What this lesson teaches
I can explain how trade restrictions affect the home country and its trading partners.
Syllabus K343, 6.2.6. Consequences of trade restrictions: impact of trade restrictions on the home country and its trading partners; advantages and disadvantages of restricting free trade
Make a guess
A country puts a tariff on imported steel. Who in that country loses?
- Firms that use steel, and their customers.
- Foreign steel makers, who now sell less steel in that country.
- No one, because local steel makers gain more sales.
Show the answer
Firms that use steel, and their customers.
Car makers and builders pay more for steel, so their costs rise. They may raise prices or cut jobs.
Protection can save some jobs at home, but raises prices, reduces choice and may provoke retaliation.
For the home country, protection can save jobs in protected industries, help infant industries grow, raise tariff revenue and reduce a current account deficit.
But consumers pay higher prices and have less choice. Firms that use imported materials face higher costs, so they become less competitive. Protected firms may become inefficient because they face less competition.
For trading partners, protection reduces their exports, so their output and jobs fall. They may retaliate with their own tariffs. A trade war can then reduce trade for everyone, hurting exporters in both countries.
Overall, restricting free trade has advantages for some groups and disadvantages for others. Most economists argue that widespread protection makes countries poorer, but targeted, temporary protection can be justified.
- Home-country gains
- Protected jobs, infant industry growth, tariff revenue.
- Home-country costs
- Higher prices, less choice, dearer inputs, inefficiency.
- Trading partner
- Lower exports; possible retaliation and trade war.
Worked example: A tariff on imported steel
Suppose a country puts a 25% tariff on steel imports.
- Local steel makers: sell more and keep jobs.
- Car makers and builders that use steel: their costs rise, so they may cut jobs or raise prices.
- Consumers: pay more for cars and buildings.
- Trading partners: may retaliate with tariffs on this country's exports.
Watch out for this
Protection helps everyone in the home country.
It helps protected producers and their workers, but consumers and firms using imported inputs pay more, and exporters may face retaliation.
Check your understanding
What is a likely consequence of a tariff for the trading partner?
- Its exports rise, because it sells more to other markets instead.
- Its exports fall, and it may retaliate with its own tariffs.
- It is unaffected, because the tariff is paid by buyers in the other country.
Show the answer
Its exports fall, and it may retaliate with its own tariffs.
Right. Lower demand for its goods can lead to a trade war.
Check your understanding
Tariffs shield local steel makers from foreign rivals for many years. What is the most likely long-run result?
- Firms that use steel gain as their input costs fall
- The protected firms become the lowest-cost steel producers in the world
- Steel prices at home fall as local output keeps rising
- Protected firms face less pressure to cut costs and improve
Show the answer
Protected firms face less pressure to cut costs and improve
Right. With less competition, protected firms may become inefficient.