Governments protect domestic industries with tariffs, import quotas, subsidies and embargoes.
Protectionism means restricting trade to protect domestic industries from foreign competition. There are four main methods.
A tariff is a tax on imports. It raises the price of imported goods, so consumers buy more domestic goods. It also raises government revenue.
An import quota is a limit on the quantity of a good that can be imported. It cuts the supply of imports, which usually raises their price.
A subsidy to domestic producers lowers their costs, so they can charge lower prices and compete with imports. An embargo is a complete ban on trade in a good, or with a particular country, often for political or safety reasons.
- Tariff
- Tax on imports.
- Import quota
- Limit on the quantity of imports.
- Subsidy
- Payment to domestic producers to lower costs.
- Embargo
- Complete ban on trade.
Worked example: Comparing the four methods
A country wants to protect its steel industry.
- Tariff: a 25% tax on imported steel makes it dearer than local steel.
- Import quota: only 1 million tonnes of foreign steel may enter each year.
- Subsidy: local steel makers receive payments that let them cut prices.
- Embargo: steel from a particular country is banned completely.
Watch out for this
A tariff is a subsidy paid to importers.
A tariff is a tax on imports. It raises their price; it does not help importers.
Check your understanding
A government limits imports of cars to 50,000 a year. What is this?
- An import quota
- A tariff
- An embargo