genuinely competitive.
  • Consequence: Lower global output and less efficient resource use (reduction in allocative efficiency).

2. Higher Prices for Consumers

  • Trade barriers restrict supply, leading directly to higher domestic prices (as seen with tariffs and quotas).
  • Consumers have less choice and must pay more for goods. This disproportionately affects lower-income families (making the policy regressive).

3. Reduced Competition and Innovation

  • When domestic firms are shielded from foreign competition, they face less pressure to innovate, improve quality, or reduce costs.
  • Over time, this results in lower productive efficiency and a lack of dynamic progress within the protected industries.

4. Risk of Retaliation

  • If Country A imposes a tariff on steel imports from Country B, Country B is likely to respond by imposing a tariff on, say, agricultural products from Country A.
  • This leads to a "trade war," where global trade volume shrinks, hurting exporting firms in all involved countries and resulting in overall lower economic welfare.

5. Higher Costs for Exporting Industries

  • Protectionism often raises the price of imported raw materials or intermediate goods (e.g., a tariff on imported steel makes cars more expensive to produce domestically).
  • This increases the costs for domestic firms that rely on imports, making their final goods less competitive in export markets.

6. Welfare Loss and Reduced Economic Growth

  • As illustrated by trade diagrams, tariffs and quotas create a deadweight welfare loss—a net loss of total consumer and producer surplus for society.
  • In the long run, protectionism limits the benefits of specialisation, restricts consumer spending power, and stunts innovation, thereby slowing down national and global economic growth.

Key Takeaway: The costs of protectionism—higher prices, inefficiency, and the risk of trade wars—often outweigh the benefits, leading to reduced overall economic welfare.

Summary Review: Protectionism

To ace your exam questions on protectionism, always remember the trade-offs:

1. Definition: Measures to restrict trade and protect domestic firms.
2. Tools: Tariffs (tax), Quotas (quantity limit), Subsidies (payment), Embargoes (ban), Red Tape (admin burdens).
3. Justifications (For): Infant industry, anti-dumping, jobs, BOP correction.
4. Consequences (Against): Inefficiency (misallocation), higher consumer prices, retaliation, lack of innovation, and long-term welfare loss.