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4.2

Types of trade protection

Unit 4 · The global economy · SL and HL

Trade protection means government measures that restrict imports or help domestic producers against foreign competition. This page covers the four types in the syllabus — tariffs, quotas, subsidies and administrative barriers — with the diagrams for the first three. All use the same domestic market and a world price of $3, so you can compare their effects on consumers, producers, the government, foreign producers and society. HL students must calculate each of those effects from the diagram.

🎯What you need to be able to do

  • Draw and explain the effect of a tariff on price, production, consumption, expenditures, revenues and welfare.
  • Draw and explain the effect of a quota, and of a subsidy (including export subsidies), on the same variables.
  • Explain administrative barriers: standards and regulations.
  • Evaluate the effects on markets and stakeholders.
  • HL Calculate from a diagram the effects on stakeholders of tariffs, quotas and subsidies.

📚The economics

All three diagrams use domestic demand running from $12 and domestic supply from $1.50, with a world price of $3. Under free trade: domestic producers supply 30 units, consumers buy 90, and 60 are imported.

Tariffs

A tariff is a tax on imported goods. It raises the domestic price of imports to Pw + tariff. The US tariffs on steel (2018) and on many Chinese goods, and the broad US tariffs of 2025, are prominent examples; Indonesia applies tariffs on many consumer goods.

Domestic demand and supply with a world price of 3 dollars. A 1 dollar tariff raises the domestic price to 4 dollars: domestic supply rises from 30 to 50, domestic demand falls from 90 to 80, and imports fall from 60 to 30. The green rectangle of 1 dollar times 30 is tariff revenue of 30 dollars. Two red triangles are the welfare loss, 10 plus 5 dollars.
A $1 tariff: imports halve, the government earns $30, society loses $15.
Consumers
pay more ($3 → $4) and buy less (90 → 80); consumer surplus falls; less choice.
Domestic producers
sell more (30 → 50) at a higher price; revenue rises from $90 to $200; producer surplus rises; jobs protected.
Government
earns tariff revenue: $1 × 30 = $30.
Foreign producers
export less (60 → 30); their revenue falls from $180 to $90.
Society
welfare loss: the production triangle (inefficient domestic firms replace cheaper imports) and the consumption triangle (consumers priced out): ½ × 20 × 1 + ½ × 10 × 1 = $15.

Quotas

A quota is a legal limit on the quantity (or value) of a good that may be imported. Indonesia uses import quotas and licences for goods such as rice, sugar, beef and garlic.

The same market with an import quota of 30 units. Supply above the world price becomes domestic supply plus the quota, so the price rises to 4 dollars where domestic supply of 50 plus 30 imports meets demand of 80. The amber rectangle of 30 units times 1 dollar is quota rent earned by import-licence holders. The welfare loss is 15 dollars.
A quota of 30 raises the price to $4, like the tariff, but the government collects nothing.
  • The effects on consumers, domestic producers and society are like a tariff of equal size.
  • The difference: the area that was tariff revenue becomes quota rent (30 × $1 = $30), earned by whoever holds import licences (domestic importers or foreign exporters), not the government. Licences can invite corruption.
  • With a quota, further increases in demand raise the price rather than imports: the quantity is fixed.

Subsidies

A production subsidy is a payment to domestic producers per unit, which lowers their costs so they can compete with imports. An export subsidy is a payment per unit exported, which makes exports cheaper abroad.

A 1 dollar per-unit subsidy shifts domestic supply down. At the unchanged world price of 3 dollars, domestic output rises from 30 to 50 and imports fall from 60 to 40, while consumers still buy 90. The green rectangle of 1 dollar times 50 is the subsidy cost of 50 dollars; the red triangle is a welfare loss of 10 dollars.
A subsidy leaves the price unchanged: only domestic output and imports change.
  • Consumers: unaffected: price stays at Pw, consumption 90.
  • Domestic producers: output 30 → 50; they receive $4 per unit ($3 + $1); revenue $200.
  • Government: cost $1 × 50 = $50, with an opportunity cost (taxpayers pay).
  • Foreign producers: imports fall 60 → 40.
  • Society: welfare loss of ½ × 20 × 1 = $10 from inefficient domestic production. No consumption loss, which is why economists see subsidies as less distorting than tariffs, though costly to taxpayers.
  • Export subsidies can depress world prices and harm farmers in poorer countries; they are restricted under WTO rules.

