Trade Protection

Despite the gains from trade, governments frequently intervene to shield domestic industries from foreign competition. This intervention is called trade protection, and it takes several forms: tariffs, quotas, subsidies, and administrative barriers. Each redistributes welfare among consumers, producers, and the government, and each generally creates a net loss of efficiency for the economy as a whole.

Tariffs

A tariff is a tax on imported goods. It is the most common protectionist tool. Consider a small importing country facing a horizontal world supply curve at the world price Pw. At Pw, domestic quantity supplied is Q1 and domestic quantity demanded is Q4, so imports equal Q4 − Q1.

When the government imposes a tariff, the price faced by domestic consumers rises to Pw + tariff. At this h