The tariff diagram step by step: world supply at the world price, the tariff on top, domestic output up and imports down, then tariff revenue, the gain in producer surplus, the lost consumer surplus and the two deadweight triangles. Quotas and other barriers, and the arguments for and against protection. Through the UK steel trade measure of July 2026.
On 19 March 2026 the UK government announced a new steel trade measure. From 1 July 2026 it replaced the steel safeguard, which had charged 25% on imports above a quota. The quotas are now 51% smaller, and steel imported above them pays a 50% tariff.
UK crude steel output fell from 10.9 million tonnes in 2015 to 4 million tonnes in 2024. The government blames global overcapacity: the OECD expects world steelmaking capacity to exceed demand by 721 million tonnes by 2027. It says making steel at home is vital for national security, and wants UK producers to meet half of UK steel demand, up from 30%.
Who gains from a tariff on imported steel, and who pays for it?
Sources: Department for Business and Trade, UK’s steel trade measure from 1 July 2026 (gov.uk, updated 3 November 2026); Department for Business and Trade and Wales Office press release, 23 March 2026.
Free trade is trade between countries with no tariffs, quotas or other barriers. Protectionism is putting up barriers to trade to protect domestic producers from foreign competition. The main barriers:
The tariff diagram assumes the country is a small buyer on the world market, so it can import any quantity at the world price without changing it. It also assumes imported and home-made goods are identical, there is no retaliation and nothing else changes (ceteris paribus).
A 25% tariff is put on imported steel.
Before the tariff, the country makes some of its own steel and imports the rest at the world price.
Who is most likely to gain from the tariff?
Domestic steelmakers sell more at a higher price, and the government collects the tariff. Buyers pay more, and what they lose is bigger than those two gains put together. The tariff diagram shows exactly how.
Draw it in exam order. Price up the side, quantity along the bottom. D and S are domestic demand and domestic supply: UK steel buyers and UK steelmakers. With no trade at all, the price would be Pe, where they cross, £1,100 a tonne, and the UK would make and use Qe, 120 thousand tonnes a month.
Check: In the tariff diagram, what does the S curve show?
S is domestic supply only. Foreign supply comes in as a separate line, at the world price.
Now open the market to trade. The world price, Pw, is £800, below Pe. The UK can import as much as it wants at Pw, so world supply, Sw, is a horizontal line: perfectly elastic. At Pw buyers want Q4, 180 thousand tonnes, but domestic firms only supply Q1, 60. Imports fill the gap: Q4 − Q1.
Teacher tip: Sw is flat because this country is too small to move the world price. Draw it with a ruler, right across the diagram.
Check: At the world price, how much steel is imported, in thousand tonnes?
Imports are what is bought minus what is made at home: Q4 − Q1 = 180 − 60 = 120.
The government puts a tariff of £200 a tonne on imports, 25% of the world price. Importers must now pay the world price plus the tariff, so world supply shifts up by the tariff, to Sw + tariff. The domestic price rises to Pw + t, £1,000. Domestic firms do not pay the tariff, so the domestic S curve does not move.
Teacher tip: Shift the world supply line, never the domestic S curve. The tariff is only paid on imports.
Check: The domestic price is about to rise to Pw + t. Before you see it: what happens to the quantity domestic firms supply?
Domestic firms get a higher price and pay no tariff, so they supply more: a movement along S.
At Pw + t domestic firms extend supply from Q1 to Q2: 60 to 100 thousand tonnes. Buyers face a higher price, so demand contracts from Q4 to Q3: 180 to 140. Imports shrink from both ends, from Q4 − Q1 = 120 to Q3 − Q2 = 40 thousand tonnes.
Check: Which two changes cut imports after the tariff?
Imports are consumption minus domestic output. Output rises from Q1 to Q2 and consumption falls from Q4 to Q3, so the gap shrinks from both ends.
Now the welfare effects. Buyers pay more and buy less, so consumer surplus falls by the whole shaded band: between Pw and Pw + t, from the price axis out to demand. Some of that loss goes to other people. Some goes to nobody.
Check: Part of the lost consumer surplus goes to domestic producers. Which part?
Domestic firms now sell at Pw + t instead of Pw. They get £200 more on the tonnes they made before, and the extra tonnes up to Q2 add surplus above S. That is the area left of S between the two prices.
Domestic producers gain producer surplus: the area between Pw and Pw + t, to the left of the domestic S curve. They get a higher price on what they made before, and they make more.
The government gains the tariff revenue: the tariff per tonne times the quantity still imported, Q3 − Q2. On the diagram it is the rectangle between Pw and Pw + t, from Q2 to Q3.
