DP Economics HL 4.2 Types of Trade Protection

DP Economics HL 4.2 Types of Trade Protection - Full notes

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DP Economics HL | 4.2 Types of Trade Protection

DP ECONOMICS · UNIT 4: THE GLOBAL ECONOMY

4.2

Types of Trade Protection

Full notes for HL · IB-style

Contents

1	What trade protection is
2	Tariffs
3	Import quotas
4	Production subsidies
5	Administrative barriers
6	Comparing the forms of protection
7	Calculating the effects of protection (HL only)
8	Free trade with a world price
9	Tariffs: diagram analysis
10	Tariff calculations
11	Import quotas
12	Production subsidies
13	Export subsidies
14	Administrative barriers
15	Welfare effects of protection
16	Trade wars
17	Effective protection
18	Mixed review: worked problems
19	Additional exam-style practice
20	Non-tariff barriers and technology
21	Choosing between protection methods
22	Protection in agriculture
23	Common misconceptions and links
24	Exam-style question with markscheme
25	Check your understanding
26	Summary and topic map

These are full teaching notes. Read each section in order, try the Think about it question before you read on, and do every Quick check before moving to the next section.

Before you start

Rate yourself on each statement now, and again after you've worked through the notes. Shade R (not yet), A (getting there) or G (confident).

I can…	R	A	G
define trade protection and name its main forms
draw and explain a tariff diagram, identifying effects on consumers, producers, government and welfare
draw and explain the effects of an import quota
draw and explain the effects of a production subsidy
explain administrative barriers
compare the effects of different forms of protection on stakeholders
calculate changes in consumer surplus, producer surplus, revenue and welfare loss from a tariff, quota or subsidy diagram

Section 7 (calculations) is Additional Higher Level content. Every other section is common to SL and HL.

Guiding questions

How do governments restrict imports, and what does each method cost? Who gains and who loses when a country puts a tariff on imported steel?

How this topic is examined

Tariff, quota and subsidy diagrams are examined in nearly every session. You must draw them accurately, label the world price and all quantities, and identify each stakeholder's gain or loss using areas.

Evaluation compares the forms of protection: which raises revenue, which is most costly to consumers, which is least visible. HL Paper 3 often asks you to calculate these areas from numbers on the diagram.

Command term	What the examiner wants
Define	the precise meaning, ideally in the IB wording, in one or two sentences
Draw / Sketch	a fully labelled diagram with every axis, curve, equilibrium and change labelled
Explain	a causal chain linked to economic theory, usually supported by a diagram
Analyse	break a situation into its parts and trace the effects of each
Evaluate / Discuss	weigh up arguments, question assumptions and reach a justified conclusion using real-world examples
Calculate	use the areas on the diagram with ½ × base × height for triangles

How to use these notes

Each section teaches one part of the syllabus in full. You'll see these boxes throughout; each has one job:

Box	What it's for
Think about it	a question to get you thinking before a section; the answer comes in the section
Key point	the one idea you must not forget
Common mistake	an error examiners see every year, and how to avoid it
In the real world	where the economics shows up outside the classroom
Try this	something quick you can do yourself to test the idea
Worked example	full solutions with IB-style marks (M1 method, A1 answer, R1 reasoning)
Quick check	short questions to test yourself at the end of each section

1 What trade protection is

Protection shields domestic producers from foreign competition.

Think about it

In 2018 the United States put a 25% tariff on imported steel. Who do you think gained, and who paid?

Trade protection is any government action that restricts imports or gives domestic producers an advantage over foreign producers. It moves a country away from free trade. The main forms are tariffs, import quotas, production subsidies for domestic firms and administrative barriers.

All forms of protection have a common pattern: domestic producers of the protected good gain, while domestic consumers and foreign producers lose, and the economy as a whole usually suffers a welfare loss because resources are diverted from more efficient uses.

Quick check

1. Define trade protection.

2. Name four forms of protection.

Answers: 1. government measures that restrict imports or favour domestic producers 2. tariffs, quotas, subsidies, administrative barriers

2 Tariffs

A tariff is a tax on imports.

A tariff (customs duty) is a tax on imported goods. A specific tariff is a fixed amount per unit; an ad valorem tariff is a percentage of the import's value.

Start from free trade at the world price Pw: domestic producers supply Q1, consumers buy Q2, and Q2 − Q1 is imported. A tariff raises the price of imports to Pw + tariff. The domestic price rises to this level.

