AQA A-level Economics: Protectionism, trading blocs and the WTO (7136) – Revision Notes

These notes condense the protectionism content of AQA A-level Economics (7136), specification version 1.3, section 4.2.6.2 (3.2.6.2 on the AQA website): tariffs, quotas, export subsidies, the tariff diagram, causes and consequences of protectionism, customs unions, the Single European Market (SEM) and the World Trade Organisation (WTO). All figures are invented and illustrative. For full explanations and the main worked example, read the study guide, then try the practice questions. Course pages: AQA A-level Economics hub, checklist and free diagnostics.

Key definitions

Term	Meaning
Protectionism	Policies that shield domestic producers from foreign competition
Tariff	A tax on imports, per unit or ad valorem (a percentage of price)
Quota	A cap on how many units of a good may enter the country
Export subsidy	A payment per unit exported, lowering firms’ costs
Quota rent	The price gap per unit multiplied by the quota quantity
Deadweight loss	Surplus lost by consumers that no one else gains
Customs union	Free trade between members plus a common external tariff
SEM	A market where goods, services, capital and labour move freely between members
WTO	The body that sets and polices trade rules and settles disputes

The tariff diagram: method in steps

1. Draw price (vertical) and quantity (horizontal) axes, a downward domestic demand curve D and an upward domestic supply curve S.
2. Draw a horizontal line at the world price Pw. A small country cannot change it.
3. Read off home supply (where S meets Pw) and home demand (where D meets Pw). Imports are the gap.
4. Draw a second horizontal line at Pw plus the tariff. Read off new supply and demand. Imports shrink.
5. Label areas: consumer surplus lost (the whole strip between the two prices to the left of D), producer surplus gained (strip to the left of S), government revenue (tariff times new imports), and two deadweight triangles.

Effects of a tariff in one line each:

• Price paid by home buyers rises.
• Home output rises and imports fall.
• Government gains revenue.
• Consumers lose more than producers and government gain, so there is a net loss.

Worked reminder: a tariff

Country Pell’s market for ceramic stoves (thousands, c): Qd = 120 − 2P, Qs = 2P − 10, world price 20 c.

• Free trade: Qd = 80, Qs = 30, imports 50.
• Tariff of 5 c (25% of the world price): price 25. Qd = 70, Qs = 40, imports 30 (a fall of 40%).
• Revenue = 5 × 30 = 150.
• Consumer loss = (80 + 70)/2 × 5 = 375. Producer gain = (30 + 40)/2 × 5 = 175.
• Deadweight loss = 1/2 × 5 × 10 + 1/2 × 5 × 10 = 25 + 25 = 50.
• Check: 175 + 150 + 50 = 375.

Same market, quota of 30: the price must rise to 25 so that Qd - Qs = 30. Quota rent = 5 × 30 = 150. Who gets it decides whether the country loses more than under the tariff.

Tariff versus quota versus export subsidy

	Tariff	Quota	Export subsidy
Aim	Raise price of imports	Cap quantity of imports	Cut firms’ costs abroad
Home price	Rises	Rises	Rises (firms sell for more at home too)
Who collects gap	Government	Licence holders (government if auctioned)	Government pays out
Cost to government	Gains revenue	Gains only if licences sold	Pays the subsidy
Main risk	Retaliation	Retaliation, rent going abroad	Retaliation, taxpayers fund it

A subsidy of 4 c on 40 units exported costs the government 4 × 40 = 160.

Causes of protectionism

• Infant industries: high costs while small, so shield until they gain scale.
• Sunset industries: slow decline, ease adjustment.
• Protect jobs, with a high cost per job.
• Anti-dumping: dumping is selling below cost or below the home price.
• Strategic industries and national security.
• Reduce a current account deficit.
• Raise government revenue.
• Standards on safety, labour or the environment.

Evaluation: ask who gains, who pays and for how long. Do consumers pay more than the benefit? Will other countries retaliate? Does it delay the structural change the economy needs?

Consequences: winners and losers

• Consumers: pay more, choose less.
• Protected producers: gain sales, may become inefficient.
• Firms using the good as an input: higher costs.
• Foreign exporters: lose sales and may retaliate.
• Wider economy: misallocation of resources and lower efficiency; a trade war can leave everyone worse off. In the standard payoff table each country does better by tariffing whatever the other does, yet both end below the free-trade outcome.

