OCR A Level Economics: Protectionism and the case for free trade (H460) – Revision Notes

Quick recall for the first part of “Trade policies and negotiations” in Component 2, Macroeconomics, of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. For full explanations and worked examples read the study guide, then test yourself with the practice questions. Course pages: the OCR Economics hub, the checklist, the Macroeconomics revision notes and the free diagnostics. All figures here are invented.

Methods of protectionism

Method	What it does	Key point
Specific tariff	Fixed tax per imported unit	Tariff ÷ price = ad valorem equivalent
Ad valorem tariff	Percentage of the import price	Amount rises with the price
Quota	Cap on units allowed in	Rectangle is quota rent
Subsidy	Payment to domestic producers	Taxpayers pay; consumer price unchanged
Embargo	Total prohibition	Extreme; price rises to the no-trade level
Voluntary export restraint	Exporter caps its own sales	Agreed under pressure
Administrative barriers	Standards, licences, delays	No revenue; hard to measure
Local content rules	Required share of domestic inputs	Raises costs for assemblers

Tariff diagram: method in steps

1. Sketch demand D, supply S and a flat world price line (a small country), with price on the vertical axis and quantity on the horizontal.
2. Add the tariff to get the new price line.
3. Read quantities demanded and supplied at both prices. Imports are the gap between them.
4. Label four areas between the price lines:
   • a is the producer surplus gain.
   • b is the production triangle, the extra output at higher domestic cost.
   • c is the revenue rectangle: tariff times imports.
   • d is the consumption triangle, the lost demand.
5. Consumer surplus falls by a + b + c + d. The net welfare loss is b + d.

Worked reminder (illustrative). World price 10, Qd = 80 − 2P, Qs = 3P − 20. Free trade: Qd = 60, Qs = 10, imports 50. A tariff of 2 gives a price of 12, Qd = 56, Qs = 16, imports 40, revenue 80. Consumers lose 116; producers gain 26; revenue is 80; so the net loss is 116 − 26 − 80 = 10, made of 6 (production) and 4 (consumption).

Tariff versus quota versus subsidy

Feature	Tariff	Quota	Subsidy
Fixes	Price	Quantity	Producer price
Government revenue	Yes	Only if licences are sold	None; it pays
If demand rises	Imports rise, price fixed	Price rises, imports fixed	Imports rise
Consumer price	Higher	Higher	Unchanged
Net welfare loss	Two triangles	Two triangles	Production triangle only

Quota rent = (domestic price − world price) × quota. With a quota of 40 and a price of 12 against a world price of 10, rent is 80.

Effectiveness: what to weigh

• Elasticity of demand and supply: inelastic home supply means few jobs saved.
• Retaliation and trade wars.
• Size: a large importer can pass part of the tariff to exporters; a small one cannot.
• Aim: revenue, infant industry or deficit reduction conflict with one another.
• Time: temporary and declining beats permanent.
• Inputs: tariffs on components raise domestic costs.
• Cost per job saved: net welfare loss or consumer loss divided by jobs protected.
• Prohibitive point: when the tariff cancels all imports, revenue is zero.

Quota diagram: method in steps

1. Draw demand, supply and the world price line as before.
2. Treat the quota as the only gap allowed between quantity demanded and quantity supplied.
3. Find the price at which the horizontal distance between supply and demand equals the quota. That price is the new domestic price.
4. Read the quota rent as (new price − world price) × quota.
5. If demand later rises, the gap stays fixed, so the price climbs further.

Reminder. With the same market and demand raised to Qd = 90 − 2P, a quota of 30 solves 90 − 2P = 3P − 20 + 30, so P = 16, Qd = 58, Qs = 28, imports 30 and rent (16 − 10) × 30 = 180.

Tariff schedule: the revenue pattern

Same market (world price 10, Qd = 80 − 2P, Qs = 3P − 20):

Tariff	Price	Imports	Revenue
0	10	50	0
2	12	40	80
5	15	25	125
8	18	10	80
10	20	0	0

Revenue rises, peaks and falls to zero. The no-trade price is 20 (where 80 − 2P = 3P − 20), so a tariff of 10 or more is prohibitive. Use this to explain why protection and revenue conflict.

Large country reminder

If a large importer’s tariff pushes the world price down from 10 to 9, the exporter bears part of the tax. The importer gains from better terms of trade, but the gain is at the exporter’s expense, so retaliation is likely and may cancel it.

