A-Level Economics May/June 2024 Q5(a): Explain what is meant by protectionism and consider the effectiveness of using tariffs…

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  Protectionism refers to government policies and actions designed to protect domestic businesses and industries from foreign competition (AO1). It is a deliberate attempt to restrict free trade between countries (AO1) with the primary goal of increasing the price competitiveness of domestic goods and services relative to imported ones (AO1).

  One of the most common methods of protectionism is the use of a tariff. A tariff is a tax imposed by a government on imported goods (AO2). This tax directly increases the cost of bringing the foreign good into the domestic market, which in turn raises its final selling price for consumers. As imported goods become more expensive, domestically produced substitutes become relatively cheaper in comparison. This encourages domestic consumers to switch their expenditure from foreign imports to domestic products, thereby increasing demand for local firms and protecting them from foreign competition (AO2).

  The effectiveness of tariffs, however, is debatable. A significant problem is the risk of retaliation. If one country imposes tariffs, its trading partners are likely to respond by imposing their own tariffs on its exports. This can lead to a 'trade war', harming domestic export industries and potentially negating any gains from protecting import-competing firms. Furthermore, the effectiveness of a tariff depends heavily on the price elasticity of demand (PED) for the import. If demand is price inelastic (e.g., for essential raw materials or goods with no close domestic substitutes), a higher price will not significantly reduce the quantity of imports demanded. Instead, domestic firms and consumers are forced to pay higher prices, which can lead to cost-push inflation and a reduction in consumer surplus, with little protective effect (AO2).

  In evaluation, the effectiveness of a tariff is highly conditional. It may successfully protect a specific domestic industry if the demand for the targeted import is highly price elastic and if the risk of retaliation from the exporting country is low (AO3). However, in a globalised economy where supply chains are interconnected and major trading partners have significant economic power, these conditions are often not met. The negative consequences, such as higher prices for consumers, increased costs for domestic producers who use imported components, and the potential for damaging trade wars, often outweigh the benefits of protecting a single industry. Therefore, while tariffs are a tool for protectionism, their effectiveness is often limited and they can create significant unintended negative economic consequences (AO3).

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  How the marks are awarded

  • AO1 — The first mark is for defining protectionism as government action to protect domestic firms from foreign competition, as stated in the first sentence.
  • AO1 — The second mark is for identifying that protectionism involves restricting free trade, as mentioned in the second sentence.
  • AO1 — The third mark is for explaining that the goal is to increase the price competitiveness of domestic businesses, as covered at the end of the first paragraph.
  • AO2 — The fourth mark is for explaining how a tariff works, specifically as a tax that increases the price of imported goods.
  • AO2 — The fifth mark is for explaining the consequence of the price rise: domestic goods become relatively cheaper, shifting demand towards them and thus protecting domestic firms.
  • AO2 — The sixth mark is for analysing the problems with tariffs, with the answer covering both the risk of retaliation and the issue of price inelastic demand for imports.
  • AO3 — The seventh mark is for evaluation, where the answer weighs the conditions under which a tariff might be effective (elastic demand, no retaliation) against the common negative outcomes.
  • AO3 — The final mark is for the justified conclusion which summarises that a tariff's effectiveness is limited and conditional, often creating significant negative consequences.

  Common mistakes

  • Defining a tariff but failing to first define the broader concept of protectionism, losing initial AO1 marks.
  • Explaining how a tariff protects domestic firms but failing to analyse any of its limitations (like retaliation or PED), capping the answer at 5-6 marks and missing AO2/AO3 marks.
  • Providing a purely descriptive answer without any evaluative judgement on the 'effectiveness' of tariffs, thus scoring zero on AO3.
  • Confusing a tariff (a tax) with a quota (a physical limit on quantity), leading to an incorrect explanation of the mechanism.

  Examiner tip: For 'consider' or 'discuss' questions, always structure your answer to first define the key terms, then explain the relevant economic mechanism, then analyse its limitations, and finally provide a balanced evaluation to reach a justified conclusion.

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