International Trade
Senior 6 · Economics
International Trade
Lesson 4 of 5
25 min
In 2016 the countries of the East African Community (EAC) agreed to phase out imports of second-hand clothing and footwear, to help their own garment and leather industries grow. Rwanda raised its tariffs on these goods sharply; according to the Office of the United States Trade Representative (USTR), by "more than one thousand percent, effectively banning imports of these products".
The United States, where many of the used clothes came from, reviewed whether Rwanda, Tanzania and Uganda should keep their benefits under the African Growth and Opportunity Act (AGOA), a US law that lets eligible African countries sell many goods to the US without duty. Kenya, Tanzania and Uganda changed course and kept their benefits. Rwanda kept its tariffs, and from 31 July 2018 the US suspended duty-free entry for all Rwandan clothing under AGOA. USTR put the affected trade at about US$1.5 million, roughly 3% of Rwanda's exports to the US in 2017.
Questions to keep in mind: who gained and who lost from Rwanda's tariff? Was it worth the retaliation? This lesson gives you the tools to answer.
Definition
Protectionism: government policies that restrict imports (or sometimes exports) in order to shield domestic producers from foreign competition.
Example: Rwanda's high tariffs on used clothing from 2016.
Definition
Tariff (customs duty): a tax on imported goods. A specific tariff is a fixed amount per unit (Frw 100 per kg); an ad valorem tariff is a percentage of the goods' value (25% of the import price).
Quota: a legal limit on the quantity (or value) of a good that may be imported in a period, usually enforced with import licences.
Definition
Deadweight loss (welfare loss): the loss of consumer and producer surplus that nobody gains, not the government, not producers, not licence holders. It arises because protection makes the country produce some units at a higher cost than the world price and stops consumers buying units they valued above the world price.
| Tool | How it works | Illustration |
|---|---|---|
| Tariffs | Tax raises the price of imports | A duty on imported finished goods |
| Quotas | Limit the quantity imported | A ceiling on tonnes of imported sugar each year |
| Subsidies to local producers | Lower domestic firms' costs so they can undercut imports or export more cheaply | Cheap fertiliser or credit for farmers |
| Embargo (total ban) | Forbids trade in a good or with a country | A ban on imports of a harmful product |
| Exchange control | The central bank rations foreign currency for imports | Importers need approval to buy dollars |
| Administrative barriers and standards | Licences, inspections and product standards that delay or exclude imports | Strict quality marks required for sale |
| Government procurement | Public bodies told to buy local | Schools and ministries buying local furniture |
| Devaluation | A cheaper currency makes all imports dearer | Covered in Unit 3 |
| Reason | Argument | Evaluation |
|---|---|---|
| Infant industries | New firms need time to grow big enough to compete | Valid only if protection is temporary and firms really become efficient; many never "grow up" |
| Protecting jobs | Imports destroy jobs in local firms | Jobs saved in one industry may be lost elsewhere through dearer inputs or retaliation |
| Anti-dumping | Foreign firms sell below cost to kill local rivals | Legitimate under WTO rules if dumping is proved |
| Balance of payments | Fewer imports reduce the deficit | Treats the symptom; retaliation can cut exports too |
| Government revenue | Tariffs are easy to collect at the border | Important for poor countries, but falls as trade is liberalised |
| Strategic and security goods | Food, medicine and energy should not depend entirely on foreigners | Can justify some local capacity, at a cost |
| Protecting health, safety and the environment | Keep out unsafe or harmful goods | Accepted if applied equally to local and foreign goods |
| Diversification | Build new industries so the economy depends less on a few exports | A long-run aim; needs skills and investment, not only protection |
Take a small country that imports a food (illustrative figures). Its domestic demand and supply are
where is the price in Frw per kg and is in tonnes per week. Without trade the market would clear where , at and . But the world price is only Frw per kg, and the country can buy as much as it wants at that price.
Worked example 1: the effects of a tariff of Frw 100 per kg
Free trade (): t; t; imports t.
With the tariff (): t; t; imports t.
Measure each area in (Frw per kg) × tonnes, which is thousands of francs, because 1 tonne = 1,000 kg.
So each week the government collects Frw 40 million, producers gain Frw 15 million and consumers lose Frw 65 million; the deadweight loss is thousand, Frw 10 million.
Check: million: what consumers lose and nobody gains is the deadweight loss. Triangle b is the production loss (the 100 extra tonnes made at home cost more than the world price); triangle d is the consumption loss (100 tonnes no longer bought, though consumers valued them above the world price).
Suppose instead the government allows only 400 tonnes of imports a week. At any price from Pw upwards, total supply is now domestic supply plus 400 tonnes. The market clears where
Worked example 2: a quota compared with a tariff
The quota gives the same price (Frw 400 per kg), the same home output (200 t), the same consumption (600 t) and the same deadweight loss (Frw 10 million a week) as the tariff. The difference is who receives rectangle c. With a tariff it is government revenue. With a quota, importers who hold licences buy at 300 and sell at 400, so they earn the quota rent:
A quota also has a hidden risk: if demand rises, the price rises further, because imports cannot increase. A tariff lets imports rise at the same price.
Warning
Common mistakes on the tariff diagram. (1) The tariff revenue is the rectangle between the two price lines over the new imports (Q2 to Q3), not the old ones. (2) There are TWO deadweight triangles; forgetting the production triangle b halves the answer. (3) The tariff does not shift the demand or supply curves: it raises the price at which imports are available.
| Possible benefits | Costs and risks |
|---|---|
| Home output and jobs rise in the protected industry | Consumers pay higher prices and have less choice |
| Government gains tariff revenue | Deadweight loss: resources used less efficiently |
| Infant industries get time to grow | Protected firms may stay inefficient and never compete |
| Imports and the trade deficit may fall | Other countries may retaliate against the country's exports |
| Strategic industries are kept alive | Dearer imported inputs raise costs for other local firms |
| Smuggling and corruption around licences and borders |
The used-clothing case shows several of these at once: local tailors and garment firms were protected, consumers lost access to cheap clothes, and the US retaliated against Rwanda's clothing exports.
Tip
Label the diagram "a, b, c, d" left to right. Consumers lose all four; producers get a; the government (or licence holders) get c; b and d are nobody's: the deadweight loss.
Important
Discuss. Rwanda chose to keep its used-clothing tariffs and accept the loss of AGOA clothing benefits, while its EAC neighbours backed down. Using the ideas of infant industries, consumer welfare and retaliation, argue whether Rwanda's choice was sound. What evidence would you need to judge it ten years later?
EconplusDal, "Tariff Diagram" (about 8 minutes, 2025). He builds the tariff diagram step by step and names each area. Check that his areas match a, b, c and d in the diagram above.
Practice
Sources and credits
Written by Ganzaa: the tariff and quota diagrams, the tables, the worked examples and the practice items. The demand, supply and price figures are illustrative. This lesson adapts CC BY-SA material and is shared under CC BY-SA 4.0.
