Countries trade because it makes both sides richer, and governments restrict trade because some people at home lose. Protectionism (A Level Economics) is the second half of that sentence: tariffs, quotas, subsidies and the arguments for and against them. This page covers why countries trade, absolute and comparative advantage with a numerical example, the terms of trade, the types of protectionism, the tariff diagram with its revenue and deadweight-loss areas, trading blocs and the WTO, a worked example in pounds and three exam-style questions with the answers derived.
Spec map: where trade and protectionism sit on your board
| Board | Where it sits | Papers that test it |
|---|---|---|
| AQA 7136 | 4.2.6.1 globalisation (causes, characteristics, consequences, multinationals). 4.2.6.2 trade: “the model of comparative advantage”, the distinction from absolute advantage, that “specialisation and trade can increase total output”, the other benefits (economies of scale, competition), the costs of trade, changes in the UK’s pattern of trade, “tariffs, quotas and export subsidies”, the causes and consequences of protectionism, customs unions, the Single European Market and the WTO. The additional information asks for “numerical examples” of comparative advantage and a diagram of “the effects of a tariff on imports” | Paper 2, Paper 3 |
| Edexcel 9EC0 | 4.1.1 globalisation, 4.1.2 specialisation and trade (“absolute and comparative advantage (numerical and diagrammatic)”, its assumptions and limitations, advantages and disadvantages), 4.1.3 pattern of trade, 4.1.4 terms of trade (calculation, factors, impact), 4.1.5 trading blocs and the WTO (free trade areas, customs unions, common markets, monetary unions and the eurozone; costs and benefits; the role of the WTO; conflicts between the two), 4.1.6 restrictions on free trade (reasons; “tariffs, quotas, subsidies to domestic producers, non-tariff barriers”; impact on consumers, producers, governments, living standards and equality) | Paper 2, Paper 3 |
| OCR H460 | Component 02: 4.1 international trade (patterns over time; advantages and disadvantages to developed, emerging and developing countries), 4.3 globalisation (absolute and comparative advantage, “explain and calculate” the terms of trade, international competitiveness), 4.4 trade policies and negotiations (protectionism; integration through free trade areas, customs unions, monetary union and economic union; “with the aid of a diagram: the impact of tariffs and quotas on trade creation and trade diversion”; protectionism against free trade; the WTO) | Component 02, Component 03 |
| Cambridge International 9708 | AS 6.1 the reasons for trade (absolute against comparative advantage, the benefits of specialisation and free trade “including the trading possibility curve”, the terms of trade measured, changed and their impact, the limits of the theory) and 6.2 protectionism (meaning; “tariffs, import quotas, export subsidies, embargoes, excessive administrative burdens”; the arguments for and against). A Level 11.6 globalisation: free trade area, customs union, monetary union, full economic union; trade creation and trade diversion | Paper 1 and 2 (AS), Paper 3 and 4 (A Level) |
Section numbers are from the AQA specification (PDF 4.2.6.x, web 3.2.6.x), the Edexcel specification (Issue 2), the OCR specification (v3.0, June 2026) and the Cambridge syllabus for 2026 to 2028, all checked in September 2026. The currency side of trade is on the exchange rates and the balance of payments page.
What you must be able to do
- Define absolute and comparative advantage and work them out from an output table.
- Show, with numbers, that specialisation and trade raise total output.
- Calculate the terms of trade and say what a change in them means.
- Name the types of protectionism and the reasons governments use them.
- Draw the tariff diagram and identify the revenue and deadweight-loss areas.
- Compare a tariff with a quota and a subsidy.
- Distinguish a free trade area, a customs union, a single market and a monetary union.
- Evaluate protectionism against free trade for consumers, producers, workers and the government.
Why countries trade: absolute and comparative advantage
Absolute advantage is being better at making something: more output per worker. Comparative advantage is having the lower opportunity cost. A country can be better at everything and still gain from trade, because it cannot have the lower opportunity cost in everything. That is the whole theory, and the exam wants it in numbers.
