This topic is examined on Paper 2: Macroeconomics and the Global Economy.
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Unlock This CourseIn the last lesson, Free Trade, you saw that trade without barriers brings benefits but also costs. Many governments therefore step in. Protection means a government acting to shield its own producers from foreign competition, usually by making imports dearer or harder to bring in. The tools it uses, such as tariffs and quotas, are covered in the next lesson, Tariffs, Quotas and Subsidies. This lesson is about the reasons why governments do it.
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There are seven reasons to learn. Each one is a way a government might justify protection.
Protecting a new, infant industry gives it time to grow before facing foreign rivals
A foreign firm may sell its goods very cheaply to push local firms out of business. Once the local firms have gone, the foreign firm can raise its prices. A government may block dumping to keep its own firms alive and to keep competition fair.
Cheap imports can cause local firms to close and workers to lose their jobs. Protection makes imports dearer, so more people buy home-made goods and more jobs are saved. Governments also want to avoid the costs of unemployment.
A new industry has high costs at first because it makes only a small amount. Established foreign firms can make more and sell cheaper. Protection gives the new industry time to grow and lower its costs. The hope is that it can compete without help later.
A tariff is a tax on imports, so it brings money into the government. This is useful to countries that find it hard to collect other taxes. The money can pay for schools, roads and hospitals.
Safety checks on imports protect consumers from unsafe products
Some imports may be unsafe, such as toys with poisonous paint, contaminated food or faulty electrical goods. A government can ban them or restrict them to protect consumers.
A country with a current account deficit spends more on imports than it earns from exports. Making imports dearer should cut the amount bought, and so reduce the deficit.
If Country A puts barriers on Country B's goods, Country B may do the same back. Country A's exporters then lose sales too.
Country Ventor is a small country with a new electric-bus industry. Each bus costs Ventor's firms £300,000 to make, while a large foreign firm sells similar buses for £220,000. Without help, nobody in Ventor will buy the local buses.
Ventor's government taxes imported buses so that the foreign buses cost more. This is an infant industry argument. Local firms get time to grow and cut their costs. Employment is also protected, since local bus makers keep their jobs. The government gains tariff revenue on every bus imported.
Protection has a price. Consumers may pay higher prices and have less choice, which are the advantages of free trade you have already seen. Protected firms may become lazy because they face less competition. Retaliation can also leave everyone worse off, because exporters in both countries lose sales. A protected infant industry may never grow up if the help is never taken away.
Some reasons are stronger than others. Protecting consumers from unsafe products is widely accepted. Protecting jobs in a firm that cannot compete may only delay the problem. In an exam answer, say whether the reason is likely to work and what the costs might be.
Country Kaltor has a growing current account deficit. Its government plans to put a tax on imported shoes. Foreign shoe firms sell shoes in Kaltor at a price below the cost of making them. Kaltor's own shoe industry employs 20,000 people.
(a) Define dumping. [2 marks]
(b) Explain one reason why Kaltor's government might protect its shoe industry. [3 marks]
(c) Analyse one possible disadvantage of the plan. [4 marks]
(a) Dumping is selling goods in another country (1) at a price below the cost of making them or below the home price (1).
(b) The government may want to protect employment (1). If imports become dearer, more people will buy Kaltor's shoes (1), so its shoe firms keep their sales and 20,000 jobs are saved (1).
(c) Kaltor's shoe buyers may have to pay higher prices (1) because imported shoes cost more after the tax (1). Foreign countries may retaliate (1) by taxing Kaltor's exports, so its exporters lose sales and jobs elsewhere (1).
For a "reason" question, name the reason from the list and then add a chain of cause and effect. Use words such as "so", "which means" and "therefore" to earn the explanation marks.