In the modern world, national governments have at their disposal a wide range of policies for restricting international trade and protecting domestic industries. These include production subsidies, price support schemes, tariffs on imports, export subsidies and taxes, import quotas and local content schemes. Some of these policies also serve as sources of government revenue. In this chapter and the next we analyse a range of these policies in the competitive framework of the HOS model developed in Chapter 1. Because the case of tariffs is sufficient to illustrate all of the basic principles, we look at tariffs first. However, later we consider some of the many other policies which are frequently used. These non-tariff distortions to trade have in recent years assumed increasing importance as the principal impediments to free trade while tariffs themselves have been negotiated to a very low level.

Here and in Chapter 3, we confine our attention to the case of a country which is “small” in all relevant world markets, facing a perfectly elastic supply of imports and a perfectly elastic demand for its exports. In other words, the country cannot affect its terms of trade. Of course, there are many interesting cases in which countries are large enough to affect the price at which they buy or sell certain commodities, and these are considered in Chapter 4. The model of this chapter provides a convenient starting point and serves to identify the domestic effects of protection which arise independently of any market power a country may have in particular commodities.