Give the UK and France 100 units of labour each. The UK needs 5 units to make a car and 2 to grow a tonne of wheat. France needs 10 for a car and 2.5 for a tonne.
| Cars if all labour makes cars | Wheat if all labour grows wheat | Opportunity cost of a car | Opportunity cost of a tonne of wheat | |
|---|---|---|---|---|
| UK | 20 | 50 tonnes | 2.5 tonnes | 0.4 cars |
| France | 10 | 40 tonnes | 4 tonnes | 0.25 cars |
| Comparative advantage | UK (2.5 < 4) | France (0.25 < 0.4) |
The UK has the absolute advantage in both. But a car costs the UK 2.5 tonnes of wheat and costs France 4. So the UK should make cars. A tonne costs France a quarter of a car and costs the UK 0.4 of one. So France should grow wheat. Before trade, with each country splitting its labour in half, the world makes 15 cars and 45 tonnes. If France grows only wheat (40 tonnes) and the UK puts 80 units into cars and 20 into wheat (16 cars, 10 tonnes), the world makes 16 cars and 50 tonnes. More of both, from the same labour.
Trade needs a price, the terms of trade, and it must sit between the two opportunity costs: between 2.5 and 4 tonnes a car. At 3 tonnes a car, the UK sells 6 cars for 18 tonnes and consumes 10 cars and 28 tonnes (point C), up from 10 and 25 (point A). France consumes 6 cars and 22 tonnes (F), up from 5 and 20 (D). Both are outside their own PPF, which no country can reach alone. That is the gain from trade.
Key terms: The terms of trade are the price of exports relative to imports: index of export prices ÷ index of import prices × 100. If export prices rise 10% while import prices are flat, the terms of trade improve to 110: each export now buys more imports. An improvement is good for the balance of trade only if demand for exports is price inelastic, because exports have become dearer.
Common mistake: Reading absolute advantage as the reason to trade. In the table the UK is better at both goods. The examiner wants opportunity cost: “the UK has the comparative advantage in cars because it gives up 2.5 tonnes of wheat, fewer than France’s 4”. The theory’s limits are evaluation marks: constant opportunity costs, no transport costs, only two goods, and the gains not shared equally.
Protectionism: tariffs, quotas, subsidies and the rest
Protectionism is any policy that shields home producers from foreign competition. Governments use it to protect infant industries until they can compete, to protect jobs in declining industries, to stop dumping (selling below cost abroad), to protect strategic industries, to raise revenue, and to answer another country’s tariffs.
| Type | What it does | Effect on price and imports | Who wins | Who loses |
|---|---|---|---|---|
| Tariff | A tax on imports | Price rises, imports fall, home output rises | Home producers, the government (revenue) | Consumers (higher price, less choice), foreign exporters |
| Quota | A limit on the quantity imported | Price rises the same way, but the extra revenue goes to whoever holds the import licences, often the foreign exporters | Home producers, licence holders | Consumers, the government (no revenue) |
| Subsidy to home producers | A payment per unit made at home | Home supply shifts right, imports fall, the consumer price need not rise | Home producers, consumers | Taxpayers; foreign exporters |
| Non-tariff barriers | Rules, standards, paperwork, safety checks | Raise the cost of importing without a tax | Home producers | Consumers, small exporters who cannot afford the compliance |
| Embargo | A ban | Imports stop | Nobody economically; used for politics or safety | Consumers, exporters |
| Competitive depreciation | Holding the currency down to make exports cheap | Acts like a tariff on all imports and a subsidy on all exports | Exporters | Importers, consumers, and trading partners who retaliate |
Drawing the tariff diagram for A Level: revenue and deadweight loss
The tariff diagram is a demand and supply diagram for one good with a flat world supply line. Under free trade the country buys at the world price. Home firms supply what they can at that price and imports fill the gap. A tariff lifts the price consumers pay by the tariff. Home firms supply more, consumers buy less and imports shrink from both ends.
Read the areas. The rectangle between the two prices and the two import quantities is tariff revenue: £10 on each of 20 imported units, £200. The two triangles are the deadweight loss. The left one is the production distortion: home firms making units 10 to 20 at a cost above the world price. The right one is the consumption distortion: consumers who valued units 40 to 50 above the world price and no longer buy. Consumers lose the whole trapezium between the two prices under demand: £450. Producers gain £150, the government gains £200, and £100 vanishes.
Mark scheme: Label the world price P_w and the tariff price P_w + t. Show home supply and demand at each price on the quantity axis. Shade and name the revenue rectangle and the two deadweight-loss triangles. “Imports fall from Q4 − Q1 to Q3 − Q2” earns the analysis mark. A quota drawn on the same diagram gives the same price and the same triangles, but the rectangle goes to the licence holders, not the Treasury.
Free trade against protectionism: the arguments
For protection: infant industries need time to reach the scale that makes them competitive. Dumping destroys home firms that would otherwise survive. Strategic industries (food, steel, energy, defence) are worth a cost. Jobs in a declining industry can be lost more slowly. Tariffs raise revenue where income tax is hard to collect. And a tariff can be a bargaining chip.
