Draw and analyse tariff, quota and subsidy diagrams, explain administrative barriers, evaluate each type of protection for consumers, producers and the government, and (HL) calculate their effects.
Each is in the Economics glossary, with every other term in the subject.
Rules, standards, regulations and procedures, such as product, health and safety standards or customs paperwork, that make it harder or costlier to import goods.
A complete ban on trade with a particular country, or on trade in a particular good, usually imposed for political or security reasons.
A government payment to domestic producers, per unit produced or exported, that lowers their costs so that they can compete with imports or sell more abroad.
A legal limit on the quantity or value of a good that may be imported into a country over a period of time.
The extra revenue earned by whoever holds the right to import under a quota, equal to the gap between the domestic price and the world price times the quantity imported.
A tax on imported goods, either a fixed amount per unit or a percentage of their value, which raises their price in the domestic market.
Government measures that restrict imports or favour domestic producers over foreign ones, such as tariffs, quotas, subsidies and administrative barriers.
An agreement in which an exporting country limits the quantity of a good it sends to an importing country, usually under pressure from the importing country.
Define trade protection and distinguish between tariffs, quotas, subsidies and administrative barriers.
Draw a tariff diagram and use it to explain the effects of a tariff on price, domestic production, consumption, imports, revenues and welfare.
Draw a quota diagram and explain how a quota affects the market and its stakeholders, including who receives the quota rent.
Draw diagrams for a production subsidy and an export subsidy and explain their effects on the market and its stakeholders.
Explain how standards and regulations can act as administrative barriers to trade.
Evaluate the effects of each type of protection on consumers, domestic and foreign producers, the government and society.
Calculate the effects of tariffs, quotas and subsidies on stakeholders from a diagram (HL).
Trade protection is any government measure that restricts imports or gives domestic producers an advantage over foreign ones. Even after decades of tariff cuts, governments still protect particular industries, and since 2018 protection has risen again in several large economies, most visibly in a series of US tariffs.
Protection is a form of intervention in international markets. Each type of protection changes prices and quantities in a predictable way, creates winners and losers, and usually reduces efficiency, so its use raises questions of equity (who pays and who benefits) and of interdependence, because one country’s barriers harm producers in others.
142 exam-style questions on this subtopic, written in the style of the IB papers. The first has its markscheme open. Counted on
Open economies are linked to the rest of the world through spending on exports and imports.
Using the circular flow of income model, explain how a fall in exports combined with a rise in spending on imports could reduce a country's national income.
10 marks
Answers may include:
Terminology: definitions of circular flow of income, foreign sector, exports (an injection), imports (a leakage), national income, interdependence.
Explanation: exports bring spending from foreign households and firms into domestic firms, so a fall in exports reduces injections into the flow; spending on imports goes to foreign producers rather than domestic firms, so a rise in imports increases leakages from the flow; with injections falling and leakages rising, total leakages exceed total injections; domestic firms receive less revenue, cut output and employment, and pay out less in factor incomes; household incomes and consumption fall further, so national income falls until leakages and injections are equal again.
Diagram: a circular flow diagram with the foreign sector, showing a smaller X injection and a larger M leakage; may show an AD/AS diagram with AD shifting left as net exports fall.
A maximum of [6] should be awarded if only exports or only imports are explained.
Markbands (best fit)
Level | Marks | Descriptor |
|---|---|---|
One of 41 short multiple-choice questions on 4.2. Pick an answer to see why it's right or wrong.
In a small importing country, which type of protection raises domestic output without raising the price consumers pay?
The official deck for this part of the syllabus.
What is trade protection?
Which term describes: government measures that restrict imports or favour domestic producers over foreign ones?
With a free account, Augment remembers where you stopped and what you have practiced.
Scope: Tariffs, quotas, subsidies and administrative barriers, each with its diagram, its effects on stakeholders and an evaluation, are studied at both SL and HL. HL adds calculating those effects from the diagrams: changes in price and quantities, revenues, consumer expenditure, government revenue or cost, and welfare loss.
Under free trade, a small country buys or sells a good at the world price. Protection raises the price that domestic consumers pay for imports, limits the quantity that can be imported, or lowers the costs of domestic producers, so that domestic firms sell more and foreign firms sell less than they would under free trade.
The four main types work in different ways, and that difference decides who pays for the protection.
