Pearson Edexcel International Advanced Level Economics: Blocs, WTO, protection (YEC11) – Revision Notes

These revision notes cover section 4.3.2 items 4 and 5 of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (YEC11), Issue 2, June 2018: trade liberalisation and trading blocs, and restrictions on free trade. The specification lists Unit 4 among the International A2 units, so this content is for the full International A Level only (Units 1 and 2 are the International AS). For full explanations see the study guide. Then test yourself with the practice questions, the Edexcel economics hub, the printable checklist and the free diagnostics. All numbers are invented.

Key definitions

Term	Meaning
Trade liberalisation	Lowering the barriers that stand between buyers and sellers in different countries
WTO	Body that runs trade negotiations, sets rules and settles disputes between members
Trading bloc	Countries giving each other preferential trade treatment
Trade creation	Switch from higher-cost home output to lower-cost partner imports
Trade diversion	Switch from a lower-cost outside supplier to a higher-cost partner
Tariff	Tax on imports (specific = per unit, ad valorem = percentage)
Quota	Legal limit on the quantity imported
Non-tariff barrier	Any other barrier: standards, licences, delays, embargoes, local-content rules
Dumping	Exporting at a price under production cost or under the price charged at home
Quota rent	Extra income from the gap between domestic and world price on quota units

The WTO in five lines

1. Forum for negotiating lower barriers, with agreed rates bound.
2. Non-discrimination: same treatment for all members (most-favoured-nation), and imports treated like home goods once inside (national treatment).
3. Dispute settlement, ending in permitted retaliation.
4. Monitoring and transparency of members’ policies.
5. Allows anti-dumping duties and bloc membership under conditions.

Limits: slow consensus, power imbalance, enforcement by retaliation.

Bloc types

Step	Adds	Example of what changes
Free-trade area	No internal tariffs	Each member keeps its own external tariffs, so rules of origin are needed
Customs union	Common external tariff	Trade policy must be agreed together
Common market	Free movement of labour and capital	Common standards needed
Economic and monetary union	One currency, one monetary policy	Members lose their own interest rate and exchange rate

Method: assessing a bloc

1. Find each member’s cheapest source before and after the change (use landed price = world price × (1 + tariff)).
2. If supply switches from home to partner, that is trade creation. If from outsider to partner, that is trade diversion.
3. Measure the production effect (units × cost saved or lost) and consumption effect (½ × price change × quantity change).
4. Add dynamic effects: scale, competition, investment, transaction costs, factor movement.
5. Evaluate: size of cost gaps, adjustment time, who loses (outsiders, workers in weak firms), retaliation.

Reminder. Tariff 20% on all imports. Outsider sells at 50, partner at 54. Landed prices: 50 × 1.2 = 60 and 54 × 1.2 = 64.8. Before the bloc, buy from the outsider at 60. After, the partner’s price of 54 is below 60, so you switch. The world resource cost rises by 4 per unit, so this is trade diversion. Total gains and losses need the quantities too.

Reasons for protection: one-line test

Reason	Argument	Counter
Infant industry	Time to reach scale	May never be removed
Geriatric industry	Slower job losses	Delays adjustment
Jobs	Saves home output	Costs consumers, invites retaliation
National security	Secure supply	Excuse risk
Dumping	Stops predatory pricing	Consumers gain from low prices
Current account deficit	Fewer imports	Treats symptom and brings retaliation
Revenue	Easy to collect	Falls if imports fall

Method: tariff diagram in words

Axes: price on the vertical, quantity on the horizontal. Home demand slopes down and home supply slopes up. The world price is a horizontal line. A tariff lifts the horizontal line by the tariff amount. Imports are the gap between demand and supply at each price. Label four areas: consumer surplus lost (the trapezoid between the two prices under demand), producer surplus gained (the strip above supply), government revenue (new imports × tariff) and two welfare-loss triangles.

Reminder. Tariff 15% on a good priced at 40: new price 40 × 1.15 = 46. If 70 units are still imported, revenue = 0.15 × 40 × 70 = 420. A quota that lets in 200 units, with a domestic price of 36 against a world price of 30, creates rent of (36 − 30) × 200 = 1,200. Who receives it depends on who holds the licences.

