Using your knowledge of economics and the information in the text, discuss the possible

consequences of a US policy involving increased trade protection measures, as suggested by the

author. [8 marks]

A possible US policy that could be used to increase trade protectionism as suggested by the article
would be to “impose more tariffs to raise prices for specific foreign goods.” Protectionism is when a
government institutes a tariff, quota, subsidy, or administrative barriers aimed at making domestic
producers more competitive with foreign producers by limiting the amount of imports into a country.

As seen in the diagram in part C, a tariff could have both positive and negative implications. A pro
would be the protection of domestic producers, as they would be producing more f the good since it is at a
higher price (0-Q2). Also, a tariff would protect infant/sunrise industries that need higher prices to compete
with industries that reached economies of scale. A tariff would give these industries time to grow and reach
economies of scale in order for them to compete with foreign producers. IN addition, it “protects local
industries against cheap foreign competition.” This means that countries with cheap labor are able to sell
their products at a lower price compared to countries where labor costs are high. A tariff would could also
be used to limit the consumption of a demerit good to society such as goods that “destroy the environment.”
MOreover, a tariff would increase government revenue which they can then spend on public goods. Finally
a tariff would decrease the amount of dumping that results from low exporting cost.

However, there are some negative consequences of imposing a tariff. Firstly, there is a total welfare
loss resulting in the decrease of quantity sold (Q3-Q4), if the tariff was non instituted. Also, quantity
between Q1-Q2 would have been sold at a lower price thad there been free trade. [unreadable word] on a
tariff decreases consumer surplus by raising the price of the good. A tariff also limits domestic competition
as domestic firms would feel safe knowing a tariff is imposed. This leads to a lack of innovation and
economic growth and development. Also, comparative advantage would be lost as trade disputes increase
between nations. They would not be able to produce the good that is the most costly effective due to the
increase in the cost of production. This could lead to trade wars. Also, protectionism could lead to
corruption as industries who enjoy the benefits of a tariff could bribe the government to keep the tariff in
place. Finally, a tariff would limit the variety of products in a nation.

Furthermore, there are both positive and negative consequences of instituting a tariff. Instituting
protectionist policies could benefit producers, however it has a cost on society as consumption would
decrease and price would increase. Therefore, the negatives of protectionism outweigh the positives, as its
negative consequences leave society worse off than with free trade.