Every argument for protection has a cost. The country as a whole usually loses.
The costs at home
Higher prices, less choice
Consumers pay more and can buy fewer imported goods.
Misallocation of resources
Resources go to firms that produce at a higher cost than abroad.
No incentive to improve
Sheltered firms face less competition, so they cut costs and innovate less.
Higher costs for firms
A tariff on imported inputs, such as steel, raises the costs of car makers.
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Other countries can answer back.
Retaliation: the chain
Country A protects
In 2018 the United States put tariffs on steel and on many Chinese goods.
Country B answers
China put tariffs on US goods, including soybeans.
Exporters lose
US soybean farmers lost sales: protecting one industry hurt another.
The points to remember
- Reduced export competitiveness: higher input costs and retaliation hurt exporters.
- Write it like this: "Protection may provoke retaliation, so the country's exporters lose sales."
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Quick reminder
- Curves: Dd and Sd (domestic demand and supply), the flat Pw and Pw + tariff lines
- Marks: Pw, Q1 and Q4 under free trade; Q2 and Q3 with the tariff
- Dots with dashed lines to the axes, an arrow for the shift
- No numbers, no title
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Paper 3 asked this in November 2022, for 4 marks.
Using the information provided, explain two reasons that may account for the government's decision to remove the 20% tariff on imported wheat. Wheat prices rose by about a third in six months.
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