Type | What it does | Who pays for it |
|---|---|---|
Tariff | A tax on imports that raises their price | Domestic consumers, through higher prices; the government gains revenue |
Quota | A legal limit on the quantity of imports | Domestic consumers, through higher prices; the holders of import rights gain |
Subsidy to domestic producers | A payment that lowers domestic firms’ costs | Taxpayers, through government spending |
Administrative barriers | Standards, regulations and procedures that make importing harder or costlier | Domestic consumers and foreign producers, through higher costs and less choice |
The analysis uses the free trade diagram for an importing country. Domestic demand (Ddom) and domestic supply (Sdom) would cross at the domestic price; the world price Pw lies below it, so under free trade the country imports. Each type of protection then changes this picture in its own way.
A tariff is a tax on imported goods. It may be a fixed amount per unit (a specific tariff, such as $2 per kilogram) or a percentage of the value of the import (an ad valorem tariff, such as 20%). Like any indirect tax, it is collected when the good enters the country, and it raises the price of the import in the domestic market.
Before the tariff, consumers can buy any quantity at the world price Pw. Domestic firms supply Q₁, consumers buy Q₄, and imports are Q₄ − Q₁. A tariff of t per unit raises the price of imports to Pw + t. Domestic firms can now also charge Pw + t, because consumers have no cheaper source. The effects follow from the higher price.
Price rises from Pw to Pw + t.
Domestic production rises from Q₁ to Q₂, as domestic firms move up their supply curve.
Consumption falls from Q₄ to Q₃, as consumers move up the demand curve.
Imports fall from Q₄ − Q₁ to Q₃ − Q₂.
The diagram shows the domestic demand and supply curves, the world price line Pw and a second horizontal line at Pw + t. The world supply of imports is still perfectly elastic, now at the higher price, so the domestic supply curve does not move. Imports are the horizontal distance between the curves at Pw + t, which is much smaller than at Pw.
The tariff diagram shows the effects on every stakeholder through the areas a, b, c and d.
Consumers pay a higher price and buy less. Their consumer surplus falls by the whole area a + b + c + d. Their total expenditure on the good changes from Pw × Q₄ to (Pw + t) × Q₃; whether it rises or falls depends on the price elasticity of demand, but consumers are clearly worse off.
Domestic producers sell more output (Q₂ instead of Q₁) at a higher price, so their revenue rises from Pw × Q₁ to (Pw + t) × Q₂. Their producer surplus rises by area a. Their workers also benefit, because more output needs more labour, which is why tariffs are often justified as a way to protect jobs.
The government collects the tariff on every unit imported, so tariff revenue is t × (Q₃ − Q₂), area c. This revenue can be large for countries that find other taxes hard to collect, which is one reason why low-income countries tend to rely more on tariffs.
Foreign producers sell fewer units (Q₃ − Q₂ instead of Q₄ − Q₁) and still receive only the world price for each, because the tariff goes to the government. Their revenue from this market falls from Pw × (Q₄ − Q₁) to Pw × (Q₃ − Q₂).
Area a is a transfer from consumers to domestic producers, and area c is a transfer from consumers to the government. Areas b and d are lost to everyone: they are the welfare loss of the tariff.
Triangle b is a loss from inefficient production. Domestic firms now produce units between Q₁ and Q₂ at a cost above the world price, using more resources than it would cost to import them.
Triangle d is a loss from reduced consumption. Consumers no longer buy units between Q₃ and Q₄ that they valued above the world price, the price at which they could be supplied.
The welfare loss shows that a tariff causes a misallocation of resources. Resources are drawn into an industry in which the country does not have a comparative advantage, and consumers are prevented from buying goods that they value at more than their cost.
Stakeholder | Effect of a tariff | Area on the diagram |
|---|---|---|
Consumers | Pay a higher price, buy less; consumer surplus falls | − (a + b + c + d) |
Domestic producers | Sell more at a higher price; revenue and producer surplus rise | + a |
Government | Gains tariff revenue | + c |
Foreign producers | Sell fewer units at the world price; revenue falls | Revenue falls from Pw × (Q₄ − Q₁) to Pw × (Q₃ − Q₂) |
Society | Welfare loss from inefficient production and lost consumption | − (b + d) |
YouTubeTariffs are simple to administer and raise revenue, and they give domestic producers clear and immediate protection. Those are the reasons governments use them. The costs, however, are large and are borne mostly by consumers, who are many and pay a little each, while the gains are concentrated on a few producers, who have strong reasons to lobby for protection.
