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

This guide covers the first part of the “Trade policies and negotiations” topic in the “global context” area of study in Component 2, Macroeconomics, of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. It teaches methods of protectionism, tariff and quota diagrams, effectiveness, the cases for and against protection and free trade, and government policies for international competitiveness. Economic integration, the EU and the WTO are separate bullets and are not taught here. The specification does not label any of this content as AS or Higher. All countries, firms and figures below are invented. Work with the OCR Economics hub, the checklist, the revision notes, the practice questions and the free diagnostics.

What the specification asks you to do

Specification statement	Where it is taught below
Explain different methods of protectionism	Methods of protectionism
Explain the impact of methods of protectionism, including a diagrammatic explanation of tariffs and quotas	Tariff diagram, Quota diagram, Other methods
Evaluate the effectiveness of different methods of protectionism	Effectiveness
Evaluate the case for and against protectionism	The case for and against protectionism
Evaluate the case for and against free trade	The case for and against free trade
Evaluate the effectiveness of government policies to achieve international competitiveness	Policies for international competitiveness

Methods of protectionism

Protectionism means government action that gives home producers an advantage over foreign rivals. Main methods:

• Tariff: a tax on imports. A specific tariff is a fixed sum per unit; an ad valorem tariff is a percentage of the price.
• Quota: a cap on how many units (or how much value) of a good may enter the country.
• Subsidy to domestic producers: payments that lower their costs so they can compete with imports. Export subsidies do the same for sales abroad.
• Embargo: a complete prohibition on trading a particular good or with a particular country.
• Voluntary export restraint: an exporting country agrees to cap its own sales, usually under pressure.
• Administrative barriers: product standards, licensing, paperwork and customs delays that raise the cost of importing without any tax.
• Local content rules: a share of inputs, or of government contracts, must go to domestic firms.

A specific tariff converts to an ad valorem rate by dividing it by the price: a tariff of 2 on a good priced at 10 is 20%.

The tariff diagram

Use a small open market for kettles in Country A (illustrative). Price is in currency units, quantity in thousands.

• Domestic demand: Qd = 100 − 4P
• Domestic supply: Qs = 3P − 5
• World price: 10, and Country A is too small to change it. Foreign supply is perfectly elastic at that price.

Picture the diagram with price on the vertical axis and quantity on the horizontal. Demand falls from left to right, supply rises, and a flat line at the world price crosses both. Imports fill the gap between them.

Free trade at 10: Qd = 60, Qs = 25, so imports = 35.

A tariff of 2 (20%) lifts the domestic price to 12. A second horizontal line at 12 now applies.

• At 12: Qd = 100 − 48 = 52 and Qs = 36 − 5 = 31, so imports = 21.
• Tariff revenue = 2 × 21 = 42.

Label the areas between the two price lines:

Area	Meaning	Working	Value
a	Gain in producer surplus (domestic firms)	(25 + 31)/2 × 2	56
b	Triangle: extra output at higher domestic cost	½ × 2 × (31 − 25)	6
c	Rectangle: government tariff revenue	2 × 21	42
d	Triangle: consumption lost to the higher price	½ × 2 × (60 − 52)	8
a + b + c + d	Loss of consumer surplus	(60 + 52)/2 × 2	112

The check works: 56 + 6 + 42 + 8 = 112. Consumers lose 112. Producers gain 56 and the government gains 42, so the net loss to society is b + d = 14. Triangle b is production inefficiency: imports at 10 were cheaper than extra home output costing up to 12. Triangle d is allocative inefficiency: consumers value the lost units above their cost.

Jobs. Suppose each 1,000 units of output needs 10 workers. Output rises by 6 thousand units, which protects 60 jobs. The net loss of 14 thousand is about 233 per job, while consumers pay about 1,867 per job. The cost per job is a useful evaluation point.

A prohibitive tariff. Without trade, Country A would settle where 100 − 4P = 3P − 5, at a price of 15 and 40 thousand units. Any tariff of 5 or more removes imports.

Tariff	Domestic price	Imports	Revenue
0	10	35	0
2	12	21	42
4	14	7	28
5	15	0	0

Revenue peaks at a middle rate, then falls to zero. A tariff cannot both protect fully and raise much revenue.

A large country. If Country A buys so much that the world price falls to 9.5 after the tariff, the domestic price is 11.5 (9.5 + 2). Then Qd = 54, Qs = 29.5, imports = 24.5, revenue = 49. Foreign sellers carry 0.5 × 24.5 = 12.25 of that revenue. Net welfare is: consumer loss 85.5, producer gain 40.875, revenue 49, giving +4.375. A large importer can gain, which is the optimal tariff argument. The gain comes at the exporter’s expense and vanishes if foreign governments retaliate.

The quota diagram

A quota of 21 thousand creates the same result as the tariff of 2: the price rises to 12 and the same triangles appear. The difference is who gets rectangle c. Under a quota that rectangle is quota rent. It goes to whoever holds the import licences: foreign exporters, domestic importers, or the government if it auctions them.

Now suppose demand rises to Qd = 114 − 4P.

• Under free trade: Qd = 74, Qs = 25, imports = 49.
• Under the tariff of 2: the price stays at 12, Qd = 66, Qs = 31, imports rise to 35.
• Under the quota of 21: imports cannot rise, so the price adjusts. Solve 114 − 4P = 3P − 5 + 21, giving P = 14. Then Qd = 58, Qs = 37 and imports = 21. Quota rent = (14 − 10) × 21 = 84.

A tariff leaves the price fixed and lets quantity adjust. A quota fixes the quantity and lets the price adjust. That is why a quota gives domestic firms more protection when demand grows, and why consumers can lose more.

Other methods

Subsidy. Pay domestic producers 2 per unit. They now receive 12, so Qs = 31, while consumers still pay 10 and buy 60. Imports fall from 35 to 29. The cost to the government is 2 × 31 = 62, split into 56 of extra producer surplus and 6 of wasted resources (triangle b). There is no consumption distortion, so the net loss (6) is smaller than the tariff’s (14), but taxpayers fund the whole cost and it raises no revenue.

Administrative barriers act like a tariff but raise no revenue, and are harder to measure and challenge. An embargo is the extreme case: the home price rises to the no-trade level. Export subsidies help exporters but can trigger counter-measures.

Effectiveness

Protection is effective when it achieves its aim at an acceptable cost. The evidence for and against depends on these factors:

• Elasticities. If domestic demand is price-inelastic, a tariff raises the price paid with little fall in quantity. If domestic supply is inelastic, home firms cannot expand much, so few jobs are saved.
• Retaliation. If trading partners respond with tariffs, exporters in the protecting country lose sales, and the original gains can vanish. A trade war leaves both sides worse off.
• Size of the country. A large buyer can shift costs to foreign producers, as in the 9.5 example. A small one cannot.
• Aim. A tariff can raise revenue, shield an infant industry or cut a trade deficit, but not all at once.
• Time and design. Temporary, declining tariffs for an infant industry are likelier to work than permanent ones, which remove the pressure to cut costs and invite lobbying.
• Inputs. A tariff on imported components raises costs for domestic firms that use them, which can offset protection for the final good.

The case for and against protectionism

For:

1. Infant industries. New firms need time to reach scale before facing mature foreign rivals.
2. Dumping. Sales below cost can wipe out efficient local firms, so anti-dumping duties may be justified.
3. Strategic and security goods, such as food, energy and defence.
4. Structural unemployment. Slowing the decline of an industry gives time for retraining.
5. Revenue, especially where taxes are hard to collect.
6. Trade deficit, as a short-run correction, and diversification away from reliance on a few exports.
7. Terms of trade, through an optimal tariff in a large country.
8. Standards, such as safety and environmental rules for imports.

Against:

1. Welfare loss, shown by triangles b and d.
2. Higher prices, which hurt poorer households most.
3. Retaliation and trade wars.
4. Reduced competition, and so X-inefficiency and less innovation.
5. Damage to exporters and to firms using imported inputs.
6. High cost per job saved, and lobbying and corruption.
7. Protected infant industries that never grow up.

A strong answer judges which side wins in context. The case is stronger where the industry is genuinely new, the protection is temporary and the country is large. It is weaker where industries are mature, alternatives such as subsidies or training exist, and partners will retaliate.

The case for and against free trade

For:

• Specialisation by comparative advantage raises world output and lowers prices.
• Larger markets allow economies of scale.
• Competition forces efficiency, innovation and variety.
• Imports of capital goods and technology raise productivity.
• Consumers gain more than producers lose: moving from the tariff of 2 back to free trade gives a net gain of 14 in the example.

Against:

• Structural unemployment, because gains are spread widely but losses fall on identifiable workers and regions.
• Over-specialisation leaves a country exposed to price falls or supply shocks in one product.
• Unequal gains. Developing countries that export primary goods may face falling terms of trade.
• Environmental costs, from transport and from firms moving to places with weaker rules.
• Low-wage competition and dependence on foreign supply in a crisis.
• Gains assume mobile resources. In practice, adjustment takes time.

Free trade is usually defended on efficiency and criticised on distribution and risk. Good evaluation compares the size and timing of gains with who is compensated.

Policies for international competitiveness

International competitiveness is how well a country’s firms win sales against foreign rivals, abroad and at home, on price, quality and cost. Unit labour cost is labour cost per unit of output: wage cost divided by productivity. Wages up 4% with productivity up 1% gives 1.04 / 1.01 = 1.0297, so unit labour costs rise 2.97%. Wages up 3% with productivity up 3% leaves them unchanged. A worker paid 20 an hour who makes 5 units costs 4 per unit. Training that lifts output to 6.25 units cuts that to 3.2, a fall of 20%.

Policy	How it helps	Evaluation
Education and training	Raises productivity and lowers unit costs	Slow, costly, and benefits can leave with workers
Infrastructure and R&D	Cuts business costs, raises quality	Long lags, large spending, uncertain returns
Lower corporation tax, deregulation	Raises investment and profit	Revenue loss, possible social or environmental harm
Competition policy, flexible labour markets	Pushes firms to cut costs	May increase inequality or insecurity
Subsidies to exporters	Lower prices abroad	Opportunity cost, retaliation
Managing the exchange rate	Lowers export prices	Inflation risk; other units cover this

Supply-side policies work in the long run but take years to show results. Others act quickly but are easy for rivals to copy. A balanced answer weighs speed against durability.

Common errors

• Treating tariff revenue as a welfare loss. It is a transfer from consumers to the government. The loss is the two triangles.
• Saying a quota raises revenue without saying who receives the rent.
• Listing arguments without a judgement about when each applies.
• Describing unit labour costs as wages alone.

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).