Globalisation and Trade Restrictions » Methods of Protection

Trade restrictions: making imports harder to buy

Imagine a country where shoppers love cheap imported shoes. The local shoe makers cannot compete and are worried about their jobs. The government might step in to make imported shoes more expensive, or harder to get, so that people buy more local shoes. This is called protection.

In Free Trade you saw what trade looks like with no restrictions. This lesson looks at the ways a government can restrict trade. The reasons for doing so, and the consequences, come in the next two lessons.

Key terms:

• Trade restriction (method of protection): a government action that makes imports more expensive or harder to buy, or helps home producers, so that home firms are protected from foreign competition.
• Tariff: a tax on imported goods.
• Import quota: a limit on the quantity of a good that can be imported in a given time period.
• Embargo: a total ban on trade with a country, or a ban on trading a particular good.

Tariffs

A tariff is a tax on imports. The importer has to pay it when the good arrives at the border, and the importer usually passes the cost on by charging a higher price in the shop.

How it works: the tariff is added to the price of the imported good, so the good becomes more expensive. Home-made goods look cheaper by comparison, so people are more likely to buy them. The government also collects the tax.

Import quotas

An import quota is a limit on how much of a good can be imported. The government sets a maximum number of units (or a maximum value) that may enter the country in a period, such as one year.

How it works: once the limit is reached, no more of that good is allowed in. Fewer imports are on sale, so home producers face less competition. A quota works on quantity, whereas a tariff works on price.

Do not mix this up with the quotas you met in Nationalisation, Privatisation and Quotas. Those limited the amount of a natural resource that could be taken. An import quota limits what comes into the country from abroad.

Subsidies to home producers

You met subsidies in Indirect Taxes and Subsidies: a payment from the government to producers that lowers their costs. In trade, the government pays a subsidy to home producers so they can compete better with foreign firms.

How it works: the subsidy lowers the firm's costs, so the firm can charge a lower price. This does two jobs:

A subsidy is different from a tariff or a quota. It does not touch the imported good at all. It helps the home producer instead.

Embargoes

An embargo is the strongest method. It is a complete ban on trade, either with one country or in one particular good. No imports of that good are allowed in at all, however low the price.

How it works: the banned goods cannot legally be bought from the targeted country, so that trade stops. Embargoes are usually set up by a government, and sometimes by a group of countries acting together.

Comparing the four methods

Method	What the government does	What it works on
Tariff	Taxes imports	The price of imports
Import quota	Limits how many can come in	The quantity of imports
Subsidy	Pays home producers	The costs of home producers
Embargo	Bans the trade completely	All imports of that good or from that country

Exam-style question

The country of Sorland imports most of its furniture. The government wants to protect its own furniture makers from foreign competition. Imported sofas cost $500 each.

(a) Define the term 'tariff'. [2 marks]

(b) Sorland puts a 10% tariff on imported sofas. Calculate the new price of an imported sofa. [2 marks]

(c) Explain how an import quota on sofas could protect Sorland's furniture makers. [4 marks]