Revise Protectionism for Cambridge 9708 (6.2)

Protectionism refers to government policies designed to restrict international trade and protect domestic industries from foreign competition. The primary objective is to shield domestic producers and their employees from the pressures of cheaper or more efficiently produced imports. Common arguments for protectionism include safeguarding jobs in declining industries, nurturing 'infant industries' until they can achieve economies of scale, preventing 'dumping' (where foreign firms sell goods below their cost of production), and improving a country's current account balance by reducing import expenditure. Governments may also use these measures, particularly tariffs, to generate revenue. While these aims may seem beneficial, protectionist policies distort the free market, leading to higher prices for consumers and potential retaliation from trading partners.

A tariff is a tax imposed on an imported good, which directly increases its price in the domestic market. On a standard supply and demand diagram, the world supply is perfectly elastic at the world price (Pw). The imposition of a tariff shifts this supply curve upwards to 'Pw + Tariff'. As a result, the domestic price rises, causing a contraction in domestic demand (from Q4 to Q3) and an expansion in domestic supply (from Q1 to Q2). The quantity of imports subsequently falls from (Q4-Q1) to (Q3-Q2). This policy reduces consumer surplus, increases domestic producer surplus, and generates revenue for the government. However, it also creates a deadweight welfare loss, representing the net loss to society.

A quota is a non-tariff barrier that places a physical limit on the quantity of a specific good that can be imported. Unlike a tariff, which influences quantity through price, a quota directly restricts the quantity. On a diagram, this is shown by shifting the domestic supply curve to the right by the amount of the quota, creating a new, kinked total supply curve that becomes vertical once the quota limit is reached. This restriction of supply raises the domestic price above the world price, leading to similar effects as a tariff: domestic production rises, and consumption falls. The key difference lies in the revenue; the financial gain from the higher price (known as 'quota rent') goes to the firms holding the import licences, not the government.

Both tariffs and quotas result in a net loss of economic welfare, known as deadweight loss. This loss occurs because the reduction in consumer surplus is greater than the combined gains for domestic producers and (in the case of a tariff) the government. On a trade diagram, this deadweight loss is represented by two distinct triangles. The first triangle signifies the 'production inefficiency loss', as more efficient foreign producers are replaced by less efficient domestic producers who have a higher cost of production. The second triangle represents the 'consumption inefficiency loss', where consumers who were willing and able to buy the good at the world price are now priced out of the market. This net welfare loss demonstrates that protectionism leads to an inefficient allocation of resources.

Before a tariff, domestic price equals world price (Pw). With a tariff of $t per unit, domestic price rises to approximately Pw + t.

• Consumer surplus falls (higher price, lower quantity demanded).
• Producer surplus rises (domestic firms sell more at higher price).
• Government revenue = tariff × import quantity.
• Deadweight loss = two triangles — lost gains from trade.