Head to www.savemyexams.

com for more awesome resources

DP IB Economics: HL Your notes

4.2 Types of Trade Protection

Contents
Tariffs
Quotas
Export Subsidies
Administrative Barriers

Page 1 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Tariffs
Your notes
An Introduction to Protectionism
Free trade aims to maximise global output through national specialisation
However, there are numerous reasons why countries would seek to limit free trade in order to protect
themselves from certain outcomes
This is called protectionism and may take the form of import tariffs, export subsidies, the use of quotas
or embargoes

An Explanation of Tariffs
The most commonly used forms of trade protectionism include tariffs, subsidies, quotas and
administrative barriers
A tariff is a tax on imported goods/services (customs duty)
The tax raises the selling price of the good/service within the country

The higher price allows more inefficient domestic firms to increase their production and market share
More efficient global competitors reduce their output due to the tariff
With increased domestic output, employment may increase

Page 2 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Your notes

A tariff raises the price of the world supply from PW to PW + Tariff. This reduces the quantity of imports
from Q1Q2 to Q3Q4
Diagram Analysis
World supply (SW) is considered to be infinite and this supply curve is included with the domestic
demand (DD) and supply (SD) curves

The pre-tariff market equilibrium is seen at PwQ2

Domestic firms supply up to Q1 at a price of Pw
Foreign firms supply the difference equal to Q1Q2 at a price of Pw (imports)

After the tariff is imposed, the world price increases from Pw to Pw+ tariff
The new market equilibrium is seen at Pw+tariff and Q4
Following the law of demand, the quantity demanded contracts from Q2 to Q4
Following the law of supply, the quantity supplied by domestic firms extends from Q1 to Q3
The level of imports is reduced from Q1Q2 to Q3Q4

Page 3 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

An Evaluation of Tariffs
The best way to consider the impact of a tariff on stakeholders is to explain it using a diagram Your notes

A tariff impacts domestic producers, consumers, foreign producers and the government
The Impact of Tariffs on Stakeholders

Stakeholder Explanation of Impact

Domestic Before the tariff domestic producers produced output equal to 0Q1 and
Producers their revenue was equal to Pw x Q1
After the tariff was imposed domestic producers produced 0Q3 and their
revenue was equal to Pw+tariff x Q3
Domestic producer surplus has increased by area 1

Foreign Before the tariff foreign producers sold output equal to Q1Q2 and
Producers their revenue was equal to Pw x (Q2 - Q1)

Page 4 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

After the tariff was imposed foreign producers sold output equal to Q3Q4 and
their revenue was equal to Pw x (Q4 -Q3)
Your notes
Foreign producer surplus has decreased by the areas underneath 2 and 4

Domestic Before the tariff domestic consumers consumed Q2 products at a price of Pw

Consumers
After the tariff domestic consumers consumed fewer products (Q4) at a
higher price of Pw+tariff
Domestic consumer surplus has decreased by areas 1,2 3 and 4
Some consumers have been priced out of the market (contraction of quantity
demanded from Q2 → Q4

The Government After the tariff is imposed the government receives tax revenue equal to
((Pw+tariff) - Pw) x (Q4-Q3)
This is equal to area 3

Downstream Other producers who rely on the imported product as a raw material in their
Producers own production process, now have to pay more for it as prices are higher
This increases their costs of production
They may have to reduce output which could impact unemployment levels and
government tax receipts in their industry

Society (welfare Less efficient domestic firms are now producing at the expense of more
loss) efficient foreign producers - there is a welfare loss equal to area 2
Consumers are frustrated with the higher prices and there is no longer
allocative efficiency - there is a welfare loss equal to area 4
The net welfare loss is equal to areas 2 and 4

Worked Example
The diagram below illustrates Ukraine's wheat market. The EU implemented a 20 % tariff on the price
for wheat which was selling at US$6.00 per kilogram. S is EU domestic supply, D is EU domestic
demand, Sw is world supply and St is world supply with the tariff.

Page 5 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Your notes

Answer:
Using information from the diagram
a) Calculate the consumer surplus prior to the imposition of the tariff [2]
Step 1 - Identify the market equilibrium without a tariff
(70m kg's, $6)
Step 2 - Calculate the area of the consumer surplus
It is split into two parts - a rectangle and a triangle

bx h
Ar e a of triangle = + ar e a of r ec tan gle = L x B
2

60 m x 12
Area of triangle = + area of rectangle = 12 x 10 m
2

Area of triangle = 360 m + area of rectangle = 120 m

Consumer surplus = $ 480 m

Page 6 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

[1 mark for any correct working and 1 mark for correct answer]