Figure 1. A tariff raises the domestic price from Pw to Pw + tariff. Domestic output rises from Q1 to Q3, consumption falls from Q2 to Q4, and imports fall to Q4 − Q3. The shaded area is tariff revenue.

Walk through the effects. At the higher price, domestic producers increase output from Q1 to Q3: they sell more at a higher price, so producer surplus rises. Consumers pay more and buy less (Q4 instead of Q2), so consumer surplus falls. Imports fall from Q2 − Q1 to Q4 − Q3. The government collects tariff revenue: the tariff per unit times the new quantity of imports (the shaded rectangle).

There is a welfare loss made up of two triangles. The left triangle is a production inefficiency: domestic firms produce units between Q1 and Q3 at a higher cost than the world price, using resources that could be used better elsewhere. The right triangle is a consumption loss: consumers who valued the good above Pw no longer buy units between Q4 and Q2.

Foreign producers sell less, and their country's export revenue falls. They may retaliate with their own tariffs, which harms the exporters of the first country.

Stakeholder	Effect of a tariff
Domestic consumers	higher price, lower consumption; consumer surplus falls
Domestic producers	higher price and output; producer surplus rises; jobs protected
Government	gains tariff revenue
Foreign producers	lower exports and revenue
Society	welfare loss from inefficient production and lost consumption

In the real world

A study of the 2018 US tariffs on washing machines found that prices rose by about 12%, and that consumers paid roughly $1.5 billion a year extra, about $815 000 for each job created in the US industry.

Common mistake

Calculating tariff revenue on the original imports (Q2 − Q1). Revenue is collected only on imports after the tariff, Q4 − Q3.

Quick check

1. Define a tariff.

2. What happens to imports after a tariff?

3. Identify the two parts of the welfare loss.

Answers: 1. a tax on imports 2. they fall from Q2 − Q1 to Q4 − Q3 3. inefficient domestic production and lost consumption

3 Import quotas

A quota limits the quantity of imports directly.

An import quota is a legal limit on the quantity (or value) of a good that can be imported in a period. Because supply to the domestic market is restricted, the domestic price rises above the world price until the quantity demanded equals domestic supply plus the quota.

The effects on consumers, domestic producers and the welfare loss are similar to those of a tariff: the price rises, consumers lose, domestic producers gain, and there are two welfare loss triangles. The key difference is the area that would have been tariff revenue. With a quota, the government collects no revenue. Instead, the difference between the domestic price and the world price on the imported units goes to foreign exporters or importers who hold the quota licences, as extra profit (quota rent). If the government auctioned the licences, it could capture this area.

Figure 2. An import quota: the domestic price rises; the area between the domestic and world price on the quota quantity goes to licence holders, not the government.

Quick check

1. Define an import quota.

2. Who gains the 'revenue' area under a quota?

Answers: 1. a legal limit on the quantity of imports 2. foreign exporters or licence holders (unless licences are auctioned)

4 Production subsidies

Help domestic producers directly rather than restricting imports.

A production subsidy is a payment from the government to domestic producers, lowering their costs. The domestic supply curve shifts down (right) by the amount of the subsidy. Domestic producers can now supply more at the world price.

Because the subsidy does not affect the price consumers pay, the domestic price stays at Pw, and consumption stays at Q2. Domestic production rises from Q1 to Q3, and imports fall from Q2 − Q1 to Q2 − Q3. Producers receive Pw plus the subsidy per unit.

Consumers are not directly affected, which is why subsidies are often seen as a less harmful form of protection. But the government must pay the subsidy on every unit produced domestically, which has an opportunity cost and must be financed by taxes. There is a welfare loss from inefficient domestic production (resources used to produce units more expensively than the world price), but no consumption loss.

Figure 3. A production subsidy: domestic supply shifts down; domestic output rises from Q1 to Q3; the price and consumption are unchanged; imports fall to Q2 − Q3.

Quick check

1. How does a production subsidy affect the domestic price?

2. Who pays for a subsidy?

Answers: 1. it stays at the world price 2. the government (taxpayers)

5 Administrative barriers

Rules and red tape can block trade as effectively as taxes.

Administrative barriers are rules and procedures that make it harder or more costly to import, even though they are not formally tariffs or quotas. They include strict product standards (health, safety, environmental and technical standards), lengthy customs procedures and paperwork, licensing requirements, and 'buy local' rules in government procurement.

Some standards are genuine protection for consumers, such as food safety rules. Others are designed mainly to keep out foreign competition, which is harder to prove. Because they are less visible than tariffs, administrative barriers are sometimes called hidden protectionism. Their costs fall on consumers through higher prices and less choice, and they raise no revenue.

