4-1-4-protectionism

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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

Diagram illustrating UK's cheese export to USA with £2 tariff, raising price to £12. Comparisons show UK cheese costs £10, USA cheese £12. — **When the USA places a tariff on imported cheese from Britain, the price of British cheese in the USA rises**

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

Examiner Tips and Tricks

Students are often confused about who pays the tariff. It is not the foreign company but the domestic company that pays the tariff. In our cheese example above, any retailers in the USA who import cheese from Britain have to pay the tariff (import tax) when it crosses the border into the USA. This policy may help cheese manufacturers in the USA, but it harms any other business that imports and sells foreign cheese, as it raises the costs of production.

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

A hand holds a pile of rice grains, with a blurred background of more rice spread on the ground, indicating an outdoor setting. — **The quota on rice imports from Cambodia to China helps to protect rice farmers in China**

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

	Government legislation	Domestic subsidies
How does it work?	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	Payments are given to domestic businesses to help lower the costs of production
Example	There is a UK ban on imported chicken from the USA due to the practice there of using chlorine to wash chicken carcasses	Post-Brexit, the UK government is providing subsidies to its farmers in order to decrease their costs of production
Benefits	Allows domestic firms to grow, as they have limited competition from businesses abroad	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
Drawbacks	Can lead to retaliation from countries facing the legislation	Businesses may become inefficient, as they know their costs are being subsidised

Examiner Tips and Tricks

In Paper 1, you need to be able to evaluate the effects of protectionism on a business. You should also be able to assess the short-term and long-term effects of protectionism on foreign and domestic businesses. Depending on the nature of the business, the effect of protectionism can be immediately felt. It may take some time for other firms to feel the effects. Read the case study carefully to determine the context.

Business_A-level_Edexcel

1-marketing-and-people

4-1-4-protectionism

Protectionism — tariffs

How tariffs work

Examiner Tips and Tricks

Import quotas

Other trade barriers

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

Examiner Tips and Tricks

Responses