Your notes
b) Calculate the producer surplus prior to the imposition of the tariff [2]
Step 1 - Identify & calculate the area of the domestic producer surplus
Domestic producers produce up to 30m kg's at a price of $6

bxh
Producer surplus =
2

30 m x 6
Producer surplus =
2

Producer surplus = $ 90 m

[1 mark for any correct working and 1 mark for correct answer]

c) Calculate the consumer surplus after the imposition of the tariff [2]
Step 1 - Calculate the loss in consumer surplus as a result of the tariff
After the tariff, the price is$7.20 and the quantity 64m kg's
Consumer surplus lost = the trapezoid formed between Sw and St

a +b
Ar e a = x h
2

64 m + 70 m [1 mark]
Ar e a = x 1. 20
2

Area = 80 . 4m

Step 2 - Subtract the loss of consumer surplus from the original consumer surplus (answer for a)

New consumer surplus = $ 480 m − $ 80 . 4m

[1 mark]
New consumer surplus = $ 399 . 60 m

d) Calculate the producer surplus after the imposition of the tariff [2]

Page 7 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Step 1 - Identify & calculate the new area of the domestic producer surplus
After the tariff, domestic producers produce up to 36m kg's at a price of $7.20 Your notes
bxh
Producer surplus =
2

36 m x 7. 20
Producer surplus =
2

Producer surplus = $ 129 . 60 m

[1 mark for any correct working and 1 mark for correct answer]

e) Government revenue after the imposition of the tariff [2]

Step 1 - Identify the area of Government tax revenue
It is the rectangle formed between Sw and St - and the two quantity points (36m, 64m)

Step 2 - Calculate the area of the tax rectangle

Tax revenue = L x B

Tax revenue = ( 64 m kg's − 36 m kg's ) x 1. 20

Tax revenue = $ 33 . 6m

[1 mark for any correct working and 1 mark for correct answer]

f) The welfare loss caused by the imposition of the tariff [2]

Step 1 - Identify the two welfare loss triangles
The welfare loss is represented by the two small triangles either side of the government tax revenue
rectangle
Triangle to the right represents inefficiencies from domestic producers
Triangle to the left represents frustrated consumers who are priced out of the market

Step 2 - Calculate the area of each triangle and add them together

Page 8 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

bxh bxh
Welfare loss = +
2 2
Your notes
6m x 1. 2 6m x 1. 2
Welfare loss = +
2 2

Welfare loss = $ 7. 2m

[1 mark for any correct working and 1 mark for correct answer]
Remember to check the units on the graph (and use them!). Consumer and producer surplus and
welfare loss are always monetary values. Don't forget to round your answers to 2 decimal places

Examiner Tips and Tricks

Tariffs are one of the most frequently examined sub-topics in Paper 2. When evaluating their use,
consider how many jobs are protected (or created) in the industry that is targeted by the tariff as
opposed to jobs which may be lost in multiple downstream industries due to higher prices.
For example, a tariff on solar panel imports protects a few firms who manufacture solar panels.
However, the higher prices can cause a significant fall in the quantity demanded leading to the
possible loss of thousands of jobs for installation experts.

Page 9 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Quotas
Your notes
An Explanation of Quotas
A quota is a physical limit on imports e.g. in June 2022 the UK extended its quota on steel imports for a
further two years in order to protect employment in the domestic steel industry
This limit is usually set below the free market level of imports
As cheaper imports are limited, a quota raises the market price
As cheaper imports are limited a quota may create shortages
Some domestic firms benefit as they are able to supply more due to the lower level of imports
This may increase the level of employment for domestic firms

A quota on steel imports reduces the equilibrium quantity from Q4 → Q3 and raises the market price
from Pw → Pq
Diagram Analysis
The initial market equilibrium is at PwQ4

Page 10 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Domestic firms supply up to Q1 and Q4-Q1 is imported

To support the domestic steel industry, the UK government limits the amount of imports by instituting Your notes
a quota
The domestic supply curve (Sd) shifts to the right by the size of the quota (Q2-Q1)
Where this curve crosses the domestic demand curve (Dd) it forms the new market equilibrium at
Pq Q 3
The quota has raised prices and reduced total output from Q4→Q3
Domestic producers supply up to Q1 PLUS Q3-Q2
Foreign producers supply Q2-Q1 (the quota)

Once governments announce the quota level, the market automatically prices in the reduced output
This means that each unit of output is sold at the quota price (Pq)
Both domestic producers and foreign producers receive a higher price for their steel

