Globalisation & Trade Restrictions
International Trade & Globalisation
Trade restrictions help some groups and harm others, in both the home country and its trading partners.
Effects on the home country
- Domestic producers in the protected industry gain market share, output and jobs.
- Consumers face higher prices and less choice, which hits low-income households hardest.
- The government may gain revenue (from tariffs) but bears costs (from subsidies).
- Domestic firms may become less efficient over time, because protection reduces the pressure of competition.
- Firms that use imported inputs face higher costs, which can raise their prices and reduce their output and employment.
Effects on trading partners
Trading partners lose export sales to the protecting country, which can reduce their output and employment. They often retaliate with restrictions of their own, so the protecting country's exports fall too. Escalating retaliation can lead to a trade war that leaves all sides worse off.
The overall verdict is that protection can bring short-term gains to a specific industry but tends to impose wider long-term costs through higher prices, lost efficiency and retaliation.
Common exam question
Discussing whether protection helps the economy
Question: Discuss whether or not high tariffs, or a subsidy for an export industry, will help a government achieve a macroeconomic aim such as lower unemployment (8 marks).
Asked in 2 of the 11 structured papers. Both are levels-marked: Level 3 (6–8) needs both sides developed, and a one-sided answer stays in Level 2 (at most 5).
For: dearer imports switch spending to domestic products, raising demand for domestic workers; a subsidy lowers export prices, raising export revenue, output and jobs and improving the current account; tariff revenue can fund subsidies or education and training that make workers more mobile.
Against: partners retaliate, so exports and the demand for domestic workers fall; foreign producers may stay cheaper; output cannot rise at full employment or without resources; dearer imported raw materials raise costs; protected firms grow complacent; export demand may be price-inelastic; extra exports can raise total demand and cause inflation; and the money has an opportunity cost.