Against: consumers pay more and choose from less. Home firms sheltered from competition stay inefficient. Other countries retaliate, so exporters lose too. Resources stay in industries where the country has no comparative advantage. The deadweight loss in figure 2 is real output that nobody gets. And infant industries rarely grow up while the protection lasts.
The evaluation is about who and when. Protection helps identifiable producers now and hurts diffuse consumers later. It helps a developing country building a manufacturing base more than a rich one defending a declining industry. And it works only if the rest of the world does not respond.
Trading blocs in economics: free trade areas, customs unions and the single market
Countries that drop barriers between themselves form a bloc. Each step removes more barriers and gives up more control.
| Bloc | What members do | What they give up | Example |
|---|---|---|---|
| Free trade area | Remove tariffs and quotas between members; each keeps its own tariffs on the outside world | Little: rules of origin are needed to stop goods entering through the lowest-tariff member | NAFTA, now the USMCA; EFTA |
| Customs union | Free trade inside plus one common external tariff | Their own trade policy: no separate deals with outsiders | The EU customs union (Turkey is inside the customs union, not the EU) |
| Single (common) market | A customs union plus free movement of goods, services, capital and labour, and shared rules | Control of regulation, and of who can come to work | The EU single market, which the UK left in January 2021 |
| Monetary union | A single market plus one currency and one central bank | Their own interest rate and exchange rate | The eurozone |
Two ideas the exam attaches to blocs. Trade creation: a member switches from a dear home producer to a cheaper member producer, so welfare rises. Trade diversion: a member switches from a cheaper outside producer to a dearer member producer because the outsider now faces the external tariff, so welfare falls. Whether a bloc is good depends on which is bigger.
The World Trade Organisation sits above the blocs. It runs the rules of world trade, hosts negotiations to cut barriers and settles disputes between members. Blocs can conflict with it, because a bloc discriminates against outsiders and the WTO’s principle is that every member gets the same treatment.
Worked example — the tariff in figure 2, from the world price to the deadweight loss
Home demand is P = 80 − Q and home supply is P = 20 + Q, with quantities in thousands of units. The world price is £30. The government puts a £10 tariff on imports.
- Free trade: at £30 home firms supply 30 − 20 = 10 and consumers buy 80 − 30 = 50. Imports are 50 − 10 = 40, four fifths of what is bought.
- With the tariff the price is 30 + 10 = £40. Home supply rises to 40 − 20 = 20. Demand falls to 80 − 40 = 40.
- Imports fall to 40 − 20 = 20. Half the imports have gone: ten replaced by home firms, ten simply not bought.
- Tariff revenue = tariff × imports after = 10 × 20 = £200 (thousand). The rectangle.
- Production deadweight loss = ½ × 10 × (20 − 10) = £50. Consumption deadweight loss = ½ × 10 × (50 − 40) = £50. Total £100. The two triangles.
- Consumers lose the trapezium under demand between £30 and £40: ½ × (50 + 40) × 10 = £450. Producers gain the trapezium above supply: ½ × (10 + 20) × 10 = £150.
- The accounting: 150 + 200 + 100 = 450. Everything consumers lose goes to producers, the government or nowhere.
- A quota of 20 instead: home demand minus home supply equals 20 when (80 − P) − (P − 20) = 20, so P = £40. Same price, same triangles. The £200 is now quota rent to the licence holders.
Exam-style questions
Q1: In the market of figure 2 the tariff is £5 instead of £10. Calculate the new price, imports, tariff revenue and deadweight loss. (6 marks)
A: Price = 30 + 5 = £35 (1). Home supply = 35 − 20 = 15 and demand = 80 − 35 = 45, so imports = 45 − 15 = 30 (2). Revenue = 5 × 30 = £150 (1). Deadweight loss = ½ × 5 × 5 + ½ × 5 × 5 = £25 (1). Halving the tariff cuts the deadweight loss to a quarter, because each triangle’s height and base both halve (1).
Q2: In country A a worker makes 8 TVs or 4 bikes a week. In country B a worker makes 6 TVs or 2 bikes. Which country has the absolute advantage in each good, and which should specialise in which? (4 marks)
A: A has the absolute advantage in both: 8 > 6 TVs and 4 > 2 bikes (1). Opportunity cost of a TV: A gives up 4 ÷ 8 = 0.5 bikes, B gives up 2 ÷ 6 = a third of a bike, so B has the comparative advantage in TVs (1). Opportunity cost of a bike: A gives up 2 TVs, B gives up 3, so A has the comparative advantage in bikes (1). A should make bikes and B should make TVs, and both gain at any terms of trade between 2 and 3 TVs a bike (1).