Examiner Tips and Tricks

One of the main reasons that the quota diagram is confusing is because it appears that domestic
producers supply up to Q1, then take a holiday while the imports flood in until Q2 is reached, after
which they continue to supply up until Q3. This is not how it works in reality.
1. The government announces the quota for the next 12 months
2. The market factors in the reduced supply and a new market price is established
3. Even while domestic firms are selling their products, importers continue to import the foreign
product for as long as there i any quota allowance left
4. The government keeps track of the level of imports and once the quota level is reached, they will
not allow any more imports of that product to enter the country

Worked Example
The diagram below illustrates United Kingdom's steel market. The UK implemented a quota on the
market for steel. SD is UK domestic supply, DD is UK domestic demand, Sw is world supply and
Squota is the world supply with the quota

Page 11 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Your notes

Answer:
Using information from the diagram
a) Calculate the change in consumer expenditure as a result of the imposition of the quota [2]
Step 1: Calculate the consumer expenditure before the quota
= Pworld x world Ddomestic
= £30 x 180
= £5,400
Step 2: Calculate the consumer expenditure after the quota
= Pquota x Quota demand
= £52 x 140
= £7,280
Step 3: Calculate the difference between the two figures
£7,280 - £5,400 = £1,880
Consumer expenditure has increased by £1,880 as a result of the quota

Page 12 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

[1 mark for any correct working and 1 mark for correct answer]

Your notes
b) Calculate the change in domestic producer revenue as a result of the imposition of the quota
[2]
Step 1: Calculate the domestic producer revenue before the quota
= Pworld x Sdomestic
= £30 x 60
= £1,800
Step 2: Calculate the domestic producer revenue after the quota
= £52 x 110 (60 + 50 units)
= £5,720
Step 3: Calculate the difference between the two figures
£5,720 - £1,800 = £3,920
Domestic producer revenue has increased by £3,920 as a result of the quota
[1 mark for any correct working and 1 mark for correct answer]

c) Calculate the change to foreign producer revenue as a result of the imposition of the quota [2]
Step 1: Calculate the foreign producer revenue before the quota
= Pworld x Worldsupply
= £30 x 120
= £3,600

Step 2: Calculate the foreign producer revenue after the quota

= £52 x 30
= £1,560

Step 3: Calculate the difference between the two figures

£3,600 - £1,560 = £2,040

Page 13 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Foreign producer revenue has decreased by £2.040 as a result of the quota

[1 mark for any correct working and 1 mark for correct answer] Your notes

Remember to check the units on the graph (and use them!).

An Evaluation of Quotas
Quotas can be beneficial in that they are a less confrontational method of protectionism than tariffs
as there is less of a penalty for trading partners

The Impact of Quotas on Stakeholders

Stakeholder Explanation of Impact

Domestic Before the quota, the domestic revenue was area g

Producers
After the quota, domestic revenue is greater covering areas a+g+d+e+i

Foreign Before the quota, foreign producer revenue was area h+i+j
Producers
After the quota, foreign producer revenue is less covering areas b+c+h
Under the quota, they receive a higher price for all units sold at Pq but they sell
fewer products

Domestic Consumers pay a higher price (Pq) than previously (Pw) which reduces their
Consumers disposable income
Some consumers leave the market as they cannot afford the higher price
(contraction from Q4→Q3)

The Government They gain some favour with the industry they are protecting
This policy may create jobs in the industry being protected and reduce the
level of unemployment benefits required
The government does not receive tax revenue as they do when using a tariff

Downstream Other producers who rely on the imported product as a raw material in their
Producers own production process, now have to pay more for it as prices are higher

Page 14 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

This increases their costs of production

They may have to reduce output which could impact unemployment levels and Your notes
government tax receipts in their industry

Efficiency Global efficiency has worsened as less efficient domestic producers are
producing at the expense of more efficient foreign producers (area e+f)

Page 15 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Export Subsidies
Your notes
An Explanation of Export Subsidies
Both subsidies and export subsidies lower the cost of production for domestic firms
They can increase output and lower prices
With lower prices their goods/services are more competitive internationally
If firms are able to meet all of the domestic demand (Dd) then the excess supply may be exported
Otherwise, the level of imports will decrease
The increased output may result in increased domestic employment

Following the 2nd World War, the European Union subsidised food production and this has continued
ever since
Once food security had been established within Europe, countries were able to start exporting
the excess supply that subsidies generate

Page 16 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Your notes

European Union subsidies for truffle producers shift the domestic supply curve to the right which
decreases the level of truffle imports required from Q1Q3to Q2Q3

Diagram Analysis
The domestic market for truffles in the EU was initially in equilibrium at PwQ3
Domestic firms supplied up to Q1, while Q2-Q1 was imported into the EU

The implementation of the subsidy lowered firms costs of production, shifting the domestic supply
curve from Sd to Sd + subsidy
Domestic firms increase output and market share from Q1→Q2
Imports reduce from Q1Q3 → Q2Q3

