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Protectionism and Ways to Protect the Steel Industry

An economy is facing the shutdown of its steel making industry as a result of cheap imports.

Explain what is meant by ‘protectionism’ and describe two ways in which this steel industry could be protected. [8]

Category:

International Trade and Protectionism

CIE AS February 2022

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Answer

Tip: Don't forget to relate the essay to the steel industry. Use diagrams and examples relative to the steel industry to stay relevant to the questions!

(Step 1: Define protectionism )



Protectionism involves protecting domestic industries from foreign competition. With globalisation, a country's domestic steel industry may struggle to compete with cheap imported steel produced by foreign firms. Methods of protectionism can be used to protect the domestic steel-making industry from foreign competition.




(Step 2: Explain what is meant by protectionism)



Protectionism restricts free trade and the methods used often seek to increase domestic industries’ relative price competitiveness. Methods of protectionism include tariffs quotas, exchange control, export subsidies, embargos, voluntary export restraints and administrative burdens (‘red tape’).

A country's steel may find it difficult to survive when faced with competition from more established, larger steel foreign firms. Domestic steel-making firms may be too small to have gained economies of scale and they cannot charge a lower price for steel compared to foreign suppliers.

Protecting the steel industry may give it time to grow and so benefit from economies of scale and gain a global reputation. This will help a country's steel industry to compete internationally



(Step 3: Describe TWO ways in which this steel industry could be protected)



📖Method 1: A country's steel industry can be protected by imposing a tariffs on steel imports.📖



A tariff is a tax on imports. Tariffs increase the costs of steel production to importers, thus raising the price of foreign steel in the domestic market and lowering the amount of steel imported.

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The imposition of a tariff will benefit domestic producers as their output rises from Q to Q1. Domestic consumers lose out as they have to pay a higher price P1 and experience a reduction in their consumption from Q3 to Q4. A tariff will be more effective in protecting the domestic steel industry if demand for imports is price elastic.

For example, the US imposed import tariffs on steel (25 percent) in 2018. The protection of it's national industry seemed to be one of the main reasons behind the US decision, particularly given the growing intensity of competition in steel industry in the US domestic market and the inability of the US industries to compete against foreign imports.

The imposition of these tariffs was intended to encourage local industry, increase local production, protect against competition from countries such as China. US manufacturers welcomed the decision and some of them announced plans to ramp up their production.

(Source: https://trendsresearch.org/insight/economic-impact-of-us-tariffs-on-steel-and-aluminum-import/)



📖Method 2: A country's steel industry can be protected by imposing quota on foreign steel.📖



An import quota on steel sets a quantitative limit on the sale of a foreign steel into a country. The limits can be imposed on the quantity of steel imports or imposed on the value of steel imports that can be purchased each year.

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The imposition of a quota at Q2 reduces the supply of steel import from S1 to S2 (where supply is perfectly price inelastic). This leads to the price of steel import rising from P1 to P2, and output falling from Q1 to Q2. The quota limits the quantity imported and thus raises the market price of foreign steel. This will make a country's domestically produced steel prices appear more attractive to domestic consumers compared to foreign steel.



(Step 4: Conclude)




Protectionism can be an effective way to protect a country's domestic steel industry against foreign competition. Tariffs and quotas can be imposed on imported steel, this will make domestic steel more price competitive compared to foreign steel firms.












MARKING SCHEME:

For knowledge and understanding of the meaning of protection in terms
of giving an advantage to domestic industries/protecting domestic industries
against foreign competition (1 mark) through interference with the free
market / restricting free trade / increasing the price competitiveness of
domestic industries against foreign competition. (1 mark)

For application that illustrates how industries are protected. Identification Of
a method (1 mark) and an explanation of how the chosen method works in
practice (1 mark) and develops how this bestows advantage on the
domestic industry. (l mark)
(Up to 3 marks)

2 methods x 3 marks: 6 maximum

GUIDANCE:

Candidates should not be credited for
simply stating that protectionism is
'protecting industries'. There must be a
developed reference to foreign
competition.
Accept any valid method of protection for
e.g., tariffs, export subsidies, quotas etc.



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