Protectionism: reasons and tariffs

Reasons for protectionism

• Protecting domestic jobs in industries threatened by cheaper imports.
• Infant industries: new industries need time to grow and gain economies of scale before facing established foreign rivals.
• Strategic industries: food, energy, steel and defence goods may be protected for national security.
• Preventing dumping: foreign firms selling below cost to drive out domestic producers.
• Improving the balance of payments by cutting imports.
• Raising government revenue (tariffs).
• Retaliation against other countries' barriers.
• Protecting standards (health, safety, the environment).

Tariffs

A tariff is a tax on imported goods. An ad valorem tariff is a percentage of the import price; a specific tariff is a fixed amount per unit.

Effects: the domestic price of the import rises, so consumers buy less in total; domestic producers sell more at a higher price; imports fall; the government collects revenue (tariff per unit x imports); consumers pay more and have less choice.

Price after an ad valorem tariff = world price x (1 + tariff rate).

The tariff diagram

Draw domestic demand (D) and domestic supply (S). Draw a horizontal world price line Pw below the domestic equilibrium: at Pw, domestic firms supply Q1, consumers demand Q2 and imports are Q2 - Q1. A tariff shifts the world price line up to Pw + t: domestic supply rises to Q3, demand falls to Q4, imports shrink to Q4 - Q3, and tariff revenue is the rectangle t x (Q4 - Q3).

The October 2024 series WBS14 paper asked candidates to construct a diagram showing the effect of a tariff on Turkey's wheat market (4 marks: knowledge 1, application 2, analysis 1). The mark scheme accepted a simpler supply and demand diagram: axes labelled price and quantity (knowledge), the original equilibrium and the supply curve shifted left by the tariff (application), and the new equilibrium with a higher price and lower quantity (analysis). The world price diagram above shows the same effect in more detail, including the fall in imports.

What a tariff changes

Impact on businesses

Winners: domestic producers competing with imports (higher price, more sales); possibly their suppliers.

Losers: firms that import raw materials or components (higher costs and lower margins); retailers of imported goods; exporters, if other countries retaliate; foreign firms selling into the market, which may respond by setting up production inside the country (FDI).

In the long run protection may reduce the incentive for domestic firms to become efficient.

Worked example

The world price of a component is $20.00. A 25% ad valorem tariff is imposed. 40,000 units are still imported. Find the new price and the tariff revenue.

1. New price = 20.00 x 1.25 = $25.00
2. Tariff per unit = $5.00
3. Revenue = 5.00 x 40,000 = $200,000

Answer: $25.00 per unit; revenue $200,000.

Check yourself

1. Imported steel costs $640 per tonne. A 15% ad valorem tariff is imposed. What is the new price per tonne?
   Show answer

   $736. 640 x 1.15 = $736.

2. A specific tariff of $3 per unit is placed on an imported good. After the tariff, 250,000 units are imported. Calculate the tariff revenue.
   Show answer

   $750000. 3 x 250,000 = $750,000.

3. Before a tariff, domestic demand is 900,000 units and domestic supply 300,000. After it, demand is 820,000 and domestic supply 380,000. By how many units do imports fall?
   Show answer

   160000 units. Imports before = 600,000; after = 440,000; fall = 160,000.

4. A bakery imports flour costing $50,000 a year. A 12% tariff is added and it keeps buying the same amount. By how much do its annual costs rise?
   Show answer

   $6000. 50,000 x 0.12 = $6,000.

5. The infant industry argument for protection says that
   • imports of children's goods should be banned
   • old industries should be protected permanently
   • new domestic industries need time to grow and reach economies of scale before facing foreign competition
   • tariffs always raise economic growth
   Show answer

   new domestic industries need time to grow and reach economies of scale before facing foreign competition. Temporary protection lets young industries grow until they can compete.

6. A tariff on imported components is most likely to harm
   • a domestic manufacturer that uses the imported components
   • a domestic producer of the same components
   • the government's tax revenue
   • domestic firms that compete with the imports
   Show answer

   a domestic manufacturer that uses the imported components. Its input costs rise, squeezing margins or forcing up prices.

7. Explain what dumping is and why a government might protect against it.
   Show answer

   Dumping is when foreign firms sell goods abroad below cost (or below their home price) to win market share; governments protect against it because it can force efficient domestic firms out of business and cost jobs.. Dumping undercuts domestic producers unfairly; anti-dumping duties respond to it.

8. Explain why a tariff might encourage a foreign business to set up a factory in the protected country.
   Show answer

   Producing inside the country means its goods are no longer imports, so it avoids the tariff and can sell at a competitive price.. Tariff jumping is a common reason for FDI.

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Sources

• Pearson Edexcel International Advanced Level in Business specification (first teaching 2018)
• Pearson Edexcel IAL Business WBS14/01 mark scheme, October 2024 series (published January 2025)

Last updated 8 November 2026. Spotted a mistake? Tell us.