The outcome depends on several factors.
Elasticities. The more elastic domestic demand and supply, the larger the changes in quantity and the larger the welfare loss triangles b and d for a given tariff.
The size of the country. The diagram assumes a small country that cannot change the world price. A very large importer may push the world price down by buying less, so foreign producers bear part of the tariff.
How firms respond. Foreign firms may cut prices to stay competitive, absorbing some of the tariff, or may move production into the protected country to avoid it. Domestic firms may use the protection to raise prices rather than to invest.
Retaliation. Other countries may respond with tariffs on the country’s exports, so its exporting firms lose markets. The risk of retaliation is one of the main arguments against protection.
Time. Protection that lasts for years removes the pressure of competition, so protected firms may never become efficient.
Tariffs also have to respect international rules. Members of the World Trade Organization agree maximum (“bound”) tariff rates for each product and may raise tariffs above them only in specific cases, such as temporary safeguards against a sudden surge of imports or duties against dumping and foreign subsidies. In October 2024, for example, the EU added anti-subsidy duties on battery electric vehicles imported from China after an investigation into Chinese state support for EV makers.
Sources: Wikipedia, Electric vehicle industry in China (accessed 2026).
Every effect of a tariff can be calculated from a diagram with numbered axes. Quantities are read off the curves at each price; revenues and expenditure are price times quantity; the changes in surplus and the welfare loss are areas of rectangles, triangles and trapezoids.
A quota is a legal limit on the quantity (or value) of a good that can be imported in a given period. The government usually issues import licences that give their holders the right to import part of the quota.
Before the quota, the country imports Q₄ − Q₁ at the world price. Suppose the quota allows only a smaller quantity of imports. Up to the world price, supply comes only from domestic firms. At the world price, foreign firms supply exactly the quota and no more. Above the world price, total supply is domestic supply plus the fixed quota, so the supply curve becomes Sdom + quota: a line parallel to Sdom, shifted to the right by the amount of the quota and starting at Pw.
At the world price, consumers now want more than domestic firms plus the quota can supply, so the price rises. It keeps rising until quantity demanded equals domestic supply plus the quota, at Pq, where Ddom crosses Sdom + quota.
Price rises from Pw to Pq.
Domestic production rises from Q₁ to Q₂.
Consumption falls from Q₄ to Q₃.
Imports fall from Q₄ − Q₁ to Q₃ − Q₂, which equals the quota.
These effects look exactly like those of a tariff that raises the price by the same amount. The difference lies in area c.
Under a tariff, the gap between the domestic price and the world price on each imported unit goes to the government as revenue. Under a quota, there is no tax, so this gap, (Pq − Pw) × the quota, goes to whoever is allowed to import the good: they buy it at Pw and sell it at Pq. This gain is the quota rent.
If the licences are given to domestic importers, they receive the quota rent.
If foreign exporters control the supply, they can raise their price to Pq and keep the rent themselves. Then the importing country loses area c as well as b and d.
If the government auctions the licences, importers bid up to the value of the rent, and the government receives area c, as with a tariff.
Stakeholder | Effect of a quota | Area on the diagram |
|---|---|---|
Consumers | Pay a higher price, buy less; consumer surplus falls | − (a + b + c + d) |
Domestic producers | Sell more at a higher price; revenue and producer surplus rise | + a |
Licence holders (importers or foreign exporters) | Buy at Pw, sell at Pq: receive the quota rent | + c |
Government | No revenue, unless licences are auctioned; costs of administering the licences | 0 (or + c if auctioned) |
Foreign producers | Sell only the quota; revenue falls unless they capture the quota rent | Revenue falls from Pw × (Q₄ − Q₁) to Pw × quota (or Pq × quota) |
Society | Welfare loss from inefficient production and lost consumption | − (b + d), or − (b + c + d) if foreigners get the rent |
YouTubeA quota fixes the quantity of imports, while a tariff fixes the price gap. This difference matters when conditions change. If domestic demand grows, a tariff lets imports rise at the same price, while a quota keeps imports fixed, so the whole increase in demand falls on domestic supply and the domestic price rises further. A quota therefore gives domestic producers more certain protection, which is why producers often prefer quotas, and it can be more harmful to consumers.
