International Trade and Protectionism (9BS0 4.1.2-4.1.4)
Trade lets countries specialise and businesses grow beyond home markets, but governments also restrict it to protect domestic industries. You need both sides: how trade and FDI drive growth, and how tariffs, quotas and other barriers change business decisions.
Trade, specialisation and FDI
International trade rests on specialisation: countries concentrate on what they produce relatively efficiently and exchange the rest, expanding total output. For a business, exporting turns a domestic product into global revenue — exports let firms escape saturated home markets and spread risk across economies growing at different speeds.
Foreign direct investment (FDI) deepens this: instead of shipping goods, a firm builds or buys operations abroad. FDI flows both ways for the UK — Nissan's Sunderland plant is inward FDI employing thousands, while AstraZeneca's announcement in November 2024 of a $3.5 billion investment in US research and manufacturing is UK-owned outward FDI, positioning production inside its largest market.
Trade and business growth reinforce each other: exports fund investment, scale cuts unit costs, and exposure to demanding foreign customers sharpens quality — advantages purely domestic rivals never develop.
Protectionism: tools and motives
Protectionism shields domestic producers from imports. The main tools:
- Tariffs: taxes on imports, raising their price.
- Quotas: physical limits on import volumes.
- Subsidies: government payments giving domestic firms a cost advantage.
- Non-tariff barriers: standards, licensing and paperwork that raise the cost of importing.
Motives include protecting infant industries and jobs, national security, retaliation and correcting perceived unfair trade. Steel is the live example: the United States imposed a 25% tariff on steel imports in March 2025 and later raised it to 50% for most countries, with UK steel temporarily held at 25% pending a bilateral deal — a serious cost for UK producers selling into America.
Costs fall on consumers (higher prices), importing firms (squeezed margins) and exporters abroad (lost sales), while protected industries gain time that they may or may not use to become competitive.
Worked tariff calculation and business responses
Tariff arithmetic is straightforward but examinable. Suppose a US importer buys UK steel components worth $800,000 and the tariff rate is 25%:
| Step | Calculation | Result |
|---|---|---|
| Tariff payable | $800,000 x 0.25 | $200,000 |
| Total import cost | $800,000 + $200,000 | $1,000,000 |
The importer now pays 25% more, and must absorb the cost (cutting margin), pass it to customers (risking sales), or switch to domestic suppliers — which is the tariff's purpose.
Exporters facing tariffs can: relocate production inside the tariff wall, as many firms investing in US plants have done since 2025; cut prices to stay competitive; reroute to other markets; or seek exemptions through lobbying and trade negotiations. Each response has costs, so the right choice depends on how permanent the tariff looks and how mobile production is.
Key terms
Practice questions
Explain one benefit to a UK business of exporting to international markets. [4 marks]
Model answer guidance: Exporting gives access to customers far beyond a mature home market, allowing continued growth when UK demand is flat. Selling across several economies also spreads risk, since a downturn in one market can be offset by growth in another. Higher total volumes then reduce unit costs through economies of scale. A UK drinks brand exporting to the US, for example, can grow revenue even while UK consumption stagnates.
Using the data, calculate the total cost to a US importer of UK goods worth $800,000 after a 25% tariff is applied. You are advised to show your working. [4 marks]
Model answer guidance: Tariff payable = $800,000 x 0.25 = $200,000. Total import cost = $800,000 + $200,000 = $1,000,000. The tariff raises the importer's cost by a quarter, which must be absorbed in margins, passed on through higher prices, or avoided by switching to a domestic supplier. This illustrates how tariffs deliberately tilt purchasing decisions towards home producers.
Discuss the possible effects of the 2025 US steel tariffs on a UK steel producer that exports to America. [8 marks]
Model answer guidance: The 25% tariff makes the producer's steel significantly dearer for US buyers, who may switch to American mills, cutting export volumes and revenue. Holding prices means losing customers; cutting prices to offset the tariff sacrifices margin on every tonne. The producer might redirect output to other markets, though probably at lower prices, or consider US production, which requires heavy investment. One partial comfort: UK steel was held at 25% while others faced 50%, giving UK exporters a relative advantage over some rivals. The overall effect depends on how long the tariffs persist.
Assess whether relocating production inside a tariff-imposing country is a sensible response for a large exporter. [10 marks]
Model answer guidance: Relocation eliminates the tariff entirely, protects access to the market long term, and may bring subsidies and political goodwill — motives visible in large investments such as AstraZeneca's $3.5 billion US commitment announced in 2024. It also hedges against future protectionism. However, building plants costs hundreds of millions, takes years, and locks the firm in even if tariffs are later removed; costs of labour and compliance may be higher than at home, and splitting production reduces scale economies. Relocation is sensible when the market is large, the tariffs look durable and volumes justify a plant; for smaller exporters, price adjustment or market diversification is usually wiser.
Evaluate whether protectionist policies do more harm than good to the country that imposes them. (20) [20 marks]
Model answer guidance: Protectionism delivers visible benefits: protected industries keep jobs, gain time to modernise, and strategic capacity such as steel is preserved for security reasons — arguments used for the 2025 US tariffs. Politically, the gains are concentrated and grateful. However, the costs are wider though less visible: domestic buyers pay more — a 25% tariff turns $800,000 of inputs into $1,000,000 — so downstream manufacturers become less competitive and consumers lose spending power. Retaliation then hits the country's own exporters, and sheltered industries often stay inefficient because the pressure to improve is removed. Economic evidence generally finds net losses from broad, lasting protection. The fairest judgement is conditional: narrow, temporary protection tied to modernisation or genuine security can pass a cost-benefit test, but broad and permanent tariffs typically harm the imposing country overall, taxing its many consumers and exporters to subsidise a few producers.
Examiner tips
- Practise tariff arithmetic until automatic: value x rate = tariff; add it back for total cost — easy marks under time pressure.
- Use the 2025 US steel tariffs (25%, later 50% for most, UK held at 25%) as your current protectionism example.
- In evaluation, always trace who pays: importers, consumers and downstream firms bear tariff costs, not just the foreign exporter.
In The Business School simulation your students make these exact decisions in a live market against rival firms — every choice mapped to the specification. Free teacher demo, no installs, students join with a PIN.