Protectionism and tariffs
Protectionism restricts trade. A tariff is an import tax that raises prices and cuts imports.
Protectionism is the use of government policy to restrict free trade and protect domestic producers from foreign competition.
The most common tool is a tariff — a tax on imports. A tariff raises the price of imported goods, shown on a demand and supply diagram:
Impact of a tariff:
- The price of imports rises (world price + tariff), so the quantity imported falls.
- Domestic producers gain: they can sell more at the higher price (their output rises).
- Domestic consumers lose: they pay a higher price and consume less (lower consumer surplus).
- The government gains tariff revenue (tariff × quantity imported).
- There is a welfare (deadweight) loss from the inefficiency.
- Protectionism = restricting trade to protect domestic producers.
- Tariff = import tax → higher import price, fewer imports.
- Domestic producers gain; consumers pay more; government gains revenue.
- Net welfare/deadweight loss from the distortion.