Lesson 3 of 6 · 15 min
Trade restrictions and tariffs
A tariff raises the domestic price, which helps local producers and the treasury but hurts consumers by more, leaving a small country with a deadweight loss; only a large country can possibly gain, and only at its trading partner's expense.
In short
- Trade restrictions (trade protection) limit free trade: tariffs, import quotas, VERs, export subsidies, embargoes and domestic content requirements.
- Motives: protect established or infant industries, protect jobs, protect strategic (national security) industries, raise revenue, retaliate.
- A small country is a price taker in the world market for the good; a large country can move the world price.
- Small-country tariff: price rises from to ; consumers lose A + B + C + D, producers gain A, government gains C, deadweight loss B + D.
- B is the production inefficiency (high-cost local output); D is the consumption inefficiency (purchases that no longer happen).
- A large country can gain if its terms-of-trade gain exceeds the deadweight loss and partners do not retaliate; world welfare still falls.
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