Tools compared

Tool	Price to consumers	Imports	Government	Domestic producers
Tariff	Up	Down	Revenue gained	Gain
Quota	Up	Down (fixed)	No revenue unless licences sold	Gain
Subsidy	Unchanged	Down	Pays the cost	Gain
Non-tariff barrier	Usually up	Down	Possibly admin cost	Gain

Worked reminder: tariff against subsidy

Home demand is Qd = 100 − 4P and home supply is Qs = 20 + 3P. The world price is 8. Compare a tariff of 2 with a subsidy of 2 per unit.

Measure	Free trade	Tariff of 2	Subsidy of 2
Price paid by consumers	8	10	8
Quantity demanded	68	60	68
Home output	44	50	50
Imports	24	10	18

• Tariff: consumer surplus loss = ½ × (68 + 60) × 2 = 128. Producer surplus gain = ½ × (44 + 50) × 2 = 94. Revenue = 10 × 2 = 20. Welfare loss = 128 − 94 − 20 = 14 (triangles 6 and 8).
• Subsidy: producers receive 10 and supply 50. Cost = 50 × 2 = 100. Producer surplus gain = 94. Welfare loss = 100 − 94 = 6.
• The subsidy has a smaller welfare loss and leaves consumers’ prices alone, but taxpayers fund it and it does not raise revenue.

Costs and benefits of membership: checklist

• Benefits: trade creation, lower prices, more choice, scale economies, more competition, lower transaction costs, bigger pool of labour and capital, stronger bargaining position.
• Costs: trade diversion, loss of tariff revenue, job losses in weak industries, loss of independent trade policy (and, in a monetary union, interest and exchange rates), pressure on public services from migration, retaliation by outsiders.
• Judgement: a bloc is more likely to gain if members are alike in size and income, trade with each other already, and are not far above the world’s lowest-cost suppliers.

Bloc against WTO: argument chain

Preferential access favours members, which cuts across non-discrimination. This diverts trade from efficient outsiders, who lose export revenue and may complain or retaliate. The WTO tolerates blocs that cover substantially all trade between members and do not raise outside barriers overall. On the other side, a bloc can move faster than a global round and may spread lower barriers. Whether it is a stepping stone or a stumbling block depends on whether its external barriers fall or rise.

Impact on groups

• Consumers: higher prices and less choice, except under subsidy.
• Producers: protected firms gain, exporters risk retaliation, users of imported inputs face higher costs.
• Governments: revenue from tariffs, cost of subsidies, risk of disputes.
• Living standards: fall if efficiency and real incomes drop, but may rise if an infant industry matures.
• Equality: taxes on basic goods are regressive, while saved low-skilled jobs may reduce inequality.

Quick self-test

1. What is trade diversion?
2. Which bloc type has a common external tariff but no free movement of labour?
3. A 25% ad valorem tariff is placed on a good with world price 80. What is the domestic price?
4. With 300 units imported at that price, how much tariff revenue is collected?
5. A subsidy of 4 per unit is paid on 500 units of home output. What is the cost to government?
6. A tariff of 2 per unit creates welfare-loss triangles that cover 5 units and 7 units of quantity. What is the total welfare loss?
7. A quota of 50 units lifts the domestic price 3 above the world price. How large is the quota rent?
8. Name two WTO principles.
9. Give one argument for and one against protecting an infant industry.
10. Why does a free-trade area need rules of origin?

Answers

1. Switching from a lower-cost outside supplier to a higher-cost partner because of tariff-free access.
2. A customs union.
3. 80 × 1.25 = 100.
4. 0.25 × 80 × 300 = 6,000.
5. 4 × 500 = 2,000.
6. ½ × 2 × 5 + ½ × 2 × 7 = 5 + 7 = 12.
7. 3 × 50 = 150.
8. Most-favoured-nation treatment and national treatment (also transparency and dispute settlement).
9. For: time to gain scale and learn. Against: protection may never be withdrawn.
10. Members set different external tariffs, so goods could enter through the lowest-tariff member and then move freely.

Where marks are usually lost

• Answers that define a bloc but never apply it to the given country or data.
• Calling every move to freer trade “trade creation”.
• Forgetting that a tariff raises the price paid on home output too, not only on imports.
• Drawing a welfare loss as one triangle when there are two.
• Saying a quota raises government revenue.
• Listing reasons for protection without weighing them against retaliation and higher prices.
• Mixing up a customs union (common external tariff) and a common market (free movement of factors).
• Judging a bloc only on static gains and ignoring scale and competition.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics, Specification, Issue 2, June 2018, first teaching September 2018, published by Pearson Education Limited: section 4.3.2 Trade and the global economy, items 4 and 5.