Worked reminder: a customs union

Country Tarn has a tariff of 6 per unit on all imports and buys 40 units a year.

• Before: outsider Voss sells at 12 (18 with tariff); member Wick sells at 15 (21 with tariff). Tarn buys from Voss at 18.
• After the union with Wick: Wick’s price is 15 with no tariff, so Tarn buys from Wick. This is trade diversion.
• Consumers save (18 - 15) × 40 = 120. Tariff revenue lost = 6 × 40 = 240. Net = -120.
• Check: the extra resource cost is (15 - 12) × 40 = 120.
• Trade creation example: Tarn’s own firms make a good at 20, and Wick sells it at 15. After the union Tarn imports it, saving (20 - 15) × 40 = 200 of resources.

Chain of reasoning for a tariff answer

1. A tariff raises the price of imports.
2. Home buyers face a higher price, so they buy less.
3. Home firms see a higher price, so they supply more and may hire more workers.
4. The government collects revenue on the imports that remain.
5. Resources move into a higher-cost industry and some buyers are priced out, so there is a net loss.
6. Evaluate: how large is the tariff, how elastic are demand and supply, will other countries retaliate, and is it temporary or permanent?

Customs union, SEM and WTO

• Customs union: no tariffs inside, a common external tariff outside, joint trade deals. A free trade area has no common external tariff.
• Trade creation: a high-cost home source is replaced by a cheaper member. Trade diversion: a cheaper outside source is replaced by a dearer member because the outsider still pays the tariff. Net effect depends on which dominates.
• SEM: free movement of goods, services, capital and labour; common standards or mutual recognition; common competition rules. Benefits: bigger market, scale, competition, investment. Costs: adjustment unemployment, loss of national control. The UK left the EU in 2020.
• WTO: began in 1995, replacing GATT. Roles: negotiate trade liberalisation, set rules (non-discrimination), settle disputes, monitor policy. Limits: slow talks, exceptions allowed, weak enforcement against large economies.

Must-know distinctions

Pair	Difference
Tariff and quota	Tariff raises the price by a set amount; quota fixes quantity and the price adjusts
Customs union and free trade area	Common external tariff or not
Customs union and SEM	SEM also covers services, capital, labour and standards
Trade creation and diversion	Replacing high-cost home supply versus replacing low-cost outside supply
Consumer loss and deadweight loss	Only two triangles are lost; the rest is transferred

Quick self-test

1. A 15% ad valorem tariff is placed on a good with an import price of 80. What do buyers pay?
2. Using the Pell market above, find imports after the 5 c tariff.
3. State the tariff revenue.
4. State the deadweight loss.
5. By what percentage does the domestic price rise?
6. Find the quota rent for a quota of 30 in the same market.
7. Give two features of a customs union.
8. State two characteristics of the SEM.
9. When did the WTO begin, and what did it replace?
10. Explain trade diversion in one sentence.

Answers

1. Tax = 0.15 × 80 = 12, so buyers pay 92.
2. 30 (70 - 40).
3. 5 × 30 = 150 c thousand.
4. 25 + 25 = 50.
5. 5/20 × 100 = 25%.
6. 5 × 30 = 150.
7. No tariffs between members and a common external tariff on outsiders.
8. Free movement of goods and services, capital and labour; common rules or standards.
9. 1995; it replaced the GATT.
10. Imports switch from a lower-cost outside country to a dearer member because the tariff on the outsider remains.

Where marks are usually lost

• Drawing a tariff line that is not horizontal, or not above the world price.
• Taking imports to be demand, not demand minus supply.
• Counting all of the consumer loss as deadweight loss.
• Saying quota rent goes to the government without saying how licences are given out.
• Describing only the gains of protection with no mention of retaliation or higher prices.
• Saying the WTO bans all protectionism when it allows some exceptions.
• Mixing up a customs union and a free trade area.
• Stating a conclusion with no judgement about size, time or who gains.

Official syllabus

AQA, AS and A-level Economics specification (7135 and 7136), version 1.3, first teaching from September 2015, section 4.2.6.2 Trade (the protectionism, customs union, SEM and WTO points).