International Trade and Protectionism: Economics 9708 (Cambridge International AS & A Level)

A government wants to protect its domestic steel industry from cheaper imported steel. It announces that, from next year, foreign steel producers will only be allowed to sell a maximum of 50,000 tonnes of steel into the domestic market each year, however low a price they charge.

Which instrument of protectionism is the government using?

Verdania and Kestria are the only two countries that produce Textiles and Machinery. Each country has exactly one worker-day of labour available, and that worker-day can be used to produce Textiles or Machinery, but not both at once, as shown in Table 1.

Table 1: maximum output from one worker-day

(a) Using Table 1, state which country (if either) has an absolute advantage in producing Textiles, and which country (if either) has an absolute advantage in producing Machinery. Explain your answer. [2]

(b) Calculate the opportunity cost of producing one unit of Machinery, in terms of Textiles given up, in each country. Show your working. [3]

(c) Using your answer to part (b), determine which country has the comparative advantage in producing Machinery. Explain why total combined output of Textiles and Machinery can rise if Verdania specialises in Textiles and Kestria specialises in Machinery, and the two countries trade, even though Verdania has an absolute advantage in producing both goods. [4]

Meridia is a small economy that buys leather shoes on the world market at a fixed world price of $20 per pair; because Meridia's own demand and supply are small relative to the world market, its purchases do not change this world price. Table 1 shows Meridia's domestic demand and supply schedule for shoes, in thousands of pairs per year, at different prices.

Table 1: domestic demand and supply of shoes in Meridia

(a) Before any tariff is imposed, Meridia trades freely at the world price of $20 per pair. Using Table 1, state the domestic quantity demanded, the domestic quantity supplied, and hence the quantity of shoes imported at this price. [2]

(b) The government now imposes a specific tariff of $4 on every pair of imported shoes. Assuming the tariff is passed on to consumers in full, state the new domestic price of shoes, and use Table 1 to calculate the new quantity of shoes imported after the tariff. [3]

(c) Calculate the total tariff revenue collected by the government once the tariff is in place. [2]

(d) Explain one way this tariff affects domestic consumers of shoes, and one way it affects domestic producers of shoes. [4]

The government of a country wants to protect its domestic sugar industry from cheaper imported sugar. It is considering several different policy instruments.

(a) Distinguish between a tariff and an import quota as two different ways the government could restrict the quantity of sugar imported into the country. [4]

(b) Explain how an export subsidy paid to domestic sugar producers could help them compete against foreign rivals in overseas export markets. [3]

(c) The government also considers completely banning the import of sugar from one particular trading partner, following a political dispute between the two countries. Identify this type of trade barrier, and explain one way it differs from both a tariff and an import quota. [3]

A newly industrialising country has a small, young car manufacturing industry that currently struggles to compete against large, well-established foreign car manufacturers. The government is considering imposing a high tariff on imported cars to protect this domestic industry.

(a) Explain two arguments that could be used to justify the government protecting the domestic car industry from foreign competition in this way. [4]

(b) Discuss the extent to which protecting the domestic car industry with a high tariff on imported cars is likely to benefit the country's economy as a whole. [6]

Which of the following is most likely to be used as an argument in favour of protecting a domestic industry, rather than as an argument in favour of free trade?

A. Specialising according to comparative advantage allows total world output to increase.

B. Producing certain essential goods domestically, such as food or defence equipment, reduces a country's vulnerability if international trade were disrupted, for example during a conflict.

C. Free trade allows domestic consumers to access a wider variety of goods produced in other countries.

D. Removing tariffs and quotas allows domestic firms to access larger export markets and benefit from economies of scale.

Bregos and Talmira are the only two countries that produce Wheat and Furniture. Each country has exactly one worker-month of labour available, and that worker-month can be used to produce Wheat or Furniture, but not both at once, as shown in Table 1.

Table 1: maximum output from one worker-month

(a) Using Table 1, calculate the opportunity cost of producing one unit of Furniture, in terms of tonnes of Wheat given up, in each country. Show your working. [3]

(b) State, with a reason, which country has the comparative advantage in producing Furniture. [2]

(c) State the range of terms of trade, expressed as tonnes of Wheat exchanged per unit of Furniture, within which trade in Furniture for Wheat would benefit both countries. Explain your reasoning. [4]

Solvenia is a small economy that buys rice on the world market at a fixed world price of $10 per sack; because Solvenia's own demand and supply are small relative to the world market, its purchases do not change this world price. Table 1 shows Solvenia's domestic demand and supply schedule for rice, in thousands of sacks per year, at different prices.

Table 1: domestic demand and supply of rice in Solvenia

(a) At the free trade world price of $10 per sack, use Table 1 to state the quantity demanded, the quantity supplied, and hence the quantity of rice imported. [2]

(b) The government now imposes an import quota that limits rice imports to 20,000 sacks per year. Use Table 1 to identify the new domestic equilibrium price consistent with this quota, and state the resulting quantity demanded and quantity supplied at that price. [3]

(c) Compare how the price paid by consumers and the quantity supplied by domestic producers change as a result of the import quota, relative to the free trade situation in part (a). [3]

A country currently imposes tariffs on imported food, such as rice and wheat, to protect its domestic farmers from cheaper imports from abroad. A trade agreement now under discussion between this country and several trading partners would remove all of these tariffs on imported food.

(a) Explain two likely benefits to domestic consumers if the tariffs on imported food are removed. [4]

(b) Discuss the extent to which removing these tariffs would benefit the country's economy as a whole, taking into account the likely effects on domestic farmers. [6]

(a) State what is meant by the term comparative advantage. [2]

(b) Country M has an opportunity cost of producing one unit of Good J equal to 2 units of Good K. Country N has an opportunity cost of producing one unit of Good J equal to 5 units of Good K. State, with a reason, which country has the comparative advantage in producing Good J. [2]

(c) Explain one assumption made by the theory of comparative advantage that may limit how well it explains real-world trade patterns. [3]