Syllabus points
- Explain the benefits of international trade and the theory of comparative advantage.
- Distinguish the main types of trade protection.
- Analyse the effects of a tariff using a diagram.
- Evaluate the arguments for and against protectionism.
Why countries trade
International trade lets countries specialise and consume beyond their own production possibility frontier. According to the theory of comparative advantage, a country gains by specialising in the goods it can produce at the lowest *opportunity cost* and trading for the rest — even if another country is absolutely more productive at everything. Trade widens consumer choice, lowers prices, and increases competition and efficiency.
Types of protection
| Method | How it restricts trade |
|---|---|
| Tariff | A tax on imports, raising their price |
| Quota | A physical limit on the quantity imported |
| Subsidy | Government support to domestic producers, lowering their costs |
| Administrative barriers | Standards and red tape that raise importers' costs |
Effects of a tariff
A tariff raises the price of imports from the world price to the world price plus tariff. As a result:
- Domestic producers supply more and gain revenue.
- Domestic consumers pay a higher price and buy less — consumer surplus falls.
- The government collects tariff revenue on remaining imports.
- There is a net welfare loss (deadweight loss) from the fall in consumption efficiency and inefficient extra domestic production.
Arguments for and against protection
- For: protecting infant industries, safeguarding jobs, guarding against dumping, and national-security or diversification concerns.
- Against: higher prices and less choice for consumers, protection of inefficiency, the risk of retaliation and trade wars, and the loss of the gains from specialisation.
On balance, most economists favour freer trade, using protection only selectively and temporarily.
Worked example
A country imports wheat at a world price of $200/tonne and imposes a $50 tariff. The domestic price rises to $250: home producers expand output and consumers cut back. The government earns $50 per imported tonne, but society bears a deadweight welfare loss from reduced consumption and higher-cost domestic production.
Common exam mistakes
- Confusing comparative advantage (opportunity cost) with absolute advantage.
- Forgetting the deadweight welfare loss when analysing a tariff.
- Presenting protection as costless — always weigh consumer costs and retaliation.
Exam technique
Draw the tariff diagram and identify each area (producer gain, government revenue, welfare loss), then evaluate protection against free trade for the given context.
Quick revision
- Comparative advantage = specialise where opportunity cost is lowest.
- Protection: tariffs, quotas, subsidies, administrative barriers.
- Tariff → higher price, more domestic output, government revenue, deadweight loss.
- Free trade usually wins; protection is selective and risks retaliation.