What this lesson teaches
I can explain the reasons governments restrict trade.
Syllabus K343, 6.2.5. Reasons for trade restrictions: protect infant (sunrise) industries; protect declining (sunset) industries; protect strategic industries; avoid dumping; reduce a deficit on the current account of the balance of payments; raise tax revenue; restrict the import of demerit goods; promote environmental sustainability
Make a guess
Foreign firms sell steel abroad below what it costs them to make. What is this called?
- Specialisation.
- Free trade.
- Dumping.
Show the answer
Dumping.
Selling exports below their cost of production can drive local firms out of business, which is why governments may protect against it.
Governments protect infant, declining and strategic industries, fight dumping, cut deficits, raise revenue and block harmful goods.
Infant (sunrise) industries are new and cannot yet compete with big foreign firms. Protection gives them time to grow and cut their costs. Declining (sunset) industries are shrinking. Protection slows job losses while workers retrain.
Strategic industries, such as food, energy and defence, are protected so the country does not rely on others in a crisis. Protection can also stop dumping. Dumping is when foreign firms sell goods abroad for less than they cost to make, which harms local firms.
Cutting imports can reduce a current account deficit. Tariffs also raise tax revenue.
Protection can keep out harmful goods, such as illegal drugs. It can also protect the environment, for example by limiting imports made with heavy pollution.
- Infant (sunrise) industry
- New industry protected until it can compete.
- Declining (sunset) industry
- Shrinking industry protected to slow job losses.
- Strategic industry
- Vital industry such as food or energy.
- Dumping
- Selling exports below cost of production.
Worked example: Arguing for protecting an infant industry
A developing country wants to build an electric vehicle industry.
- Problem: established foreign makers have huge economies of scale and lower costs.
- Protection: a temporary tariff on imported electric vehicles.
- Aim: local firms grow, cut costs, and later compete without protection.
- Risk: protected firms may stay inefficient if the tariff is never removed.
Watch out for this
Dumping means getting rid of waste in another country.
In trade, dumping means selling exports abroad at a price below their cost of production, which can drive foreign firms out of business.
Check your understanding
Why might a government protect an infant industry?
- To give a new industry time to grow and lower its costs
- To raise the price of exports so firms earn more
- Because the industry is shrinking and needs to be saved
Show the answer
To give a new industry time to grow and lower its costs
Right. It cannot yet compete with established foreign firms.
Check your understanding
What is meant by "dumping"?
- Throwing away goods that cannot be sold at home
- Selling exports abroad below their cost of production
- Placing a very high tariff on unwanted imports
- Selling poor-quality goods to foreign buyers
Show the answer
Selling exports abroad below their cost of production
Right. Dumping uses very low prices to win foreign markets and can drive local firms out.