Protection can save some jobs at home, but raises prices, reduces choice and may provoke retaliation.
For the home country, protection can save jobs in protected industries, help infant industries grow, raise tariff revenue and reduce a current account deficit.
But consumers pay higher prices and have less choice. Firms that use imported materials face higher costs, so they become less competitive. Protected firms may become inefficient because they face less competition.
For trading partners, protection reduces their exports, so their output and jobs fall. They may retaliate with their own tariffs. A trade war can then reduce trade for everyone, hurting exporters in both countries.
Overall, restricting free trade has advantages for some groups and disadvantages for others. Most economists argue that widespread protection makes countries poorer, but targeted, temporary protection can be justified.
- Home-country gains
- Protected jobs, infant industry growth, tariff revenue.
- Home-country costs
- Higher prices, less choice, dearer inputs, inefficiency.
- Trading partner
- Lower exports; possible retaliation and trade war.
Worked example: A tariff on imported steel
Suppose a country puts a 25% tariff on steel imports.
- Local steel makers: sell more and keep jobs.
- Car makers and builders that use steel: their costs rise, so they may cut jobs or raise prices.
- Consumers: pay more for cars and buildings.
- Trading partners: may retaliate with tariffs on this country's exports.
Watch out for this
Protection helps everyone in the home country.
It helps protected producers and their workers, but consumers and firms using imported inputs pay more, and exporters may face retaliation.
Check your understanding
What is a likely consequence of a tariff for the trading partner?
- Its exports fall, and it may retaliate with its own tariffs.
- Its exports rise.
- It is unaffected.