ChainWhat it assumes · how to break it
Start
A government imposes tariffs on imported steel to protect a domestic steel industry that has been losing market share to cheaper imports.
1
As a result, domestic steelmakers face less import competition, so their sales and profits rise.
protectionism
protectionism
Assumes: Imported and domestic steel are close substitutes.
But: If domestic firms cannot produce the grades buyers need, imports continue and domestic sales rise little.
2
This means labour and capital that would have left the steel industry stay in it, slowing the shift of the economy away from manufacturing.
structural change · deindustrialisation
structural change · deindustrialisation
Best link to attack
Assumes: The industry's decline is temporary or caused by unfair competition such as dumping.
Assumes: The industry's decline is temporary or caused by unfair competition such as dumping.
But: If the country has permanently lost its comparative advantage in steel, protection only delays the decline, at a cost to consumers and steel users.
3
Consequently, the economy keeps a larger manufacturing base, which governments may value for strategic reasons such as defence and security of supply.
strategic industry
strategic industry
Assumes: The protected industry is genuinely strategic.
But: Producer groups lobby for protection whether or not their industry is strategic, so protection can reflect political pressure, a form of government failure.
4
Therefore, the structure of the economy stays more weighted towards manufacturing than it would be under free trade.
sectoral balance · comparative advantage
sectoral balance · comparative advantage
Assumes: The tariff stays in place.
But: Tariffs are often reversed by later governments or removed in trade deals, and the shift towards services then resumes.
End
The tariff slows the decline of manufacturing, keeping the economy's structure more weighted towards industry.
Evaluation chain
- E1However, protection slows structural change only while it lasts, and depends on whether the industry can become competitive.
- E2If comparative advantage has moved permanently to lower-cost producers, protected firms have little reason to invest in new capacity.
- E3As a result, the industry may need protection indefinitely, and its decline resumes as soon as the tariff is removed.
- E4So a tariff changes the structure of the economy only temporarily, unless it is combined with investment that raises the industry's productivity.
Another way to attack it: For a developing economy, an infant industry tariff aims at the opposite structural change: building a new manufacturing sector and moving the economy away from dependence on primary products.
Can you say this chain from memory?
Members can hide the links, test themselves and track which chains they have mastered.
Practise this chainMembers can hide the links, test themselves and track which chains they have mastered.
Questions this answers
- Discuss whether governments should use tariffs to protect declining industries.
- Evaluate the case for protecting strategic industries such as steel.
- Assess the impact of protectionism on the structure of an economy.
Diagram
No standard diagram. Data on manufacturing's share of output or employment over time make good evidence.
Reverse and related
Tariff removed → resources move out of uncompetitive industries towards those with a comparative advantage (see lib-str).