Methods of protection

G3 Economics - syllabus K343, 2027

What this lesson teaches

  • I can describe tariffs, import quotas, subsidies and embargoes as trade restrictions.

    Syllabus K343, 6.2.4. Types of trade restrictions / methods of protection: tariffs; import quotas; subsidies; embargoes

Make a guess

A government limits imported cars to 50,000 a year. Does it collect revenue from this, as it would from a tariff?

  1. No. A quota brings in no tax revenue.
  2. Yes. Trade restrictions raise revenue for the government.
  3. Yes, because car buyers pay more.
Show the answer

No. A quota brings in no tax revenue.

Fewer imports push the price up. The extra money goes to whoever holds the right to import, not to the government.

Governments protect domestic industries with tariffs, import quotas, subsidies and embargoes.

Protectionism means restricting trade to protect domestic industries from foreign competition. There are four main methods. For each one, know how it works, who gains and who loses.

Tariff. A tariff is a tax on imports. Importers pass the tax on, so imported goods become dearer. Consumers switch to domestic goods, so domestic firms sell more and keep workers employed, and the government collects revenue. But consumers pay higher prices and have less choice. In 2018 the United States put tariffs on imported washing machines and solar panels to protect its own producers.

Import quota. An import quota is a limit on the quantity of a good that can be imported. With fewer imports for sale, the price rises, so domestic firms can sell more and charge more. Unlike a tariff, a quota raises no revenue for the government; the higher price goes to whoever holds the right to import.

Subsidy and embargo. A subsidy is a payment to domestic producers. It lowers their costs, so they can cut prices and compete with imports, but taxpayers pay for it. An embargo is a complete ban on trade in a good, or with a country, usually for political or safety reasons. Singapore itself charges almost no tariffs, but it follows United Nations sanctions that ban some trade with North Korea.

Sort these

Sort each measure by the method of protection it uses.

Groups: Tariff, Import quota, Subsidy, Embargo.

  • No more than 20,000 imported cars may be sold this year.
  • Local farmers receive $100 for every tonne they grow.
  • The government pays part of local chip makers' power bills.
  • Only 1 million tonnes of foreign rice may enter each year.
  • Imported cars pay a fixed duty of $5,000 each at the border.
  • A 25% tax is charged on imported steel.
  • All trade in weapons with one country is banned.
  • No goods at all may be imported from a sanctioned country.
Show the answer

Tariff

  • Imported cars pay a fixed duty of $5,000 each at the border. Any tax on goods entering the country is a tariff.
  • A 25% tax is charged on imported steel. A tax on imports is a tariff, and it raises revenue for the government.

Import quota

  • No more than 20,000 imported cars may be sold this year. Capping how many imports enter is a quota, which raises no revenue.
  • Only 1 million tonnes of foreign rice may enter each year. A limit on the quantity of imports is a quota.

Subsidy

  • Local farmers receive $100 for every tonne they grow. A payment to domestic producers lowers their costs so they can compete with imports.
  • The government pays part of local chip makers' power bills. Help with costs lets domestic firms cut prices, which is a subsidy.

Embargo

  • All trade in weapons with one country is banned. A complete ban on trade is an embargo, often for political or safety reasons.
  • No goods at all may be imported from a sanctioned country. Banning all trade with a country is an embargo.
Tariff
Tax on imports.
Import quota
Limit on the quantity of imports.
Subsidy
Payment to domestic producers to lower costs.
Embargo
Complete ban on trade.

Worked example: Comparing the four methods

Suppose a country wants to protect its steel industry from cheaper imports.

  1. Tariff: a 25% tax on imported steel makes it dearer than local steel. The government gains revenue; steel users pay more.
  2. Import quota: only 1 million tonnes of foreign steel may enter each year. The price of steel rises, but the government gains no revenue.
  3. Subsidy: local steel makers receive payments that let them cut prices. Steel users do not pay more, but taxpayers fund it.
  4. Embargo: steel from one country is banned completely. Imports must come from elsewhere, often at a higher price.

Watch out for this

A tariff is a subsidy paid to importers.

A tariff is a tax on imports. It raises their price; it does not help importers.

Check your understanding

A government pays local rice farmers $50 for every tonne they grow, so they can undercut imported rice. Which method of protection is this?

  1. An import quota on foreign rice
  2. A subsidy to domestic producers
  3. An embargo that bans foreign rice outright
Show the answer

A subsidy to domestic producers

Right. The payment lowers local farmers' costs, so they can compete with imports on price.

Check your understanding

An imported bicycle costs $300 before tax. The government puts a 20% tariff on it, and the whole tariff is passed on. What is the new price?

  1. $60
  2. $306
  3. $320
  4. $360
Show the answer

$360

Right. The tariff is 20% of $300 = $60, so the price rises to $360.

Check your understanding

A tariff of $5 per unit is placed on an imported good. After the tariff, 20,000 units are imported. How much revenue does the tariff raise?

  1. $20,000
  2. $4,000
  3. $20,005
  4. $100,000
Show the answer

$100,000

Right. Revenue = tariff per unit x units imported = $5 x 20,000.

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