Tariffs
- Protectionism is when a government seeks to protect domestic industries from foreign competition
- A tariff is a tax placed on imported goods from other countries
- E.g. Tennis rackets imported into the UK from China have a tariff of 4.7%
- E.g. Tennis rackets imported into the UK from China have a tariff of 4.7%
- A tariff increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses
When the USA places a tariff on imported cheese from Britain, the price of British cheese in the USA rises
- American customers are more likely now to purchase American cheese as the tariff has now made British cheese more expensive
- The benefits of tariffs include
- They protect infant industries so they can eventually become more competitive globally
- An increase in government tax revenue
- Reduces dumping by foreign businesses as they cannot sell below the market price
- The disadvantages of tariffs include
- Increases the cost of imported raw materials which may affect businesses who use these goods for production, leading to higher prices for consumers
- Reduces competition for domestic firms who may become more inefficient and produce poor quality products for their customers
- Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them
Exam Tip
Students are often confused about who pays the tariff. It is not the foreign company, but the domestic company who pays the tariff. In our cheese example above, any retailers in the USA who import cheese from Britain have to pay the tariff (import tax) when it crosses the border into the USA. This policy may help cheese manufacturers in the USA but it harms any other business that imports and sells foreign cheese as it raises their costs of production.