An Evaluation of Subsidies
Page 17 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

An evaluation of the effectiveness of the use of subsidies as a form of protectionism is best done by
considering the impact on all of the relevant stakeholders
Your notes

The effect on different stakeholders can be considered by analysing each area of the international
subsidy diagram

The stakeholders affected are domestic and foreign producers, consumers, government, and society
(welfare)

An Evaluation of the use of Subsidies to Protect Domestic Firms

Stakeholder Explanation

Domestic Decreases costs of production

Producers
Increases output from Q1 → Q2
Revenue before subsidy was f+g
Revenue after subsidy is b+c+f+g+h

Page 18 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Increases international competitiveness

Your notes
Foreign Makes it harder for them to compete with domestic firms
Producers
Their exports reduce from Q3-Q1 → Q3-Q2
Revenue for foreign firms before the subsidy was h+i
Revenue after the subsidy is only i

Consumers Consumers already benefitted from the lower world price and receive no further
benefit

Government This costs the government the amount of the subsidy - area b+c
There is an opportunity cost associated with every subsidy provided

Society There is a welfare loss (area c) as more inefficient domestic producers are now
(Welfare) producing at the expense of more efficient global producers

Worked Example
The diagram below illustrates the EU truffle market. Due to domestic pressures, the EU implemented
a subsidy to truffle farmers. SD is EU domestic supply, DD is EU domestic demand, Sw is world
supply and Ssubsidy is domestic supply with the tariff.

Page 19 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Your notes

Answer:
Using information from the diagram
a) Calculate the cost of the subsidy to the government [2]
Step 1 - Identify the size of the subsidy and the quantity domestic producers supply with the
subsidy
Size of subsidy = €10 per unit
Domestic producer supply = 15m Kg's

Step 2 - Calculate the subsidy spend by government

Total subsidy = €10 x 15m Kg's
Total subsidy = €150m
[1 mark for any correct working and 1 mark for correct answer]

b) Calculate the change to the quantity of imports [2]

Step 1 - Identify & calculate the original level of imports
= (30m kg's - 5m kg's)

Page 20 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

= 25m kg's

Your notes
Step 2 - Identify & calculate the new level of imports
= (30m kg's - 15m kg's)
= 15m kg's

Step 3 - Calculate the difference

= (25m kg's - 15m kg's)
= 10m kg's
The level of truffle imports has fallen by 10m kg's
[1 mark for any correct working and 1 mark for correct answer]

c) Calculate the change to domestic producer revenue as a result of the subsidy [2]
Step 1 - Identify & calculate the original level of domestic producer revenue
= €10 x 5m kg's
= €50m

Step 2 - Identify & calculate the new level of domestic producer revenue
= €20 x 15m kg's
= €300m
Step 3 - Calculate the difference
= €300m - €50m
= €250m
Domestic producer revenue has increased by €250m
[1 mark for any correct working and 1 mark for correct answer]

Examiner Tips and Tricks

Page 21 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

When evaluating the use of subsidies in essay responses, it is worthwhile considering both the
length of time that the subsidy has been in place, along with the size of the subsidy.
Your notes
If the subsidy is large and has been in place for a long time, the industry is likely to be a global
monopoly such as the USA cotton industry. Their price is effectively the world price.
This is one reason why the WTO aims to limit export subsidies. They put small-scale farmers in
developing nations out of business, often decimating the industry and thus increasing
unemployment. Compared to fifty years ago, very few African countries now produce cotton. This is
entirely down to the size and longevity of the subsidies in the USA.

Page 22 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
 Head to www.savemyexams.com for more awesome resources

Administrative Barriers
Your notes
An Explanation of Administrative Barriers
There are many strategies that can be used to create barriers to trade using less obvious methods
than tariffs, quotas and subsidies
Health and safety regulations e.g. in 2017 the EU put a new health regulation in place regarding the
permitted level of aflotoxins in nuts. Aflotoxin levels are naturally higher in southern hemisphere
countries and it effectively blocked the import of southern hemisphere nuts
Product specifications e.g. Canada specified that all jam imported into Canada needed to be in a
certain size of the jar. Many countries do not usually manufacture jars in the required size
Environmental regulations e.g. in November 2021 new regulations were put in place in the EU and
the USA to limit the amount of imports of 'dirty steel' - predominantly this is steel produced using
coal-fired power stations which are prevalent in China
Product labelling can be expensive for firms to apply and may limit their desire to sell into certain
markets
Inefficient administrative systems e.g. many border crossings in Africa still require physical paper
copies to be submitted at each crossing with some companies claiming they have to provide in
excess of 10,000 documents for a single journey

Page 23 of 23
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers