AQA Specification focus:
‘The causes and consequences of countries adopting protectionist policies.’
Protectionism occurs when governments impose restrictions on international trade to protect domestic industries. Its causes and consequences shape economic performance, efficiency, global competitiveness, and consumer welfare.
Causes of Protectionism
Protecting Infant Industries
One common justification for protectionist policies is the need to protect infant industries.
Infant Industry: A newly established sector that may lack the efficiency or economies of scale to compete with established foreign competitors without temporary protection.
Governments may impose tariffs or quotas to allow these industries time to grow and become internationally competitive.
Safeguarding Employment
Protectionist measures are often adopted to prevent structural unemployment, which can occur if domestic industries decline due to cheaper imports. Safeguarding jobs can be politically popular and socially stabilising.
Preventing Dumping
Dumping: The practice of foreign firms selling goods in another country below production cost or below domestic prices, often to eliminate competition.
To counter dumping, governments may impose anti-dumping duties to ensure domestic producers are not forced out of business.
National Security Concerns
Certain industries, such as defence, energy, and food supply, are considered strategically important. Governments may restrict imports to reduce reliance on foreign suppliers during crises or geopolitical tensions.
Correcting Balance of Payments Deficits
Persistent current account deficits can pressure governments to adopt protectionist policies. By reducing imports, governments aim to improve the balance of payments and reduce foreign borrowing.
Protecting Standards and Consumer Safety
Import restrictions may be justified on grounds of maintaining product safety, environmental standards, or labour rights. For instance, banning imports that fail to meet domestic regulations.
Political and Strategic Reasons
Protectionism may be used as a political tool to retaliate against unfair trade practices or as leverage in international negotiations. Trade wars often emerge from such motives.
Consequences of Protectionism
Impact on Consumers
Higher prices: Tariffs increase the cost of imports, leading to higher consumer prices.
Reduced choice: Quotas limit the variety of goods available.
Lower living standards: Consumers face reduced purchasing power.
Impact on Producers
Domestic producers benefit from reduced foreign competition and may gain market share.
Inefficiency risk: Without competitive pressure, firms may become less innovative and more inefficient.
Exporters may suffer if foreign countries retaliate with protectionist measures, reducing export markets.
Impact on Employment
Job protection in protected industries may occur in the short term.
Job losses may arise in export-oriented industries if trading partners retaliate, creating net employment uncertainty.
Impact on Government Finances
Tariff revenue provides income for governments.
Administrative costs of enforcing quotas and subsidies can be high.
Retaliation risk may harm tax revenues from reduced trade activity.
Impact on Efficiency and Resource Allocation
Allocative Efficiency: When resources are distributed to maximise welfare, where marginal benefit equals marginal cost.
Protectionism often leads to misallocation of resources, as industries that would not survive in free markets are artificially sustained. This reduces long-term efficiency.
International Consequences
Trade wars: One country’s tariffs may provoke retaliatory tariffs from others, escalating into trade wars.
Reduced global output: International trade restrictions reduce specialisation, harming global production efficiency.
Developing countries suffer: Less-developed countries may face reduced export opportunities, harming their growth and development prospects.
Consequences for Developed Countries
Short-term job protection in vulnerable sectors.
Higher costs for industries relying on imported inputs, reducing international competitiveness.
Potential retaliation against high-value exports like technology and services.
Consequences for Developing Countries
Reduced access to developed markets limits growth opportunities.
Reliance on primary goods exports makes them particularly vulnerable to protectionist barriers in agriculture and manufacturing.
Long-term disadvantage: Restrictions prevent integration into global value chains, slowing industrialisation.
Link to Other Macroeconomic Objectives
Protectionism can conflict with wider objectives:
Economic growth: Restricting trade can slow GDP growth.
Inflation: Tariffs increase prices, fuelling cost-push inflation.
Employment: Jobs saved in one sector may be lost in another.
Balance of payments: Initial improvements may be offset by retaliation harming exports.
Summary of Key Points (for structured clarity)
Causes: infant industry protection, employment, dumping prevention, national security, balance of payments correction, standards and safety, political retaliation.
Consequences: higher consumer prices, reduced choice, inefficiency, potential trade wars, harm to developing nations, conflicting macroeconomic outcomes.
FAQ
In a downturn, governments face pressure to preserve domestic employment and support struggling industries. Protectionism provides a short-term safeguard by reducing import competition.
However, this can also worsen the global slowdown as multiple countries restrict trade simultaneously, reducing international demand and cooperation.
When one country imposes tariffs, others may respond with retaliatory measures.
This can escalate into a trade war, harming both economies.
Exporters often lose access to key markets, reducing growth potential.
Long-term cooperation between trading partners may break down.
Subsidies reduce domestic firms’ costs, making them more competitive without directly raising import prices.
Tariffs raise the cost of imports, transferring the burden to consumers.
While subsidies can avoid immediate consumer harm, they may distort markets and encourage inefficiency through state support.
Developing economies often specialise in agricultural exports. When developed nations impose tariffs or quotas on these goods, farmers face reduced income.
This slows rural development, increases poverty, and prevents these countries from fully exploiting their comparative advantage in low-cost production.
Yes, under specific conditions such as supporting infant industries.
If temporary measures allow domestic firms to develop competitiveness, economies may benefit once protections are lifted.
However, prolonged protection usually reduces efficiency, creates complacency, and harms consumers through higher prices and less choice.
Practice Questions
Define the term "dumping" and explain briefly why it might lead to a government adopting protectionist policies. (3 marks)
1 mark for a correct definition: dumping is when foreign firms sell goods in another country below production cost or domestic market prices.
1 mark for explaining the motive of dumping, e.g., to eliminate domestic competition or gain market share.
1 mark for linking dumping to protectionism, e.g., governments may impose tariffs or anti-dumping duties to protect domestic industries.
Discuss the potential consequences of a government imposing tariffs on imported goods. (6 marks)
1–2 marks: Identification of possible consequences such as higher consumer prices, reduced choice, protection of domestic jobs, tariff revenue for government.
1–2 marks: Explanation of economic effects, e.g., higher prices reduce consumer welfare; protected industries may become inefficient.
1–2 marks: Consideration of wider impacts, e.g., retaliation from trading partners, harm to exporters, potential for reduced global trade.
Award up to 6 marks depending on the depth of analysis, range of consequences identified, and clear economic reasoning.
