🛍 Consumers
They usually lose. Imported goods cost more, and cheaper foreign goods may disappear from the shops. They have less choice, so they must pay higher prices or buy home-made goods that may be lower quality.
Globalisation and Trade Restrictions » Consequences of Trade Restrictions
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 6.2.6
- Who gains and who loses at home when a government restricts imports
- How trading partners are hurt by lost exports and may hit back with retaliation
- The overall advantages and disadvantages of restricting free trade
- How to write a balanced two-sided answer about trade restrictions
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Unlock This CourseWho is affected by trade restrictions?
You have seen the methods of protection and the reasons governments use them. This lesson looks at what happens afterwards. A trade restriction helps some people and hurts others. Good economists always ask: who gains, who loses, and which side is bigger?
There are two groups to think about. The first is the home country, the country that sets the restriction. The second is its trading partners, the countries it buys from and sells to.
Key terms:
- Trading partner: a country that a nation buys goods from and sells goods to.
- Retaliation: when a country responds to another country's trade restriction by putting restrictions of its own on that country's goods.
Impact on the home country
Take a country that puts a tariff on imported shoes. Imports become dearer, so people buy fewer of them. Here is what happens to four groups at home.
🏭 Producers
Home producers in the protected industry usually gain. Foreign rivals are now dearer, so they sell more and may be able to charge more. But firms that use imported materials or parts face higher costs and may lose out.
👷 Workers
Workers in the protected industry may keep their jobs, or new jobs may appear as output grows. But if other industries lose sales or face higher costs, jobs may be lost there instead.
🏛 Government
A tariff brings in tax revenue on every import still bought. A subsidy to home producers has the opposite effect: it costs the government money. Either way, the government's budget changes.
Worked example
Veltria puts a 30% tariff on imported shoes. A pair of imported shoes cost $40 before the tariff.
New price = $40 × 1.30 = $52. The tariff itself is $52 − $40 = $12 per pair.
Suppose 100,000 pairs are still imported. The government collects $12 × 100,000 = $1,200,000.
Winners: the government (revenue) and Veltrian shoemakers, whose shoes are now cheaper than the imports. Losers: shoppers, who pay $12 more per imported pair.
Impact on trading partners
Your country's imports are other countries' exports. If Veltria buys fewer shoes from abroad, the foreign shoe firms lose exports. Their sales and revenue fall, and the workers in those firms may lose their jobs. The partner country's economic growth may slow too.
The partner may not accept this. It may retaliate by putting a tariff or quota on Veltria's exports. Then Veltria's own exporters lose sales abroad. Retaliation can spread, with each country adding more restrictions. The result is that everyone trades less.
📦 Lost exports
Foreign firms sell fewer goods to the home country. Their revenue and jobs fall.
⚔ Retaliation
The partner restricts the home country's goods in return. Home exporters then lose sales, and some of the original gain disappears.
Advantages and disadvantages of restricting free trade
Now put it all together. You will need both sides in a Discuss question.
✅ Advantages
- Protects home industries and the jobs in them, for example infant industries while they grow.
- May reduce a current account deficit, because fewer imports are bought.
- Tariffs raise government revenue.
- Reduces dependence on other countries for strategic goods.
❌ Disadvantages
- Higher prices and less choice for consumers.
- Protected firms face less competition, so they may be less efficient and have little reason to improve.
- Partners lose exports and may retaliate, so home exporters suffer.
- Firms using imported materials face higher costs.
- Fewer gains from specialisation, so the world produces less in total.
Remember from the free trade lesson that free trade brings choice, lower prices and bigger markets. Restrictions give up some of these gains in return for protection. Whether this is worth it depends on the size of the gains and losses, and on how long the restriction lasts.
Common mistakes
Saying that a trade restriction is good for everyone. It helps some groups and hurts others, so always say who.
Forgetting trading partners. A good answer mentions lost exports and the chance of retaliation.
Writing that consumers gain from a tariff. They pay a higher price, so they lose.
Exam-style question
Kavonia is a country that makes cotton clothing. Last year its government put a 25% tariff on all imported clothing. Kavonian clothing firms have increased output. Prices in the shops have risen. The government of Dorlan, which sells many clothes to Kavonia, has announced a tariff on Kavonian furniture.
(a) Define retaliation. [2 marks]
(b) Explain two ways the tariff may affect consumers in Kavonia. [4 marks]
(c) Discuss whether the tariff is good for Kavonia as a whole. [6 marks]
Model answer
(a) Retaliation is when a country responds to another country's trade restriction (1) by putting restrictions on that country's goods (1).
(b) Prices of imported clothes rise because of the tariff (1), so consumers have less money left to spend on other goods (1). Consumers also have less choice, because some cheaper foreign clothes are no longer bought (1), so they may have to buy home-made clothes of lower quality (1).
(c) The tariff protects Kavonian clothing firms and their workers, who sell more (1). The government also earns tariff revenue (1). However, consumers pay higher prices (1) and Dorlan has retaliated with a tariff on furniture, so Kavonian furniture exporters lose sales and jobs (1). Protected firms may also become less efficient (1). Overall, the tariff helps some groups but harms others, so it is only good for Kavonia if the gain to clothing workers outweighs higher prices and lost furniture exports (1).
Exam tip
In a Discuss answer, give a point for each side and then finish with a short conclusion that says which side is stronger and why. Use the context: here, the furniture tariff is the retaliation.