The Effects of Protectionism

Readers Question: what are the possible consequences/effects of protectionism with

regard to the UK and the rest of the world?

Protectionism occurs when countries place restrictions on imports into the

economy. This can involve higher tariffs (a type of tax on imports) or quotas and
embargoes. Other forms of protectionism can be less obvious, such as domestic
subsidies to give industries unfair advantages. The main effect of protectionism is
a decline in trade, higher prices for some goods, and a form of subsidy for
protected industries. Some jobs in these industries may be saved, but jobs in
other industries are likely to be lost.

Different types of protectionism

1. Tariffs – This is a tax on imports.

2. Quotas – This is a physical limit on the quantity of imports
3. Embargoes – This is a total ban on a good, this may be done to stop
dangerous substances
4. Subsidies – If a govt subsidises domestic production this gives them an
unfair advantage over competitors. This is quite common
5. Administrative barriers Making it more difficult to trade, e.g. imposing
minimum environmental standards. These are sometimes known as non-
tariff barriers.
Potential benefits of Protectionism

Countries may impose tariffs on goods because:

1. Infant industry argument – protect new industries against free trade.

Protectionism can enable some industries to survivie. E.g. President
Trump placed tariffs on steel imports to try and protect jobs in the US steel
industry.
2. Diversify the economy – tariffs and protectionism can help develop new
industries to give more diversify to the economy
3. Raise revenue for the government.
4. Protect certain key industries from international competition to try and
safeguard jobs.
See: Argument against free trade
Potential costs of protectionism

It is argued that if trade falls then protectionism will have many negative effects.
  Protectionism leads to retaliation and therefore higher import prices and
higher consumer prices.
 Consumers will have to pay higher prices for imports of goods (e.g.
electronic goods from China, food from Africa)
 Higher prices lead to lower overall demand causing job losses in other
industries
 Exporters will see a fall in demand, causing less output and possibly
unemployment
 Protectionism can encourage inefficient firms to stay in business and there
is less scope for specialisation and economies of scale.
 Protectionism can keep smaller national firms which can’t benefit from the
same economies of scale.  There is Less competitive pressures for firms
and economies to cut costs.
 Benefits of Free Trade
Diagram of tariff protectionism

Thi
s diagram shows the welfare effect of placing a tariff on imports.
Losers from tariffs

 Domestic consumers who pay higher prices (P1 to P2). There is lost
consumer surplus of areas (1+2+3+4)
 Foreign exporting firms. Exports fall from (Q4-Q1) to (Q3-Q2)
  Domestic exporting firms hit by retaliatory tariffs (not shown in above
diagram)
 There is a net welfare loss to the domestic economy of (2+4)
 Other firms in the economy who see lower demand. Becuase prices rise
for this good, consumers have less disposable income to spend on other
goods. Therefore, other firms see a decline in demand.
Winners from Tariffs

 Government gains tariff revenue of area (3)

 Domestic producers who are able to sell a higher quantity to the domestic
market. Domestic supply increases from Q1 to Q2. There is an increase in
producer surplus of area (1)
Impact on country like UK

Some argue, that the benefits of free trade ignore many good reasons to impose
tariffs. In particular, it is argued free trade discriminates against developing
economies. It is argued developing countries need an element of protection to
enable new industries to grow and their economies to diversify. See arguments
against free trade
In the case of the UK, many of these arguments don’t really apply. However, for
developing countries carefully implemented protectionism may help develop their
economies. There are also good environmental reasons for promoting an
element of protectionism.

However, it depends on the type of protectionism. If it is just tariffs increased out

of spite, then there may be very little benefit to anyone. Tariffs have to be
carefully targeted and ideally only last for a couple of years.

Conclusion
Since the UK relies on trade for much of its economy, a rise in protectionism will
harm the UK economy (perhaps more than other economies). Higher tariffs will
definitely lead to lower exports, lower imports and a lower rate of economic
growth.

However, it is worth noting that 60% of UK trade is now with the EU. Therefore, if
it is just protectionism about non-EU countries, the effect will be smaller and the
impact not so severe.