Why do governments restrict trade, and what are free trade agreements and trading blocs?
Free trade and free trade agreements (including the European Union and trading blocs), the methods of protection (tariffs, quotas and subsidies), and the arguments for and against protectionism.
An OCR J205 answer on free trade and protectionism: free trade agreements including the European Union and trading blocs, the methods of protection (tariffs, quotas and subsidies), and the arguments for and against protectionism.
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What this dot point is asking
OCR wants you to explain free trade and free trade agreements (including the European Union and other trading blocs), the methods of protection (tariffs, quotas and subsidies), and the arguments for and against protectionism. This sits alongside the case for international trade: if trade is beneficial, why do governments restrict it?
Free trade and free trade agreements
The European Union (EU) is the best known trading bloc: its members trade with each other without tariffs as part of a single market. Trading blocs give members larger markets, more competition and the gains from specialisation, though firms outside the bloc may find it harder to compete with members.
The methods of protection
Each method works by making imports less attractive or home production cheaper, shifting demand towards domestic firms and protecting them from foreign competition.
Arguments for protectionism
Governments give several reasons for protecting industries:
- Protecting infant industries. New industries may need shielding until they grow large enough to compete.
- Protecting jobs. Tariffs or quotas can save jobs in industries threatened by cheap imports.
- Preventing dumping. Stopping foreign firms selling below cost to drive out home producers.
- Strategic industries. Protecting industries vital for security (such as steel or food).
Arguments against protectionism
Most economists favour free trade because protection has serious drawbacks:
- Higher prices and less choice. Tariffs and quotas push up prices for consumers.
- Retaliation. Other countries may tax your exports in return, starting a trade war that harms everyone.
- Less competition. Protected firms have less incentive to be efficient or innovate.
- Lost gains from trade. Protection blocks specialisation, so total output is lower than under free trade.
Try this
Q1. Define a tariff. [2 marks]
- Cue. A tax placed on imported goods, which raises their price in the home market.
Q2. Explain one argument against a country using protectionism. [3 marks]
- Cue. Other countries may retaliate by taxing this country's exports, starting a trade war that reduces trade and harms exporters and consumers in both countries.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR J205/02 20204 marksExplain how a tariff on imported steel could protect a domestic steel industry.Show worked answer →
A 4 mark Explain question on a method of protection.
A tariff is a tax on imports. A tariff on imported steel raises its price in the home market, so the imported steel becomes more expensive than before relative to domestic steel.
Because imports are now dearer, buyers switch towards home-produced steel, so domestic steel firms sell more, can keep producing, and protect jobs in the industry. Markers reward defining a tariff as a tax on imports, the rise in the import price, and the switch to domestic producers that protects the home industry.
OCR J205/02 20226 marksDiscuss the arguments for and against a government using protectionism to support domestic industries.Show worked answer →
A 6 mark evaluative question.
For: protectionism can shield infant (new) industries until they grow, protect jobs in struggling industries, prevent dumping (foreign goods sold very cheaply to drive out home firms), and protect industries seen as strategically important.
Against: protection means higher prices and less choice for consumers, it can invite retaliation (other countries tax your exports back, starting a trade war), it reduces competition so domestic firms have less incentive to be efficient, and it goes against the gains from specialisation and free trade. Markers reward both sides and a judgement, for example that protection may be justified briefly for genuine infant industries or against dumping, but generally raises prices and risks retaliation, so free trade is usually better.
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Sources & how we know this
- OCR GCSE (9-1) Economics J205 specification — OCR (2017)