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International Trade and Protectionism: Question 1

Syllabus 6.2

Multiple choice AS 1 mark

A government wants to protect its domestic steel industry from cheaper imported steel. It announces that, from next year, foreign steel producers will only be allowed to sell a maximum of 50,000 tonnes of steel into the domestic market each year, however low a price they charge.

Which instrument of protectionism is the government using?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall the four main instruments of protectionism

  • A tariff is a tax placed on an imported good, which raises its price to buyers.
  • An import quota is a direct physical limit on the quantity of a good that may be imported, regardless of price.
  • An export subsidy is a payment made by a government to its own domestic producers to help them sell abroad.
  • An embargo is a complete ban that allows none of a good to be imported at all.

Step 2: Match the policy described to the correct instrument

The government’s policy fixes a maximum quantity (50,000 tonnes per year) that may be sold into the domestic market, and this limit applies “however low a price” foreign producers charge. Because the restriction is stated directly in terms of quantity, not price, and some steel (up to 50,000 tonnes) is still allowed in, this is an import quota.

Step 3: Rule out the other options

  • Option B (tariff): a tariff works by taxing imports to change their price; it does not fix a maximum physical quantity directly, and the quantity actually imported after a tariff can still vary with market conditions. This does not match the policy described.
  • Option C (export subsidy): an export subsidy supports domestic producers selling their own goods abroad; it says nothing about restricting foreign steel entering the domestic market, so it does not match.
  • Option D (embargo): an embargo is a complete ban allowing zero imports. Here, up to 50,000 tonnes per year is still permitted, so this is not an embargo.

Final answer

Option A. A fixed maximum quantity of imports, regardless of price, is the defining feature of an import quota.