Free trade, comparative advantage, the costs and benefits of protectionism, globalisation, sustainable development and international competitiveness.

What this dot point is asking

WJEC wants you to explain why countries trade (comparative advantage and the gains from free trade), the methods, costs and benefits of protectionism, and the related ideas of globalisation, sustainable development and international competitiveness.

The answer

Comparative advantage and the gains from free trade

The insight, due to Ricardo, is that trade is driven by relative (opportunity) costs, not absolute costs. If each country specialises where its opportunity cost is lowest and trades at a ratio between the two countries' opportunity-cost ratios, total world output rises and both countries can consume beyond their own production possibility frontiers. Free trade therefore brings lower prices and wider choice for consumers, greater competition and efficiency for producers, economies of scale from larger markets, and faster growth. The assumptions (no transport costs, mobile resources, constant costs) limit the model, but the core gain from specialisation is robust.

Protectionism: methods, costs and benefits

The arguments for protection include protecting infant industries until they reach efficient scale, safeguarding jobs and strategic industries, preventing dumping (foreign goods sold below cost), correcting a persistent trade deficit, and raising government revenue. The arguments against are powerful: protection raises prices and reduces choice for consumers, forgoes the gains from comparative advantage, protects inefficiency and removes the spur of competition, and invites retaliation that can escalate into a trade war harming everyone. The consensus is that free trade generally raises welfare, so protection is justified, if at all, only in specific, temporary cases such as infant industries or genuine anti-dumping.

Globalisation, sustainability and competitiveness

Globalisation has driven rapid growth and falling poverty in emerging economies and given consumers cheaper goods, but it raises concerns about inequality, the loss of manufacturing in developed economies, and dependence on global supply chains. Sustainable development, meeting present needs without compromising future generations, is a growing constraint on trade-led growth, because rising output can damage the environment and deplete resources. International competitiveness matters because a country that loses competitiveness (through high relative costs, low productivity or an overvalued exchange rate) runs trade deficits and loses output and jobs, which is why supply-side policy and the exchange rate are so important.

Examples in context

Example 1. UK trade and competitiveness after leaving the EU. Leaving the EU single market and customs union raised non-tariff barriers (customs checks, regulatory divergence) on UK-EU trade, illustrating how protection and trade frictions reduce the gains from trade. The debate over new trade deals and UK international competitiveness, including the role of the exchange rate and productivity, is a live application of comparative advantage and the costs of trade barriers.

Example 2. Tariffs and the risk of retaliation. Episodes of rising tariffs between major economies, such as US-China trade tensions, show the dangers the theory predicts: tariffs raised prices for consumers, disrupted supply chains and prompted retaliation, harming exporters on both sides. They demonstrate why economists generally favour free trade and treat protection as a last resort with significant costs and the risk of escalation.

Try this

Q1. Define comparative advantage. [2 marks]

• Cue. The ability to produce a good at a lower opportunity cost than another country.

Q2. Explain one argument against the use of tariffs. [3 marks]

• Cue. For example tariffs raise prices and reduce choice for consumers, forgo the gains from comparative advantage, protect inefficient domestic firms, or provoke retaliation that harms exporters.