Q3: Evaluate the case for a government using tariffs to protect its manufacturing industry. (25 marks)
A: Two well-developed points for, two against, then a reasoned verdict.
- For: infant-industry protection lets firms reach the scale and experience that make them competitive, after which the tariff can go. Tariffs protect jobs and communities in the short run and stop dumping. Revenue is raised. Diagram: figure 2, showing home output rising from 10 to 20.
- Against: consumers pay more (£450 lost in the worked example) for a producer gain of £150 and revenue of £200; £100 is a pure loss. Sheltered firms stay inefficient. Trading partners retaliate against exports. Resources are held in an industry without comparative advantage, so the country is poorer than it could be.
- Evaluation: it depends on whether the industry really is an infant with a future, on the elasticities (inelastic demand means small quantity effects and high revenue), on the size of the country, on whether partners retaliate, and on the time period: short-run jobs against long-run growth.
- Judgement: a temporary, targeted tariff with a fixed end date can be justified for a genuine infant industry in a developing economy. A permanent tariff to protect a declining industry in a rich one costs consumers more than it saves and invites retaliation.
Examiner’s checklist: the mistakes that lose trade marks
- Absolute advantage as the reason to trade. It is opportunity cost. Calculate it for both goods.
- Terms of trade the wrong way up. Export prices over import prices, times 100.
- A tariff diagram with a sloping world supply. World supply is flat at the world price for a small country.
- Revenue on the wrong quantity. The rectangle sits over imports after the tariff, not all imports before it.
- One deadweight triangle. There are two: production and consumption.
- A quota with government revenue. The quota rent goes to licence holders unless the licences are auctioned.
- Bloc types muddled. A customs union has a common external tariff; a free trade area does not.
Key takeaways
- Comparative advantage is the lower opportunity cost. Specialising by it raises world output of both goods.
- Terms of trade between the two opportunity costs let both countries consume outside their PPF.
- Tariffs raise price, cut imports, raise revenue and cause two deadweight-loss triangles. Quotas do the same without the revenue.
- Protection helps identifiable producers now and costs diffuse consumers later.
- Free trade area, customs union, single market, monetary union: each step removes a barrier and gives up a policy.
- Trade creation is good; trade diversion is not. The WTO polices the rules between them.
FAQ
Q: What is comparative advantage at A Level Economics?
A: Having the lower opportunity cost of making something. A country with comparative advantage in cars gives up less wheat per car than its partner does. It is the reason trade benefits both sides even when one is better at everything, and the exam wants it shown with a numerical example like the table above.
Q: How do you draw the tariff diagram for A Level?
A: Home demand and supply, a flat world supply line at the world price, then a second flat line one tariff higher. Read home supply, demand and imports at each price, shade the revenue rectangle between the two prices over the remaining imports, and shade the two deadweight-loss triangles. Figure 2 is the version to copy.
Q: What are trading blocs in economics?
A: Groups of countries that remove trade barriers between themselves: free trade areas, customs unions, single markets and monetary unions, in rising order of integration. The exam wants the difference between them and the ideas of trade creation and trade diversion.
Q: What is the difference between a tariff and a quota?
A: A tariff is a tax on imports; a quota is a limit on their quantity. Set to give the same price, they have the same effect on consumers, producers and the deadweight loss. The difference is where the money goes: tariff revenue to the government, quota rent to whoever holds the import licences.
Q: What are the arguments for protectionism?
A: Infant industries, jobs in declining industries, stopping dumping, strategic industries, revenue and retaliation. The examiner then wants the costs: higher prices, inefficiency, retaliation and the deadweight loss, and a judgement about which industries and how long.
Q: Which questions come up on trade and protectionism?
A: A comparative-advantage or terms-of-trade calculation for 2 to 4 marks, “using a diagram, explain the effects of a tariff” for 6 to 10 marks, and a 15 or 25-mark evaluation of protectionism, trading blocs or globalisation. Paper detail is on the AQA, Edexcel and OCR pages; the tariff is on the A Level economics diagrams page, and the revision hub lists the rest of the macro topics.
Make the tariff diagram earn its marks
If comparative advantage still comes out as “who makes more”, or the tariff diagram has one triangle where the mark scheme wants two, one lesson fixes that. Board, year and exam date: send those and you will have a lesson time within 24 hours. The rate and lesson format sit on the A Level economics tutor page.
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