What you'll learn

• What protectionism means and why governments use it.
• How tariffs, quotas, subsidies, exchange rate manipulation and regulations affect trade.
• How to draw and explain a tariff diagram.
• How to evaluate protectionism in A-Level essays.

Start with the free trade baseline

An import is a good or service bought from another country. An export is a good or service sold to another country. Free trade means international trade with few or no government barriers.

Economists often support free trade because of comparative advantage, a theory associated with David Ricardo. A country has comparative advantage when it can produce a good at a lower opportunity cost than another country, meaning it gives up less of the next-best alternative.

In a free-trade diagram, the world price is the price available from foreign suppliers. If the world price is below the domestic equilibrium price, consumers want to buy more than domestic producers are willing to supply, so imports fill the gap.

Why governments use protectionism

Governments rarely say they are “against trade”. They usually argue that some protection is needed for a specific reason.

Infant industries

An infant industry is a new or developing industry that may eventually become efficient, but currently cannot compete with established foreign firms. Temporary protection can give firms time to grow, learn, invest and achieve economies of scale, where average costs fall as output rises.

This argument is often used for developing and emerging economies. For example, South Korea and Taiwan used selective industrial support during their development, although success depended on firms eventually becoming internationally competitive.

Jobs and communities

Protectionism can reduce job losses in industries facing import competition. This may prevent structural unemployment, where workers lose jobs because their skills or location no longer match the structure of the economy.

For example, tariffs on imported steel may protect steelworkers in the short run, especially in regions heavily dependent on one industry.

Strategic industries and national security

Some industries are considered too important to rely fully on foreign suppliers. These may include food, energy, defence equipment, medicines, semiconductors and critical minerals.

This argument became more important after global supply-chain shocks, Covid-19 disruption and geopolitical tensions.

Anti-dumping

Dumping means selling a good in a foreign market at an unfairly low price, often below cost or below the price charged at home. Governments may use protectionist measures to prevent foreign firms from driving domestic firms out of the market.

Improving the current account

The current account records trade in goods and services, plus income flows and transfers between countries. A trade deficit occurs when the value of imports exceeds the value of exports. Protectionism may reduce imports and improve the trade balance, but this is not guaranteed.

Tariffs: a tax on imports

A tariff is a tax on imported goods or services. A specific tariff is a fixed amount per unit, such as £100 per tonne. An ad valorem tariff is a percentage of the import’s value, such as 10%.

A tariff raises the domestic price from the world price to the tariff-inclusive price. Domestic producers expand output because they receive a higher price. Consumers buy less because the good is more expensive. Imports fall.

The tariff diagram below shows a small importing country. The price rises from $P_w$ to $P_w+tariff$, imports shrink, the government gains tax revenue, and two deadweight welfare losses appear.

Consumer surplus is the extra benefit consumers get when they pay less than the maximum they were willing to pay. Producer surplus is the extra benefit producers get when they receive more than the minimum they were willing to accept. A deadweight welfare loss is a loss of total welfare that is not gained by anyone else.

Quotas: a legal limit on imports

A quota is a legal limit on the quantity of a good that can be imported. Instead of taxing imports, the government restricts supply directly.

A quota raises the domestic price because imports become artificially scarce. Domestic firms gain because they sell more at a higher price. Consumers lose because prices rise and choice falls.

The key extra idea is quota rent. This is the extra profit created by the gap between the lower world price and the higher domestic price under the quota.

Subsidies: supporting domestic producers

A subsidy is a payment or financial support from the government to firms or consumers. Protectionist subsidies are usually given to domestic producers so they can compete more effectively against imports.

A subsidy lowers firms’ production costs. On a supply and demand diagram, this shifts domestic supply to the right or downwards. Domestic output rises and imports may fall.

Subsidies can be politically attractive because they may not raise consumer prices directly. However, taxpayers fund them, and there is an opportunity cost: public money used to support one industry cannot be used elsewhere, such as on the NHS, education or infrastructure.

Exchange rate manipulation

An exchange rate is the price of one currency in terms of another. For example, £1 = $1.25 means one pound buys 1.25 US dollars.

A depreciation is a fall in the value of a currency under a floating exchange rate. A devaluation is a fall in the value of a currency under a fixed exchange rate. Governments may try to keep their currency artificially low to make exports cheaper abroad and imports more expensive at home.

This can act like protectionism because domestic consumers switch away from more expensive imports, while foreign consumers find the country’s exports cheaper.

For the UK, exchange rate manipulation is limited because sterling floats and the Bank of England is operationally independent. It may also create imported inflation, especially for energy, food and raw materials priced in dollars.

Administrative and regulatory policies

Administrative and regulatory policies are non-tariff barriers, meaning trade restrictions that do not directly tax imports.

Examples include:

• Import licences and customs checks.
• Complex paperwork and border delays.
• Product standards and safety rules.
• Rules of origin, which determine where a good is legally “from”.
• Local content requirements, which force firms to use domestic inputs.
• Government procurement rules favouring domestic suppliers.

Some regulations are legitimate. For example, food safety checks can protect consumers from harmful products. But regulations become protectionist when they are unnecessarily complex, discriminatory or designed mainly to keep out foreign competition.

Brexit provides useful UK context: leaving the EU single market increased paperwork, customs checks and rules-of-origin requirements for some UK-EU trade. These are not tariffs, but they can still raise costs and reduce trade volumes.

Arguments against protectionism

The main criticism is that protectionism weakens the gains from specialisation and comparative advantage. Resources may stay in high-cost domestic industries rather than moving to more efficient uses.

Protectionism can also:

• Raise prices, worsening cost-of-living pressures.
• Reduce consumer choice and quality.
• Create deadweight welfare losses.
• Increase costs for firms that use imported inputs.
• Encourage retaliation, where trading partners respond with their own trade barriers.
• Protect inefficient firms from competition, reducing innovation over time.
• Create government failure through lobbying and rent-seeking.

Reaching a balanced judgement

Good evaluation depends on context. Temporary, targeted protection for an infant industry may be more defensible than permanent protection for an inefficient industry with strong political influence.

Ask yourself:

• Is the protection temporary or permanent?
• Are consumers or taxpayers paying the cost?
• Is the industry strategically important?
• Is the country developed, emerging or developing?
• How likely is retaliation?
• Are there better supply-side policies, such as training, infrastructure or research funding?