Quotas also invite rent-seeking: firms spend resources lobbying for licences, and the allocation of licences can be open to corruption. Quotas are generally banned under WTO rules, except in specific circumstances, so many countries have converted them into tariff-rate quotas, where a low tariff applies to imports up to a set quantity and a much higher tariff applies above it.
A voluntary export restraint (VER) is a quota imposed by the exporting country, usually because the importing country has threatened something worse. In May 1981 Japanese car makers agreed to limit exports of passenger cars to the United States to 1.68 million a year. The limit raised the price of Japanese cars in the US, and Japanese firms responded by building assembly plants in the US and by exporting larger, more expensive cars under new brands such as Lexus, Acura and Infiniti, earning more from each of the limited number of cars.
Because the exporters kept the quota rent, the restraint cost US consumers more than an equivalent tariff would have.
Sources: Wikipedia, Voluntary export restraint (accessed 2026).
An embargo is the most extreme quota: a quota of zero. It bans trade with a particular country, or in a particular good, and is usually used for political or security reasons rather than to protect domestic producers. Examples include sanctions banning imports of oil from countries under international sanctions and bans on exporting weapons or advanced technology.
A government can protect domestic producers without raising prices for consumers at all, by paying them a subsidy. A production subsidy is a payment per unit to domestic firms that lowers their costs, so they can compete with cheaper imports. An export subsidy is a payment for each unit exported, which helps domestic firms sell abroad at prices below their costs.
A subsidy of s per unit lowers domestic firms’ costs, so the domestic supply curve shifts down (to the right) by the amount of the subsidy, to Sdom + subsidy. Imports are still available at the world price, and consumers still pay Pw, because domestic firms cannot charge more than imports cost.
Price to consumers stays at Pw.
Domestic production rises from Q₁ to Q₂, where Sdom + subsidy meets Pw. Domestic firms receive Pw from consumers plus s from the government, so they effectively receive Pw + s per unit.
Consumption stays at Q₃.
Imports fall from Q₃ − Q₁ to Q₃ − Q₂.
Consumers are unaffected in this market: they pay the same price and buy the same quantity. As taxpayers, though, they pay for the subsidy.
Domestic producers sell more and receive Pw + s per unit, so their revenue rises from Pw × Q₁ to (Pw + s) × Q₂, and their producer surplus rises by area a.
The government pays s on every unit produced at home, so its cost is s × Q₂, area a + b. This spending has an opportunity cost: the money could have been spent on schools, health care or infrastructure, or left with taxpayers.
Foreign producers sell fewer units at the world price, so their revenue falls from Pw × (Q₃ − Q₁) to Pw × (Q₃ − Q₂).
Society suffers a welfare loss of triangle b: the extra domestic output between Q₁ and Q₂ costs more to produce (the Sdom curve) than it would cost to import (Pw).
A production subsidy creates a smaller welfare loss than a tariff that raises domestic output by the same amount, because it does not distort consumption: there is no triangle d. This is why many economists argue that, if an industry must be protected, a subsidy is less harmful than a tariff. Its drawbacks are that it costs the government money instead of raising it, and that it is less visible to voters, so it can last for decades.
Subsidies also harm producers in other countries, who lose sales at home and abroad as subsidised output rises. In 2002 Brazil challenged US subsidies to cotton farmers at the WTO. A WTO panel ruled against the United States in September 2004, a ruling upheld on appeal in March 2005, and after years of dispute the two countries settled in October 2014, with the United States making a one-off payment of US$300 million to the Brazilian Cotton Institute. Estimates by the International Cotton Advisory Committee suggest that such subsidies lower world cotton prices by about 10%, which reduces the incomes of cotton farmers in poorer exporting countries, including several in Africa.
Sources: Wikipedia, Brazil–United States cotton dispute (accessed 2026), citing WTO dispute DS267 and the International Cotton Advisory Committee.
An export subsidy is analysed with the diagram for a country that exports the good, so the world price Pw is above the domestic price. Exporters receive Pw from foreign buyers plus the subsidy s from the government, so they earn Pw + s on every unit sold abroad. They will not sell at home for less, so the domestic price also rises to Pw + s.
Domestic production rises from Q₃ to Q₄ and consumption falls from Q₂ to Q₁, so exports rise from Q₃ − Q₂ to Q₄ − Q₁.