Teacher tip: Revenue is the tariff times imports only, Q3 − Q2. Steel made at home pays no tariff.
Check: The tariff is £200 a tonne and 40 thousand tonnes are imported each month. How much revenue does it raise each month?
£200 × 40,000 tonnes = £8 million. Only imports pay the tariff.
The rest of the lost consumer surplus goes to nobody: the two deadweight loss triangles. The left one is the extra cost of making steel at home, between Q1 and Q2, that could have been imported for Pw. The right one is the surplus lost by buyers who no longer buy, between Q3 and Q4.
Check: Why is the left triangle, between Q1 and Q2, a loss to society?
Between Q1 and Q2 domestic firms make steel at a cost above Pw, on S, when it could be imported for Pw. The extra cost uses up resources for nothing in return.
A **quota** limits imports directly, say to Q3 − Q2. Imports become scarce, so the domestic price rises and the diagram looks the same, with one difference: no tariff revenue. The rectangle goes to whoever holds the right to import. Other barriers, such as subsidies to domestic firms or strict product rules, also protect domestic producers. The UK steel measure combines the two: a quota, with a tariff on steel above it.
Check: A quota cuts imports by the same amount as a tariff would. Who gets the rectangle that would have been tariff revenue?
Under a quota, importers buy at Pw and sell at the higher domestic price. The gap is profit for whoever holds the import licences.
The arguments for protection. Infant industry: a new industry may need time to grow and cut its costs before it can compete. Dumping: foreign firms selling below cost, often with government support, can drive domestic firms out. Strategic: a country may need its own steel, energy or food in a war or crisis. Jobs: protection can save jobs in industries and regions hit by imports.
Check: The UK government says it needs domestic steel for defence and critical infrastructure. Which argument for protection is this?
An industry a country needs in a war or crisis, such as steel, energy or food, is the strategic argument.
The arguments against. Higher prices: consumers and firms that use the good pay more and lose surplus. Retaliation: other countries may put tariffs on your exports; after the US raised tariffs with the Smoot-Hawley Act in 1930, its trading partners raised theirs. Inefficiency: protected firms face less competition, so they have less reason to cut costs or innovate, and resources stay where a country has no comparative advantage.
Check: A tariff raises the price UK car makers pay for steel. What is the most likely effect on them?
Steel is a raw material for car makers. A higher steel price raises their costs, so they may raise prices and sell fewer cars abroad.
Back to steel. The gains are concentrated in steel towns such as Port Talbot in Wales and Scunthorpe in the north of England, where the works is a major employer. The costs are spread thinly across every firm and household that uses steel. That is why tariffs can be popular where the plants are, even when they cost the country as a whole.
Check: Who bears most of the cost of a UK tariff on imported steel?
The domestic price of steel rises to Pw + t, so every UK buyer of steel pays more: car makers, builders and, through their prices, households.
They shifted the domestic supply curve up. Domestic firms do not pay the tariff; importers do. The tariff shifts world supply up to Sw + tariff, and domestic output rises from Q1 to Q2. It does not fall.
Using a diagram, explain the effects of a tariff on imported steel on domestic producers, consumers and the government.
A tariff is a tax on imports. Before the tariff, the country can import as much steel as it wants at the world price, Pw, so world supply is horizontal at Pw. Domestic firms supply Q1, buyers buy Q4 and imports are Q4 − Q1.
[Diagram: domestic D and S. Sw horizontal at Pw, with Q1 on S and Q4 on D. Sw + tariff horizontal above it at Pw + t, with Q2 on S and Q3 on D. Tariff revenue rectangle, gain in producer surplus and the two deadweight loss triangles shaded.]
The tariff raises the price of imported steel, so world supply shifts up by the tariff and the domestic price rises to Pw + t. Domestic firms do not pay the tariff, so at the higher price they extend supply from Q1 to Q2. Buyers face a higher price, so demand contracts from Q4 to Q3. Imports fall to Q3 − Q2.
Domestic producers gain producer surplus, the area between the two prices to the left of S. The government gains tariff revenue, the tariff times Q3 − Q2. Consumers lose surplus across the whole band between Pw and Pw + t out to demand, which is more than the two gains together. The difference is the two deadweight loss triangles: steel made at home at a higher cost than it could be imported for, and steel no longer bought.
However, the size of these effects depends on the price elasticities of domestic demand and supply, and on whether other countries retaliate. If steel is strategic, or the world price is low because of overcapacity and subsidies abroad, the government may judge the protection worth the welfare loss.
UK steel trade measure: Department for Business and Trade (gov.uk, March to November 2026). The steel market figures in the diagram are invented to make the arithmetic clear. Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed.