Cambridge IGCSE Economics: Trade protection: methods, reasons and consequences (0455)

This guide follows the Cambridge IGCSE Economics (0455) syllabus for examination in 2026. It covers sections 6.2.4 to 6.2.6: the methods of protection, the reasons for it and its consequences. The syllabus is not tiered, so everything here is for every candidate. Globalisation, multinational companies and the benefits of free trade (6.2.1 to 6.2.3) are taught elsewhere, so this guide uses free trade only as the starting point to compare against.

All figures in this guide are invented for illustration, and money is in dollars. The countries, firms and years are fictional.

Related pages: the revision notes, the practice questions, the exam preparation guide, the course hub, the printable checklist and the free 10-minute diagnostics.

What this unit covers

Section	What you must be able to do
6.2.4 Methods of protection	Explain tariffs, import quotas, subsidies and embargoes
6.2.5 Reasons for protection	Explain infant industry, declining industry, strategic industry and avoidance of dumping
6.2.6 Consequences of protection	Judge how effective protection is, and its impact on the home country and its trading partners

Protection means government action that shields domestic producers from foreign competition. Under free trade, goods cross borders with no such barriers. Every method below works by making imports dearer, scarcer or impossible, or by making home producers cheaper.

6.2.4 Methods of protection

A running example: Country A and bicycles

Country A buys bicycles at a world price of 200. It is a small buyer, so assume its policies do not change the world price. This is a simplification, but it keeps the arithmetic clear. Here is the market with no protection and then with a 20% tariff.

	Free trade, price 200	20% tariff, price 240
Quantity demanded	100 000	88 000
Home supply	30 000	42 000
Imports (demand minus home supply)	70 000	46 000

Tariffs

A tariff is a tax on imported goods. It raises the price of the import, so home-made goods become more competitive.

1. Tariff per bicycle: 20% of 200 = 40.
2. Price to consumers: 200 + 40 = 240.
3. Imports: 70 000 falls to 46 000, a fall of 24 000. As a percentage: 24 000 / 70 000 × 100 = 34.3%.
4. Government revenue: 46 000 × 40 = 1 840 000.
5. Home output rises from 30 000 to 42 000, an increase of 40%.
6. Quantity demanded falls from 100 000 to 88 000, a fall of 12%.

Consumers lose: they buy fewer bicycles and pay more for each. Spending rises from 100 000 × 200 = 20.0 million to 88 000 × 240 = 21.12 million, for fewer bicycles. Home producers gain: their revenue rises from 30 000 × 200 = 6.0 million to 42 000 × 240 = 10.08 million. The government gains tariff revenue.

Import quotas

An import quota is a limit on the quantity (or value) of a good that may be imported in a period. Suppose Country A sets a quota of 46 000 bicycles. The market has the same quantities as the tariff case, because only 46 000 can be imported, and the price rises to 240.

The difference is who gets the gap of 40 between the world price and the home price. With a tariff, the government collects it. With a quota, it goes to whoever holds the import licences, often the foreign exporters or importers, unless the government sells the licences. Revenue for the government is therefore not automatic: it must charge for licences.

Subsidies

A subsidy is a payment from the government to producers, which lowers their costs. Used as protection, it goes to home firms so they can compete with imports.

Suppose Country A pays 25 per bicycle to home firms. They act as if the price were 225. Assuming supply rises steadily between the two points in the table, supply at 225 is 30 000 + (25/40 × 12 000) = 37 500.

1. Consumers still pay 200, so demand stays at 100 000.
2. Imports: 100 000 − 37 500 = 62 500.
3. Cost to the government: 37 500 × 25 = 937 500.

Compare the two methods. The tariff raises the home price, cuts imports further (46 000) and earns revenue. The subsidy leaves the price at 200, cuts imports less (62 500) and costs the taxpayer money. Consumers are far better off under the subsidy.

Embargoes

An embargo is a ban on trade, either in a particular good or with a particular country. It is the strongest method. No imports means a tariff or quota is irrelevant. Governments often use embargoes for political or security reasons, or to ban harmful goods.

Methods compared

Method	Effect on import price	Government finances	Consumers
Tariff	Rises by the tax	Gains revenue	Pay more
Quota	Rises as supply is limited	No revenue unless licences are sold	Pay more, may face shortages
Subsidy	Unchanged	Pays out	Prices stay low, taxpayers pay
Embargo	Import disappears	No revenue	Lose the product or its foreign variety

6.2.5 Reasons for protection

Each reason below is a chain of reasoning you can adapt to a question.

