Protecting Domestic Jobs
The premise behind this idea is if foreign goods are kept out of the economy, more U.S. jobs will be preserved. If there
are fewer foreign competitors, American firms can increase output and employ more workers. This would cause the
unemployment rate to decline and consumer spending to rise. The downside to this argument is that only the protected
industry benefits in terms of employment from the elimination of foreign competition.
Because domestic consumers will be paying higher prices for the protected output, they will have less money to spend
on other domestic goods and services. In time, this will reduce the purchasing power of consumers and in fact increase
the unemployment rate. Another downside to this argument is that other countries may retaliate in reaction to the U.S.
decision to restrict trade. If foreign countries do restrict U.S. exports, domestic firms’ production will decrease and un-
employment will rise. Essentially, if we were to restrict trade to save jobs, we would only be redistributing employment
into the protected industry. Our economy would not be experiencing any growth.
Equal Opportunity
The argument of equal opportunity comes from some protectionists who complain that the inclusion of foreign goods
and services takes away from the demand of domestic goods and services. But if you examine this argument closely,
you’ll notice that it goes against the very foundation of our economy: competition. Doesn’t competition force firms to
be efficient? Won’t the inclusion of foreign products force domestic firms to provide variety and better quality? The
argument for equal opportunity is a touchy subject to some, but for the AP exam you will need to know the basis
behind trade restrictions to form better arguments for a free-response question.
Tools of Trade Restriction
A quotais designed to limit the number of goods that may be imported to a country. If the United States wanted to
limit the number of foreign cars imported, it could place a quota on the number of cars allowed per year. A tariffis a
tax placed on imported goods. Although tariffs do not limit the number of foreign goods outright, they do make it more
costly for foreign producers. Tariffs tend to benefit the government more so than a quota does. With a quota, the foreign
producer can raise its per-unit price, thereby making up for any lost sales because of the quota.
Tariffs and quotas are tools used to limit trade in an economy. Both of these tools lead to higher prices and less con-
sumption by domestic buyers. The basis for these tools lies in the government’s effort to control prices and output.
Effects of a Tariff
A tariff has four possible effects:
■ A decline in imports:International producers are hurt by an increase in production costs. Volume may rise for
the product domestically, but foreign producers do not see the rise in volume because the revenue goes to the
government that is imposing a tariff.
■ Consumption declines: Prices of imported goods rise when a tariff is imposed. When tariffs are present, producers
have no choice but to raise their prices in efforts to sustain revenue.
■ Revenue for the government: Tariffs redirect revenue that would have gone to the international producer to the
government instead. The government gets a share of revenue in the form of a tariff placed on either each unit or a
lump-sum tariff.
■ An increase in production for domestic producers:Domestic producers increase production of goods and ser-
vices because individuals are substituting the expensive foreign goods for the less expensive domestic goods.
Demand increases, thereby forcing suppliers to step up production.International Economics