Administrative barriers

Rules that are not taxes or quotas but make importing harder: product standards and regulations (safety, health, labelling, environmental and halal certification rules), complex customs procedures and paperwork, slow inspections, and local-content requirements. Many are legitimate (protecting health), but they can be used as disguised protection. The EU’s deforestation regulation, which requires proof that palm oil and other commodities are not linked to deforestation, is seen by Indonesia and Malaysia as a barrier to their exports; the EU sees it as an environmental standard.

✏️Worked example HL

Using the tariff diagram above (Pw = $3, tariff $1): calculate (a) the change in consumer expenditure, (b) the change in domestic producers’ revenue, (c) the change in foreign producers’ revenue, (d) government revenue, and (e) the welfare loss.
(a) Consumers: $3 × 90 = $270 before; $4 × 80 = $320 after: +$50
(b) Domestic producers: $3 × 30 = $90; $4 × 50 = $200: +$110
(c) Foreign producers: $3 × 60 = $180; $3 × 30 = $90: −$90

(d) Tariff revenue = $1 × (80 − 50) = $30.

(e) Welfare loss = ½ × (50 − 30) × 1 + ½ × (90 − 80) × 1 = 10 + 5 = $15.

Check it. Consumer spending after the tariff ($320) must equal domestic producers’ revenue ($200) + foreign producers’ revenue ($90) + tariff revenue ($30) = $320 ✓. Foreign producers still receive the world price.
Paying foreign producers the tariff-inclusive price. The tariff goes to the government; foreigners receive only Pw per unit. And the welfare loss is two triangles, not one.

📝Practise

Tagged questions are modelled on a real IB question from that session, with our own wording, numbers and context.

1. [2 marks, Paper 2 style] Define the term quota.
A government-imposed limit on the quantity (or value) of a good that may be imported into a country over a period.
2. HL [Paper 3 style] At a world price of $5, Qd = 400 and Qs = 150. A tariff of $2 raises the price to $7, where Qd = 340 and Qs = 210. Calculate tariff revenue, the change in import spending on foreign goods, and the welfare loss.
Imports: 250 → 130. Tariff revenue = 2 × 130 = $260. Payments to foreign producers: 5 × 250 = 1250 → 5 × 130 = 650: −$600. Welfare loss = ½ × 60 × 2 + ½ × 60 × 2 = $120.
3. [4 marks, Paper 2 style] Using an international trade diagram, explain how a tariff on imported rice raises revenue for the government.
The tariff raises the domestic price from Pw to Pw + t. Domestic supply extends, demand contracts, so imports shrink to Qd2 − Qs2. The government collects the tariff on each unit still imported: revenue = t × (Qd2 − Qs2), the rectangle between the two price lines over the new imports.
4. [15 marks, Paper 1 (b) — modelled on November 2023 SL Paper 1 Q3(b)] Using real-world examples, discuss the effects on different stakeholders of a tariff on imported steel.

Tariff diagram with all stakeholders. Winners: domestic producers and their workers, the government (revenue). Losers: consumers (higher prices, regressive if on staples), firms using the import as an input (steel tariffs raised costs for car makers), foreign producers, society (welfare loss).

Wider effects: retaliation (the US–China tariffs from 2018), less incentive to be efficient, possible job gains in the short run versus losses elsewhere.

Judgment: depends on elasticities, size of the tariff, whether it is temporary (infant industry) and whether it provokes retaliation; usually net costs to the imposing country.

5. [10 marks, Paper 1 (a) — modelled on November 2024 HL Paper 1 Q3(a)] Explain why abolishing a limit on imported cars could worsen a country’s current account balance.
Quota diagram: removing it lets imports expand to Qd − Qs at Pw; the domestic price falls, domestic output contracts and consumption rises. Spending on imports (a debit on the balance of trade in goods) rises. If exports do not rise to match, the balance of trade worsens, and the current account moves towards (or further into) deficit (4.6). Mention that lower input costs could eventually raise exports.
6. Compare the effects of a tariff and a production subsidy of the same size on consumers and on the government.
Consumers: a tariff raises the domestic price and reduces consumption; a subsidy leaves the price at Pw, so consumers are unaffected. Government: a tariff raises revenue (t × remaining imports); a subsidy costs money (s × domestic output). Both expand domestic output by the same amount. The subsidy has a smaller welfare loss (no consumption triangle) but must be financed by taxes elsewhere.

🔗Go deeper — other people’s work

These are external resources, not mine. If one stops working, tell me and everything above it on this page still stands.

  • WTO Tariff Download Facility and World Tariff Profiles — applied tariffs by country and product.
  • Peterson Institute for International Economics — analysis of the US–China tariffs and their costs.
  • Global Trade Alert — a database of new protectionist and liberalizing measures worldwide.