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

This guide covers the second half of the Trade content for AQA A-level Economics (7136), specification version 1.3, section 4.2.6.2 (numbered 3.2.6.2 on the AQA website): protectionist policies, their causes and consequences, customs unions, the Single European Market (SEM) and the World Trade Organisation (WTO). The specification states no AS-only or A-level-only labels in this section. Comparative advantage and the costs and benefits of trade are taught on other pages. Every country, firm and figure below is invented and illustrative. Course pages: AQA A-level Economics hub, checklist and free diagnostics. Next: the revision notes and the practice questions.

What the specification asks for

Content point	What you must be able to do
Nature of protectionist policies	Explain tariffs, quotas and export subsidies
Tariff diagram	Draw and explain the effects of a tariff on imports
Causes of protectionism	Give and weigh the reasons governments restrict trade
Consequences of protectionism	Analyse winners and losers, then evaluate
Customs union	State its main features
Single European Market	State its main characteristics
WTO	Explain its role

The three protectionist tools

Protectionism means government policies that shield domestic producers from foreign competition. Three tools matter.

• A tariff is a tax on imports. It can be a fixed sum per unit or ad valorem, a percentage of the price. A 15% tariff on a good priced at 80 adds 0.15 × 80 = 12, so buyers pay 92.
• A quota is a physical limit on the quantity of a good that may be imported.
• An export subsidy is money the government pays exporters on every unit shipped out. It cuts their costs and lets them price below foreign rivals.

Other tools exist, such as regulations and standards that are hard for foreign firms to meet. The specification lists the three above, so know those best.

The tariff diagram, with a full worked example

Country Alder is small, so it cannot change the world price. In its market for electric kettles (quantities in thousands, prices in c, an invented currency):

• Domestic demand: Qd = 200 - 2P
• Domestic supply: Qs = 3P - 50
• World price: 30 c

Without trade, Qd = Qs gives 200 - 2P = 3P - 50, so P = 50 and Q = 100.

Free trade at 30 c: Qd = 200 - 60 = 140 and Qs = 90 - 50 = 40. Imports = 140 - 40 = 100.

A tariff of 10 c lifts the domestic price to 40 c. Qd = 120, Qs = 70, imports = 50.

Here is a sketch. Price is on the vertical axis, quantity on the horizontal. D slopes down, S slopes up, and the two horizontal lines are the world price Pw (30) and the price with tariff Pt (40). S1 and D1 mark where the curves meet Pw, and S2 and D2 where they meet Pt.

Price
 50 |              X             X = no-trade point (P 50, Q 100)
    |             / \
 40 |-----------S2---D2-----     Pt: supply 70, demand 120
    |           /     \
 30 |---------S1-------D1---     Pw: supply 40, demand 140
    |         /         \
    +------------------------ Quantity   (not to scale)
              40 70   120 140

Read it in words. Under free trade, home firms supply 40 (where S meets Pw) and buyers demand 140 (where D meets Pw), so imports are the gap of 100. With the tariff, supply moves along S to 70 and demand moves along D to 120. Imports fall to 50.

Now the areas, each worked out from the numbers.

Area	What it is	Working	Value
Consumer surplus lost	Rise from 30 to 40 on lost and remaining purchases	(140 + 120)/2 × 10	1,300
a: producer surplus gained	Higher price on home output	(40 + 70)/2 × 10	550
c: government revenue	Tariff × remaining imports	10 × 50	500
b: production triangle	Extra output made at a cost above the world price	1/2 × 10 × 30	150
d: consumption triangle	Purchases lost to the higher price	1/2 × 10 × 20	100

Check: 550 + 500 + 150 + 100 = 1,300. The consumer loss equals the sum of the other four areas. Producers and the government gain, but triangles b and d (250 in total) are a deadweight loss: nobody gains them. Triangle b shows resources pulled into making kettles at home when they could buy them for less. Triangle d shows people who would have bought at 30 c and now do not.

Useful percentages: the price rises 33.3% (10/30) and imports halve.

Jobs. Home output rises by 30 (from 40 to 70). If each thousand kettles needs 10 workers, 300 jobs are protected. Consumers lose 1,300 for those 300 jobs, about 4.3 thousand c per job. Even after counting the gains to producers and government, the net loss of 250 is about 0.83 thousand c per job. Protection can be an expensive way to save jobs.

Evaluation points for a tariff.

• The bigger the tariff, the bigger the price rise and the deadweight loss.
• If demand is price inelastic, buyers pay most of the tax and the government raises plenty of revenue. If home supply is elastic, home firms expand a lot and more jobs are saved.
• A very large country that buys a large share of world output may push the world price down, shifting some of the burden to foreign sellers. A small country cannot.
• Effects grow over time: protected firms may lose the drive to cut costs.

Quotas

Suppose Alder sets a quota of 50 on kettle imports instead. At 30 c people want to buy 100 imports, so there is excess demand and the price rises until imports demanded equal 50. That happens at 40 c (120 - 70 = 50). Domestic price, consumption and output match the tariff.

The difference is who gets the gap of 10 c per kettle, here 10 × 50 = 500. It is called quota rent. If the government sells licences by auction, it captures the rent, like tariff revenue. If licences are handed free to importers or foreign exporters, they keep it, and the home economy is worse off than under a tariff. A quota also gives a fixed quantity limit whatever happens to demand: if demand rises, the price rises further, while a tariff caps the price rise.

Export subsidies

Country Brindle exports tinned fish. Quantities are in thousands, prices in c.

• Domestic demand: Qd = 90 - P
• Domestic supply: Qs = 2P - 30
• World price: 60 c (Brindle is a price taker)

Without trade, P = 40 and Q = 50. At 60 c, Qd = 30, Qs = 90, so exports = 60.

Brindle pays a subsidy of 10 c per unit exported. Firms can now earn 70 c per unit, so the domestic price rises to 70 c. Qd = 20, Qs = 110, exports = 90.

Item	Working	Value
Cost to government	10 × 90	900
Domestic consumers lose	(30 + 20)/2 × 10	250
Producers gain	(90 + 110)/2 × 10	1,000
Net effect on Brindle	1,000 - 250 - 900	-150

The net loss of 150 is the two triangles: 1/2 × 10 × 20 on the production side and 1/2 × 10 × 10 on the consumption side. Home consumers pay more, taxpayers fund the subsidy, and foreign buyers get fish at the unchanged world price. Foreign rival producers lose sales, so other countries may retaliate.

Why governments adopt protectionism

Each reason needs a chain of reasoning and a limit.

• Infant industries: a new industry has high unit costs because it is small. A tariff gives time to grow and exploit economies of scale. Limit: protection may never be removed, and governments find it hard to pick winners.
• Sunset industries: slows the decline of an old industry and gives workers time to adjust. Limit: delays resource moves to areas of advantage.
• Protecting employment: see the job calculation above. Limit: high cost per job, and jobs may be lost in industries that use the protected good.
• Anti-dumping: dumping is selling abroad below cost or below the home price. A tariff offsets it. Limit: hard to prove, and consumers lose cheap goods.
• Strategic industries and national security: keep food, defence or energy capacity at home.
• Correcting a current account deficit: import controls cut the import bill. Limit: weak competitiveness remains and retaliation may follow.
• Raising revenue, which matters most when other taxes are hard to collect.
• Standards: keep out goods that are unsafe or made with low labour or environmental standards. Limit: can be a disguised barrier.

Consequences of protectionism

Group	Likely effect
Consumers	Higher prices, less choice
Domestic producers	More sales and profit, less pressure to be efficient
Domestic firms that use the good as an input	Higher costs, less competitive
Government	Tariff revenue, or the cost of a subsidy
Foreign exporters	Lower sales and income
Whole economy	Deadweight loss, misallocation, risk of retaliation

Retaliation is the main global risk. Suppose each of two countries chooses between free trade and a tariff, with invented payoffs (A, B): both free 10, 10; A tariffs alone 14, 4; B tariffs alone 4, 14; both tariff 6, 6. Whatever the other does, a tariff pays more, so both tariff and end with 6 each, below the 10 each they get from free trade. This is a trade war.

Customs unions

A customs union is a group of countries that:

• remove tariffs and quotas on trade between members;
• apply a common external tariff on imports from non-members;
• usually negotiate trade deals with outsiders together.

Compare a free trade area, where members trade freely but each keeps its own external tariffs.

A customs union can cause two effects, which help you evaluate it. Take Country Hale with a tariff of 10 per unit on all imports, buying 100 units a year.

• Trade diversion: outsider Cedar sells at 20, so 30 with the tariff; member Dunmore sells at 24, so 34. Hale buys from Cedar at 30. After Hale and Dunmore form a union, Dunmore’s price is 24, so Hale buys from Dunmore. Consumers save (30 - 24) × 100 = 600, but tariff revenue of 10 × 100 = 1,000 is lost, a net loss of 400, equal to the extra resource cost (24 - 20) × 100 = 400.
• Trade creation: for another good, Hale’s own firms produce at 28 and Dunmore sells at 24. After the union, Hale imports from Dunmore: a saving of 4 on each of 100 units, 400, plus lower prices.

Which effect dominates depends on how efficient members are relative to outsiders.

The Single European Market

The SEM goes further than a customs union. It aims to remove barriers so that goods, services, capital and labour can move freely between members. Main characteristics: free movement of goods and services, of capital and of people; common rules and standards or mutual recognition of them; and common competition rules. Benefits include a larger market, economies of scale, more competition and lower prices, and more investment. Costs include adjustment unemployment where firms lose out, pressure on wages in some sectors and the loss of some national control over regulation. The UK left the EU in 2020, so it is no longer in the SEM or the EU customs union.

The World Trade Organisation

The WTO began in 1995, replacing the earlier GATT. Its role is to:

• promote freer trade by negotiating agreements to lower trade barriers;
• set rules for trade, including non-discrimination: members should treat other members’ goods equally (the “most favoured nation” idea);
• settle trade disputes between members;
• monitor members’ trade policies.

Evaluation: agreements are slow when members disagree; large economies hold more bargaining power; rules allow some exceptions such as anti-dumping action; and regional deals can run alongside it. A government that breaks the rules faces pressure, such as authorised counter-measures, not direct enforcement.

Common errors

• Drawing the tariff line at the wrong level: it is the world price plus the tariff, still horizontal.
• Forgetting that imports are the gap between demand and supply at the price, not demand alone.
• Calling the whole consumer loss the deadweight loss. Only triangles b and d are lost.
• Saying a quota raises revenue for government without saying who gets the licences.
• Treating the SEM and a customs union as the same thing.

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).