Types of trade restrictions / methods of protection: tariffs

International Trade and Globalisation

Globalisation and Trade Restrictions

Globalisation encourages the free movement of goods, services, capital and labour across borders.

However, governments may intervene in international trade for a variety of economic and political reasons.

These interventions are known as trade restrictions or methods of protection.

Objective

Identify and explain the main types of trade restrictions, with a focus on tariffs as a method of protection.

Types of Trade Restrictions

• Tariffs – taxes imposed on imported goods.
• Quotas – limits on the quantity of a good that can be imported.
• Import licences – permission required before goods can be imported.
• Subsidies – financial assistance to domestic producers to make them more competitive.
• Voluntary export restraints (VERs) – agreements where exporting countries limit shipments.
• Non‑tariff barriers – standards, regulations or administrative procedures that restrict imports.

Tariffs

A tariff is a tax levied by a government on goods as they cross the border.

It raises the domestic price of the imported product, giving an advantage to locally produced substitutes.

Why Governments Use Tariffs

• Protect infant industries – allow new domestic firms time to become efficient.
• Protect jobs – reduce competition from imports that might lead to layoffs.
• Raise revenue – especially important for developing countries with limited tax bases.
• Retaliation – respond to trade barriers imposed by other countries.
• Political reasons – protect strategic industries or respond to diplomatic pressures.

Types of Tariffs

Economic Effects of a Tariff

Consider a small open economy that imports a good. The diagram below (suggested) shows the impact of an ad valorem tariff.

Key outcomes:

1. Consumer surplus (CS) falls – consumers pay a higher price and buy less.
2. Producer surplus (PS) rises – domestic producers can sell more at a higher price.
3. Government revenue (GR) increases – the tariff collected on each imported unit.
4. Dead‑weight loss (DWL) – the loss of total welfare that is not offset by gains elsewhere.

Simple Tariff Calculation Example

Suppose the world price of a widget is $20. A 25 % ad valorem tariff is imposed.

Domestic price after tariff: \$20 + 0.25 × \$20 = $25.

If the quantity imported falls from 1,000 units to 600 units, government revenue is:

\$\text{GR} = \text{Tariff per unit} \times \text{Quantity imported} = (0.25 \times 20) \times 600 = 5 \times 600 = \\$3{,}000\$\$

Advantages and Disadvantages of Tariffs

• Advantages

  • Protects domestic jobs and industries.
  • Generates fiscal revenue.
  • Can be adjusted quickly to respond to trade disputes.

• Disadvantages

  • Raises prices for consumers, reducing real income.
  • May provoke retaliation from trading partners.
  • Creates inefficiency – resources may be allocated to less‑competitive industries.
  • Dead‑weight loss reduces overall economic welfare.

Summary

Tariffs are the most common form of trade restriction. They can be specific, ad valorem, or compound, each affecting the price of imports in a different way. While tariffs can protect domestic producers and raise government revenue, they also lead to higher consumer prices and dead‑weight losses, potentially harming the overall economy.