In the real world

The EU's restrictions on hormone-treated beef have been challenged by the US and Canada at the WTO as disguised protection, while the EU argues they protect consumer health.

6 Comparing the forms of protection

Each method protects producers, but costs fall in different places.

	Tariff	Quota	Production subsidy	Administrative barrier
Domestic price	rises	rises	unchanged	usually rises
Consumers	lose	lose	unaffected directly	lose
Domestic producers	gain	gain	gain	gain
Government	gains revenue	no revenue (unless auctioned)	pays the subsidy	no revenue
Foreign producers	lose	may gain quota rent on units sold	lose	lose
Welfare loss	production + consumption	production + consumption	production only	varies

Key point

All protection helps protected domestic producers at the expense of efficiency. Tariffs raise revenue; quotas hand the 'revenue' to licence holders; subsidies cost the government but leave consumers' price unchanged.

Quick check

1. Which form of protection leaves the consumer price unchanged?

2. Which raises government revenue?

Answers: 1. production subsidy 2. tariff

7 Calculating the effects of protection (HL only)

Use rectangles and triangles on the diagram.

HL only

This section is Additional Higher Level content. SL students do not need it.

WORKED EXAMPLE 1 Effects of a tariff

The world price is $10. Under free trade, domestic supply is 20 units and demand 80 units. A $4 tariff raises the domestic price to $14; domestic supply rises to 35 and demand falls to 65. Calculate (a) imports before and after, (b) tariff revenue, (c) the change in producer surplus, (d) the welfare loss.

Solution

(a) Before: 80 − 20 = 60; after: 65 − 35 = 30A1

(b) Revenue = 4 × 30 = $120A1

(d) Welfare loss = ½ × (35 − 20) × 4 + ½ × (80 − 65) × 4 = 30 + 30 = $60M1 A1

WORKED EXAMPLE 2 Fall in consumer surplus

Using the same data, calculate the fall in consumer surplus and check that it equals the sum of the other changes.

Solution

Fall in CS = ½ × (80 + 65) × 4 = $290M1 A1

Check: gain in PS (110) + revenue (120) + welfare loss (60) = $290R1

WORKED EXAMPLE 3 Cost of a subsidy

The world price is $10. A $3 per unit subsidy raises domestic output from 20 to 32 units; demand stays at 80. Calculate the cost of the subsidy and the change in imports.

Solution

Cost = 3 × 32 = $96A1

Imports fall from 60 to 80 − 32 = 48A1

Common mistake

Calculating the change in producer surplus as a rectangle. It is a trapezium between the two prices, from the vertical axis to the supply curve.

Quick check

1. Pw = $5, tariff $1; imports after the tariff = 40. Calculate tariff revenue.

2. Why does the fall in consumer surplus exceed the gain to producers and government?

Answers: 1. $40 2. the welfare loss triangles are lost to everyone

8 Free trade with a world price

The starting point.

In a small open economy, the world price (Pw) is below the domestic equilibrium price. Domestic consumers buy Qd at Pw; domestic producers supply Qs; the difference (Qd − Qs) is imported.

WORKED EXAMPLE 4 Imports (standard)

At a world price of $4, domestic demand is 900 units and domestic supply 300. Calculate imports.

Solution

900 − 300M1

= 600 unitsA1

9 Tariffs: diagram analysis

A tax on imports.

A tariff raises the domestic price from Pw to Pw + t. Domestic production rises, consumption falls, imports fall. The government earns revenue; consumers lose surplus; domestic producers gain; there is a welfare loss from inefficient production and reduced consumption.

Figure 4. The effects of a tariff.

WORKED EXAMPLE 5 Effects (exam level)

Explain the effects of a tariff on domestic producers and consumers.

Solution

Producers: higher price, higher output and revenueR1

Consumers: higher price, lower consumption, loss of surplusR1

10 Tariff calculations

Quantifying the effects.

Use the diagram values: imports = Qd − Qs; government revenue = tariff × imports after the tariff; changes in producer revenue = price × quantity before and after.

WORKED EXAMPLE 6 Revenue (exam level)

Pw = $4. A $1 tariff raises the price to $5; domestic demand falls to 800 and domestic supply rises to 450. Calculate imports and tariff revenue.

Solution

Imports = 800 − 450 = 350A1

Revenue = 1 × 350 = $350A1

WORKED EXAMPLE 7 Producer revenue (standard)

Calculate domestic producers' revenue before and after the tariff.

