Why countries restrict trade

The arguments

• Infant industries: new industries cannot yet match the low costs of established foreign rivals; temporary protection lets them grow and reach economies of scale.
• Geriatric (sunset) industries: declining industries are protected to slow job losses and give time to adjust.
• Protecting domestic industry and jobs: limit imports to keep output and employment at home, especially in recessions.
• National security: keep strategic industries (defence, energy, food, semiconductors) under domestic control.
• Preventing dumping: dumping is selling exports below cost (or below the home price), often with subsidies, to gain market share. Anti-dumping duties restore fair competition.
• Correcting a current account deficit: fewer imports improve the trade balance.
• Raising revenue: tariffs are easy to collect at the border, which matters to governments with small income tax bases.

How strong are they?

• Infant industry protection may never end: firms have little incentive to become efficient (moral hazard and lobbying). Governments find it hard to pick winners.
• Protecting jobs in one industry may cost jobs elsewhere: dearer inputs raise costs for user industries, and trading partners may retaliate.
• A current account deficit usually reflects deeper issues (low competitiveness, saving and investment imbalances); tariffs treat the symptom. The IMF (2025) argued that higher tariffs have only a minor effect on current account balances, because tariffs reduce both investment and saving.
• Anti-dumping is permitted by WTO rules, but proving dumping is difficult and duties can be misused as hidden protection.
• National security can be stretched to cover many goods.

Worked example

Explain why the infant industry argument may justify a tariff only for a limited period.

1. The new industry needs time to grow, learn and reach economies of scale.
2. Once its average costs fall to world levels it can compete without protection.
3. Permanent protection would remove the incentive to become efficient and keep prices high for consumers.

Answer: Protection should be temporary, removed once the industry reaches efficient scale.

Check yourself

1. The infant industry argument for protection is that
   • new industries need time to reach economies of scale before facing foreign competition
   • old industries should be protected forever
   • imports are always lower quality
   • exports should be taxed
   Show answer

   new industries need time to reach economies of scale before facing foreign competition. Temporary protection while the industry grows.

2. Dumping is best defined as
   • importing waste products
   • a sudden fall in a currency
   • selling exports abroad below cost or below the home market price
   • selling goods at the world price
   Show answer

   selling exports abroad below cost or below the home market price. Dumping undercuts rivals unfairly, often with state support.

3. Explain why protecting jobs with tariffs may not increase total employment.
   Show answer

   Trading partners may retaliate with their own tariffs, cutting export jobs, and dearer imported inputs raise costs for domestic firms that use them, cutting jobs there.. Jobs saved in one industry may be lost in others.

4. According to the IMF (2025), why do higher tariffs have only a minor effect on a country's current account balance?
   • They raise exports by the same amount
   • They are always removed quickly
   • They only affect services
   • They reduce investment and saving together, leaving the balance little changed
   Show answer

   They reduce investment and saving together, leaving the balance little changed. The IMF described tariffs as a negative supply shock that lowers both saving and investment.

5. Which argument is most often used to protect a country's semiconductor or defence industries?
   • Raising revenue
   • National security
   • Geriatric industry
   • Correcting a current account surplus
   Show answer

   National security. Strategic industries are protected so supply is not dependent on other countries.

6. Explain why tariffs are an important source of revenue for some low-income countries.
   Show answer

   They are easy to collect at the border, whereas income tax is hard to collect where many people work in the informal sector, so tariffs provide a reliable revenue source.. Administrative simplicity matters where the tax base is narrow.

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Sources

• Pearson Edexcel International Advanced Level in Economics specification (issue 2)
• IMF blog: Global current account balances widen, reversing narrowing trend (22 July 2025)

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