2.2.2 International trade
- Syllabus
- 2026
- Topic
- 2.2.2
- Level
- —
Learning objectives
2.2.2a Advantages and disadvantages of free tradeAdvantages and disadvantages of free trade, including:• lower prices and increased choice for consumers• lower input costs• wider markets for businesses• foreign competition harming domestic businesses• increasing unemployment.2.2.2b Reasons for protectionReasons for protection:• prevent dumping• protect employment• protecting infant industries• to gain tariff revenue• protect consumers from unsafe products• reducing current account deficits• retaliation.2.2.2c Methods of protectionMethods of protection:• tariffs• quotas• subsidies• advantages and disadvantages of each method of protection• supply and demand diagrams to show tariffs, quotas and subsidies.2.2.2d Modern trading blocsModern trading blocs:• impact of trading blocs on member and non-member countries• examples of trading blocs.2.2.2e Role of the World Trade Organization (WTO)Role of the World Trade Organization (WTO):• actions by the WTO.2.2.2f Trade patterns of developed and developing countriesTrade patterns of developed and developing countries.
Balance the gains from free trade against adjustment costs
Free trade means international exchange with few or no barriers such as tariffs and quotas.
| Channel | Advantage | Possible disadvantage |
|---|---|---|
| consumers | foreign competition and specialisation can lower prices and increase choice | a domestic supplier may close, reducing local access or employment |
| firms as buyers | imported raw materials and components can lower input costs | dependence on foreign inputs exposes firms to overseas disruption |
| firms as sellers | access to wider markets can raise sales and support economies of scale | efficient foreign rivals can take market share from domestic businesses |
| workers and the economy | expanding competitive/export industries can create jobs and income | contracting import-competing industries can increase structural unemployment |
Fewer barriers → imports become cheaper or more available → competition rises → consumers gain and firms face pressure to cut costs, improve quality or leave the market. At the same time, exporters may gain reciprocal access to larger markets.
Judge free trade by comparing widespread consumer and exporter gains with concentrated adjustment costs. The result depends on competitiveness, labour mobility, the importance of affected industries and whether trading partners also reduce barriers.
Free trade does not mean that every domestic firm loses or that unemployment must rise. Effects differ by industry, and workers may move into expanding sectors over time.
Explain seven reasons governments protect trade
Protectionism is government action that restricts imports or supports domestic producers against foreign competition.
| Reason | Protection mechanism |
|---|---|
| prevent dumping | dumping is exporting below production cost; restricting it prevents an artificially cheap rival from forcing domestic firms out |
| protect employment | lower import competition can preserve output and jobs in domestic industries |
| protect infant industries | temporary shelter gives new industries time to grow, learn and lower average cost |
| gain tariff revenue | a charge on imports transfers revenue to the government |
| protect consumers from unsafe products | controls can prevent goods that fail domestic safety standards entering the market |
| reduce a current-account deficit | fewer or dearer imports may reduce expenditure on imported goods and services |
| retaliation | a government may answer another country's barrier with its own to gain negotiating leverage |
Each reason has a condition: infant protection needs a credible route to competitiveness; import demand must respond for the current account to improve; safety rules must target genuine risk; retaliation may instead escalate a trade war.
Protecting an industry can preserve jobs in the short run but is not costless: consumers and firms using imported inputs may pay more, and sheltered producers may have less incentive to become efficient.
Compare tariffs, quotas and subsidies using market mechanisms
| Method | What the government does | Text-form diagram mechanism | Main advantage | Main disadvantage |
|---|---|---|---|---|
| tariff | taxes each imported unit | domestic supply including imports shifts left/up: equilibrium price rises and quantity falls | protects domestic output/jobs and raises government revenue | higher prices, less choice, inefficiency and possible retaliation |
| quota | sets a maximum import quantity | available supply becomes restricted/vertical at the limit: a tighter quota shifts supply left, raising price and lowering quantity | directly limits import volume and supports domestic firms | no automatic government revenue; licences/rents and shortages can arise |
| subsidy | pays domestic producers or lowers their costs | domestic supply shifts right/down: equilibrium price falls and quantity rises | raises domestic competitiveness without directly taxing consumers | opportunity cost to government and risk of overproduction/retaliation |
For every diagram: label price and quantity axes, D and the original S, add the changed supply or quota line, then mark both equilibria. State the causal direction: tariff/tighter quota → supply left → price up, quantity down; subsidy → supply right → price down, quantity up.
Choose by objective and side effect. A tariff supplies revenue but does not guarantee an import quantity; a quota fixes the limit but can create licence rents; a subsidy supports producers while using tax revenue rather than restricting imports directly.
A tariff is not drawn as a shift in demand. Protection changes the cost or availability of supply; demand moves only if a separate demand determinant changes.
Judge trading blocs from member and non-member perspectives
A trading bloc is a group of countries that reduces trade barriers between members, often while retaining some barriers against non-members. Examples used in the evidence include ASEAN, CPTPP, AfCFTA and RCEP.
| Perspective | Possible gain | Possible cost |
|---|---|---|
| member consumers | greater choice and lower prices from freer intra-bloc trade | a less efficient member supplier may replace a more efficient non-member supplier |
| member firms | larger market, scale, specialisation, investment and cheaper member inputs | stronger competition can close uncompetitive domestic firms and jobs |
| member governments/economies | closer integration may attract FDI and increase trade | reduced policy autonomy and overdependence on bloc demand or supply chains |
| non-member countries | may gain if the bloc's growth raises external demand | external tariffs or rules can divert trade away from their exporters |
Distinguish trade creation from trade diversion. Creation occurs when a lower-cost member replaces higher-cost domestic production; diversion occurs when a member replaces an even lower-cost non-member because the outsider still faces a barrier.
Membership does not guarantee that every member gains equally. Outcomes depend on competitiveness, the size of barrier reductions, adjustment costs and how much trade is diverted from efficient outsiders.
Trace how the WTO supports rules-based world trade
The World Trade Organization (WTO) supports a rules-based system for trade between countries.
| WTO action | How it supports trade |
|---|---|
| hosts negotiations | members can agree reductions in tariffs, quotas and other barriers |
| administers trade agreements and rules | common commitments make access conditions more predictable |
| provides dispute settlement | members can challenge alleged rule breaches through an agreed process rather than immediate retaliation |
| reviews and monitors trade policies | scrutiny increases transparency about members' measures |
Negotiation or enforcement of agreed rules → fewer arbitrary barriers and greater predictability → lower risk and transaction costs → firms are more willing to trade and invest internationally.
The WTO does not itself set every country's tariff or force all barriers to zero. Its influence works through agreements accepted by members, negotiation, monitoring and dispute procedures.
Compare developed and developing country trade patterns
A trade pattern describes the types of goods and services a country imports and exports, its trading partners and the relative importance of those flows.
| Typical pattern | Developed countries | Developing countries |
|---|---|---|
| exports | more diversified manufactured goods and services, often with higher value added | often a narrower range with a larger share of primary or agricultural products, though industrialising economies may export manufactures |
| imports | raw materials, agricultural products and also manufactured goods/services | capital goods, technology, manufactured consumer goods and inputs for development |
| vulnerability | diversification can reduce dependence on one commodity | commodity concentration can expose export revenue to volatile world prices and harvest/resource shocks |
Different sector structures, skills, capital, technology, infrastructure, natural resources and stages of industrialisation help explain the contrast. As an economy develops, its pattern can diversify and shift toward manufacturing and services.
The exact Question Bank has only one row for this objective, comparing a developing economy with the UK. Treat the pattern as a tendency to apply with country evidence, not a rule about every economy.
Developing countries do not export only primary goods, and developed countries do not produce every manufactured good. Country classification alone cannot determine an individual trade pattern.