Solution

Before: 4 × 300 = $1200A1

After: 5 × 450 = $2250A1

11 Import quotas

Limiting quantity.

A quota sets a maximum quantity of imports. The domestic price rises as supply is restricted. Unlike a tariff, the government earns no revenue (unless quota licences are sold); foreign exporters holding quota rights may gain higher prices (quota rent).

Figure 5. Free trade at the world price: a quota restricts the imports shown here.

WORKED EXAMPLE 8 Quota vs tariff (standard)

Give one key difference between a quota and a tariff.

Solution

Quota: no government revenue; foreign firms may capture extra priceR1

12 Production subsidies

Supporting domestic firms.

A subsidy to domestic producers shifts domestic supply right, increasing domestic production and reducing imports, while the domestic price stays at the world price. Consumers are unaffected; taxpayers pay the cost.

Figure 6. Free trade at the world price: a production subsidy shifts domestic supply right, reducing imports.

WORKED EXAMPLE 9 Subsidy (exam level)

Compare the effects of a production subsidy and a tariff on consumers.

Solution

Subsidy: consumers still pay the world priceR1

Tariff: consumers pay a higher priceR1

13 Export subsidies

Encouraging exports.

Export subsidies pay domestic firms for each unit exported, making exports cheaper abroad. They distort trade, harm foreign producers and are restricted by WTO rules.

Quick check

1. Why do export subsidies cause trade disputes?

Answers: 1. they give unfair price advantages and harm foreign competitors

14 Administrative barriers

Hidden protection.

Administrative barriers include complex customs procedures, health and safety standards, product regulations and licensing that make importing harder. They may protect consumers legitimately or act as disguised protection.

Quick check

1. Give an example of an administrative barrier.

Answers: 1. strict product standards or lengthy customs checks

15 Welfare effects of protection

Who gains and who loses?

Stakeholder	Tariff	Quota	Subsidy
consumers	lose (higher price)	lose (higher price)	no change
domestic producers	gain	gain	gain
government	gains revenue	no revenue	pays cost
foreign producers	lose	may gain quota rent	lose
society	welfare loss	welfare loss	welfare loss

16 Trade wars

Retaliation.

When one country imposes protection, others may retaliate, leading to trade wars that reduce trade, raise prices and lower growth for all.

In the real world

The US–China trade war from 2018 involved tariffs on hundreds of billions of dollars of goods; studies found US consumers and firms bore most of the cost of US tariffs.

Quick check

1. Why are trade wars often harmful to both sides?

Answers: 1. retaliation reduces exports for both; higher prices for consumers

17 Effective protection

Protecting final goods.

Tariffs on finished goods but not on imported inputs give domestic producers greater protection than the nominal tariff suggests. Tariffs on inputs can harm domestic manufacturers who use them.

Quick check

1. How can tariffs on steel harm car manufacturers?

Answers: 1. raise input costs, making cars less competitive

18 Mixed review: worked problems

Bringing the ideas together.

WORKED EXAMPLE 10 Mixed problem (exam level)

Domestic demand Qd = 1000 − 100P; domestic supply Qs = 100P − 100. World price $3. (a) Calculate imports. (b) A $1 tariff is imposed. Calculate new imports and tariff revenue.

Solution

(a) Qd = 700, Qs = 200: imports 500A1

(b) P = 4: Qd = 600, Qs = 300: imports 300A1

Revenue = $300A1

19 Additional exam-style practice

Paper 1 and Paper 3.

WORKED EXAMPLE 11 Paper 1 part (a) (exam level)

Using a diagram, explain the effects of a tariff on a country's economy. [10]

Solution

Correct tariff diagram with world price and tariffA1 A1

Explain changes in imports, domestic production, consumptionR1 R1

Revenue and welfare lossR1

20 Non-tariff barriers and technology

Digital trade.

Modern barriers include data localization rules, restrictions on digital services and technology export controls. These shape trade in services and high-tech goods.

Quick check

1. Give an example of a modern non-tariff barrier.

Answers: 1. export controls on advanced semiconductors

21 Choosing between protection methods

Policy design.

Tariffs raise revenue but raise consumer prices; quotas give certainty about import volumes but no revenue; subsidies avoid higher consumer prices but cost taxpayers. The choice depends on the government's objectives.

Quick check

1. Which method gives the government revenue?

Answers: 1. tariffs

22 Protection in agriculture

A long tradition.

Many developed countries protect agriculture through subsidies and tariffs (EU Common Agricultural Policy, US farm subsidies), which can harm farmers in developing countries by depressing world prices.

Quick check

1. How can farm subsidies in rich countries harm poorer countries?

Answers: 1. surplus output is exported cheaply, lowering world prices

23 Common misconceptions and links

Students often think…	Actually…
a tariff is paid by foreign producers	consumers pay most of it through higher prices
quotas raise government revenue	the 'revenue' goes to licence holders unless licences are auctioned
subsidies raise the consumer price	consumers still pay the world price
all standards are protectionism	some genuinely protect consumers

How 4.2 connects to the rest of the course

Topic	Connection
4.1 Benefits of trade	free trade as the starting point
4.3 Arguments for and against protection	evaluation
2.7 Role of government	the same tax and subsidy logic
2.3 Equilibrium	consumer and producer surplus

24 Exam-style question with markscheme

Try this under exam conditions (about 15 minutes) before reading the markscheme.

Figure 7. A tariff on steel imports.

Text A. The government imposed a 25% tariff on imported steel to protect domestic steelmakers. Car manufacturers, which use steel, complained that their costs had risen.

(a) Define tariff. [2]

(b) Using a diagram, explain the effect of the steel tariff on domestic producers and consumers. [4]

(d) Explain why a production subsidy might be preferred to a tariff. [3]

(e) World price $500 per tonne; tariff $125. Imports fall from 40 m to 22 m tonnes. Calculate tariff revenue. [2]

Markscheme

Part	Answer	Marks
(a)	a tax	A1
	on imported goods	A1
(b)	diagram: price rises from Pw to Pw + tariff; Q1 to Q3; Q2 to Q4	A1
	domestic producers sell more at a higher price	R1
	consumers pay more and buy less	R1
	imports fall; welfare loss	R1
(c)	steel is an input	R1
	higher costs reduce their competitiveness	R1
(d)	consumer price unchanged	R1
	no consumption loss	R1
	but costs the government; financed by taxes	R1
(e)	125 × 22 m	M1
	= $2.75 bn	A1

Examiner's comments. In (b), many answers did not label the world price or quantities. In (c), the best answers recognized that steel is an input, so the tariff harms downstream industries.

25 Check your understanding

Section A: multiple choice

1. A tariff is

A. a tax on imports B. a limit on imports C. a payment to producers D. a ban on exports

2. A tariff causes domestic consumption to

A. rise B. stay the same C. fall D. double

3. Under a quota, the area between domestic and world price on imports goes to

A. the government B. licence holders C. domestic consumers D. nobody

4. A production subsidy

A. raises the consumer price B. reduces domestic output C. raises tariff revenue D. raises domestic output without raising the consumer price

5. Which raises government revenue?

A. a quota B. a tariff C. a subsidy D. an embargo

6. Strict product standards used to restrict imports are

A. administrative barriers B. tariffs C. subsidies D. quotas

7. The welfare loss from a tariff includes

A. tariff revenue B. extra producer surplus C. lower world prices D. inefficient domestic production

8. Who gains from a tariff?

A. domestic consumers B. foreign producers C. domestic producers of the protected good D. firms using the good as an input

9. Pw $10, tariff $2, imports after 50. Tariff revenue is

A. $20 B. $50 C. $500 D. $100

Section B: structured

10. Using a diagram, explain the effects of an import quota. [6]

11. Compare the effects of a tariff and a production subsidy on consumers and the government. [4]

12. Explain what is meant by administrative barriers, with an example. [3]

Answers

1. A 2. C 3. B 4. D 5. B 6. A 7. D 8. C 9. D

10. Supply limited; domestic price rises; consumers lose; domestic producers gain; quota rent to licence holders; welfare loss.

11. Tariff: consumers pay more, government gains revenue; subsidy: consumer price unchanged, government pays.

12. Rules or procedures that hinder imports, e.g. strict technical standards or slow customs.

26 Summary and topic map

Idea	Remember
Tariff	tax on imports; price rises; revenue; welfare loss
Quota	quantity limit; price rises; quota rent to licence holders
Production subsidy	supply shifts down; price unchanged; government pays
Administrative barriers	standards, red tape; hidden protection
Common pattern	domestic producers gain; consumers and foreign producers lose
HL	areas: revenue rectangle, PS trapezium, welfare loss triangles

Before the exam, make sure you…

•label Pw, Pw + tariff and all four quantities
•identify each stakeholder with an area
•explain who gets the quota rent
•compare forms of protection

Types of Trade Protection on one page

Cover this page with a sheet of paper and try to rebuild it from memory. Whatever you can't recall is what to revise next.

Figure 8. Topic map for Types of Trade Protection.

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