International Trade and Protectionism: Question 4

Worked solution

Part (a): Tariff versus import quota

A tariff is a tax imposed on imported sugar. It works through price: the tax raises the price that buyers must pay for imported sugar, which reduces the quantity demanded of imports, while every unit of sugar that is still imported earns the government tariff revenue.

An import quota works through quantity instead of price: it places a direct physical limit on how much sugar may be imported, whatever price foreign producers are willing to charge. Because the government does not tax the sugar that gets through, a quota does not by itself generate any government revenue, unless the government also chooses to sell or auction a limited number of import licences.

The key distinction is therefore that a tariff restricts imports indirectly, by changing price, and raises revenue for the government, while a quota restricts imports directly, by fixing quantity, and does not automatically raise government revenue.

Part (b): How an export subsidy helps domestic producers compete abroad

An export subsidy is a grant or payment made by the domestic government to sugar producers for every unit of sugar they sell into overseas markets. This payment effectively lowers the producers’ cost of exporting, so they can afford to sell their sugar at a lower price abroad than they otherwise could, while still covering their production costs (or keeping the same profit margin). Because their sugar becomes cheaper in foreign markets relative to sugar from unsubsidised foreign rivals, domestic producers can win a larger share of overseas sales.

Part (c): Identifying and distinguishing an embargo

A complete ban on importing sugar from one particular country is an embargo.

An embargo differs from both a tariff and an import quota because it allows zero imports from the country concerned, rather than a reduced quantity (as with a quota) or a smaller quantity at a higher price (as with a tariff). A tariff and a quota both still permit some trade to continue; an embargo stops it completely. Embargoes are also frequently used for political or diplomatic reasons, such as the dispute described here, rather than purely to protect a domestic industry from foreign competition on economic grounds.

Final answers

• (a) Tariff $=$ a tax that raises the price of imports and earns the government revenue; import quota $=$ a direct quantity limit that does not itself raise government revenue.
• (b) An export subsidy pays domestic producers per unit exported, letting them sell more cheaply (and competitively) abroad.
• (c) This is an embargo, a complete ban (zero imports), unlike the partial restrictions of a tariff or a quota.