Writing an evaluation chain

• Point: name the effect, such as higher prices for consumers.
• Reason: tie it to the diagram, such as the consumption triangle.
• Context: use the country, product and elasticity in the stem.
• Counter: say who gains, such as producers or the government.
• Judgement: state the condition that tips the balance, such as temporary protection or likely retaliation.

Case for and against protectionism

For	Against
Infant industries	Welfare loss and higher prices
Anti-dumping	Retaliation and trade wars
Strategic and security goods	Less competition, so X-inefficiency
Slows structural unemployment	Hurts exporters and users of inputs
Revenue	High cost per job; lobbying
Trade deficit and diversification	Infant industries that stay dependent
Optimal tariff for a large country	Regressive effect on poor households
Standards on safety and environment	Rules can restrict use

Judgement phrases: it depends on whether the industry is new or mature, the protection temporary, the country large, and partners likely to retaliate.

Case for and against free trade

For	Against
Comparative advantage raises world output	Structural unemployment; uneven losses
Economies of scale in bigger markets	Over-specialisation and exposure to price falls
Competition, efficiency, variety	Primary exporters may face weak terms of trade
Cheaper imports, access to technology	Environmental costs and low-wage competition
Gains exceed losses in total	Gains need mobile resources and compensation

International competitiveness

• Unit labour cost = wage cost per unit of output = wage ÷ productivity.
• Growth: (1 + wage growth) ÷ (1 + productivity growth) − 1.
• Index: ULC index = wage index ÷ productivity index × 100. Wages index 110 and productivity index 104 gives 105.8.

Policy	Strength	Weakness
Training and education	Lifts productivity	Slow, costly
Infrastructure and R&D	Lowers costs, raises quality	Long lags
Lower tax, deregulation	Encourages investment	Revenue loss, side effects
Competition policy, flexible labour	Cost pressure	Inequality, insecurity
Subsidies	Quick	Opportunity cost, retaliation

Must-know distinctions

• Transfer (revenue, producer gain) versus deadweight loss (two triangles).
• Quota rent versus tariff revenue.
• Specific versus ad valorem.
• Fixed price (tariff) versus fixed quantity (quota).
• Protecting an industry versus protecting a country’s welfare.
• Short-run measures versus supply-side policy.

Quick self-test

1. A specific tariff of 5 is put on a good with a price of 25. State the ad valorem equivalent.
2. An ad valorem tariff of 15% applies to a good priced at 40. Find the tariff and the price paid.
3. Using world price 10, Qd = 80 − 2P and Qs = 3P − 20, find imports under free trade.
4. With a tariff of 2 in question 3, find imports and revenue.
5. In question 4, state the net welfare loss.
6. A quota of 40 raises the price from 10 to 12. Find the quota rent.
7. A firm pays 18 an hour and produces 6 units an hour. Find the labour cost per unit.
8. Wages index 110, productivity index 104. Find the unit labour cost index.
9. Give one reason the net welfare loss from a subsidy is smaller than from a tariff, and one cost to set against it.
10. State two conditions that make the infant-industry case stronger.

Answers

1. 5 ÷ 25 = 20%.
2. Tariff = 0.15 × 40 = 6; price paid = 46.
3. Qd = 60, Qs = 10, imports = 50.
4. Qd = 56, Qs = 16, imports = 40; revenue = 2 × 40 = 80.
5. 0.5 × 2 × 6 + 0.5 × 2 × 4 = 10.
6. (12 − 10) × 40 = 80.
7. 18 ÷ 6 = 3.
8. 110 ÷ 104 × 100 = 105.8.
9. Consumers still pay the world price, so no consumption triangle; but taxpayers fund the cost.
10. The protection is temporary or declining, and the industry has a realistic route to reaching scale.

Where marks are usually lost

• Not recalculating both quantities after the price changes.
• Treating revenue as a deadweight loss.
• Saying a quota raises government revenue without saying who gets the rent.
• Giving a list of arguments with no judgement about context.
• Ignoring retaliation when evaluating protection.
• Forgetting that productivity is part of unit labour costs.
• Describing the gains from free trade without saying who loses.
• Using the same example for every country in the stem.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. Area of study: the global context; topic: Trade policies and negotiations (first part).