Infant industry

A new industry may start with high unit costs because output is small. Foreign rivals, already large, sell cheaper. Protection gives time to grow.

Example: a new battery industry in Country G has a unit cost of 250 at 10 000 units. The world price is 200. A 30% tariff makes the imported price 260, so the home firm can sell and cover costs. If output grows to 60 000 units and unit cost falls to 170, below the world price, the tariff can be removed.

The risk: the firm may never become competitive, and the protection becomes permanent because workers and owners lobby to keep it.

Declining industry

Some industries shrink as demand moves elsewhere or foreign producers become cheaper. Workers may be unemployed and skills may not transfer quickly. Protection slows the decline and gives time to retrain.

Example: Country C’s cloth mills are losing out to imports. A quota lifts the price of cloth from 8 to 9.50 per metre. Consumers buy 6 000 000 metres. Extra spending: (9.50 − 8) × 6 000 000 = 9.0 million. If the quota protects 1 500 jobs, the cost is 9.0 million / 1 500 = 6 000 per job per year. Whether that is worthwhile depends on the alternative uses of the money.

Strategic industry

Some industries are needed for national security or survival: food, energy and defence equipment. A country that relies on imports could be cut off in a conflict or a price shock.

Example: Country E eats 2.5 million tonnes of grain a year and imports 80% of it, which is 2.0 million tonnes. A ban on grain exports by its supplier would be serious. Protecting home farmers keeps domestic capacity in place, though at the price of dearer food.

Avoidance of dumping

Dumping is selling a good abroad at a price below its cost of production, or below its price in the exporter’s home market. It can drive home firms out of business, after which the dumper may raise prices.

Example: a firm in Country D has a cost of 180 per unit and sells at 210 at home. It exports to Country A at 150, where local firms sell at 200. The loss per unit is 30. The export price is (210 − 150) / 210 × 100 = 28.6% below its home price. Country A could add an anti-dumping tariff of 50 to bring the price back to 200.

6.2.6 Consequences of protection

How effective is it?

Protection works if it achieves its aim at an acceptable cost. Test it with these questions.

• Does the import fall? In Country A, a 20% price rise cut quantity demanded by only 12%, giving a price elasticity of demand of −12/20 = −0.6. Demand is inelastic, so consumers keep buying and pay the tax. Half of the fall in imports (12 000 of 24 000) came from home output rising and half from lower demand.
• Do home firms use the breathing space to improve? If not, protection only keeps inefficient firms alive.
• Do other countries retaliate?
• Is it enforced? High tariffs encourage smuggling.

Impact on the home country

• Consumers: higher prices, less choice, lower real income.
• Producers: more sales and profit, and jobs protected, but less pressure to cut costs.
• Government: revenue from tariffs, or spending on subsidies.
• Economy: resources may be tied up in inefficient industries, and exports can suffer if partners retaliate.

Impact on trading partners

Country B sold 70 000 bicycles to Country A at 200: exports of 14.0 million. After the tariff it sells 46 000: 9.2 million. The loss is 4.8 million, or 34.3%. Jobs and incomes in B’s export industry fall.

If Country B retaliates, it puts tariffs on Country A’s exports. Suppose A sold 6 million of goods to B and a tariff cuts that by 20%. A loses 1.2 million. A trade war leaves both countries worse off, with higher prices and lower trade.

Evaluation: putting it together

A good evaluation uses a two-sided chain.

1. Say who gains and who loses.
2. Say what depends on: how long protection lasts, how elastic demand is, whether partners retaliate, and the size of the cost per job saved.
3. Reach a judgement with a reason. For example: temporary protection of an infant industry with a clear end date is easier to defend than open-ended protection of a declining one.

Common errors

• Writing that a tariff is paid by the exporter. Consumers in the importing country usually pay it through the higher price.
• Saying a quota raises government revenue. It only does if licences are sold.
• Describing a subsidy as raising the price to consumers.
• Treating dumping as any cheap import. Dumping means below cost, or below the exporter’s own home price.
• Giving only benefits or only costs when asked for the impact. Cover both home country and trading partners.
• Forgetting that protection can hurt the home country’s own exporters through retaliation.

Next steps

Test yourself with the practice questions, use the revision notes to recall, or take a 10-minute diagnostic.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment (Cambridge International Education). Content: section 6.2, subtopics 6.2.4 to 6.2.6.