Domestic consumers pay more and lose consumer surplus a + b.
Domestic producers gain producer surplus a + b + c.
The government pays s on every unit exported, a cost of s × (Q₄ − Q₁) = b + c + d.
Society loses b + d: consumers give up units they valued above the world price (b), and firms produce extra units at a cost above the world price (d).
Export subsidies are prohibited under WTO rules for manufactured goods and have been phased out for agricultural goods, because they push down world prices and take markets from producers in other countries. Importing countries can respond with countervailing duties, tariffs that offset the subsidy.
Not all protection takes the form of taxes, limits or payments. Governments set many rules that imported goods must meet, and these can also keep imports out. Such measures are called administrative barriers (non-tariff barriers).
Common forms include the following.
Product standards and technical regulations: requirements on size, composition, safety features or testing, such as rules on electrical safety or vehicle emissions.
Health and safety (sanitary) standards: rules on pesticide residues, food additives, hormones, animal diseases or hygiene in food production.
Environmental standards: rules on how goods are produced or disposed of, or on the emissions they cause.
Labelling and packaging rules: requirements for labels in the local language, country of origin, nutritional content.
Customs procedures and licensing: paperwork, inspections, permits and slow border clearance that add time and cost.
Rules of origin and public procurement rules: requirements that a share of a product is made locally, or that governments buy from domestic firms.
Many of these rules have legitimate purposes: protecting consumers, public health, animal welfare and the environment. They become a form of protection when they are stricter than needed for that purpose, when they apply differently to imports than to domestic goods, or when the procedures are deliberately slow and costly. The difficulty is that a regulation designed to protect domestic producers is rarely labelled as such, so it is hard to tell genuine standards from disguised protection.
Administrative barriers raise the cost of supplying the domestic market for foreign firms, which must redesign products, test them, relabel them or wait at the border. Their effect is similar to a tariff: the price of imports rises and fewer are sold, while domestic producers gain market share. Unlike a tariff, however, the government receives no revenue, and the extra costs are a pure waste of resources unless the standard achieves a real benefit, such as safer food. Some barriers, like a ban on a product that fails a standard, act like a quota of zero.
Administrative barriers affect small and low-income exporters most, because meeting many different national standards requires testing laboratories, certification and expertise that are expensive to acquire. This can keep low-income countries out of high-value markets even when their costs of production are low.
In 1989 the European Communities banned imports of meat from cattle treated with artificial growth hormones, which the United States had approved for use. The US argued that the ban was disguised protection. In 1998 the WTO found that the ban was not based on a proper scientific risk assessment, and in July 1999 the US was authorised to impose retaliatory tariffs of US$116.8 million a year on EU goods. In 2009 the two sides agreed a compromise in which the EU opened a new duty-free import quota for high-quality, grain-fed beef.
The dispute shows both sides of administrative barriers. The EU argued that it was protecting consumer health and responding to public concern; the exporters argued that the standard had no scientific basis and protected European farmers. Both claims contain some truth, which is why such barriers are so hard to evaluate.
Sources: Wikipedia, Beef hormone controversy (accessed 2026), citing WTO dispute DS26.
Strengths | Limitations |
|---|---|
Can protect consumers, health and the environment where markets fail (for example, information failure about food safety) | Easily used as disguised protection; hard to prove whether a standard is protectionist |
Common standards can reduce costs by making goods compatible across markets | Raise prices and reduce choice for consumers, with no government revenue |
May respond to genuine consumer preferences and values | Fall most heavily on small and low-income exporters that cannot afford compliance |
Allowed under WTO rules when based on science and applied equally | Can provoke disputes and retaliation, as in the hormone beef case |
A reasonable judgment is that standards are justified when they correct a real market failure and apply equally to domestic and imported goods, and that the best way to limit their protectionist use is through international agreement on common standards and mutual recognition of testing.
All four types raise domestic output and reduce imports, but they differ in who pays, who gains and how large the welfare loss is.
Effect | Tariff | Quota | Production subsidy | Administrative barrier |
|---|---|---|---|---|
Domestic price | Rises to Pw + t | Rises to Pq | Unchanged at Pw | Rises |
Domestic output | Rises | Rises | Rises | Rises |
Consumption | Falls | Falls | Unchanged | Falls |
Imports | Fall | Fall to the quota | Fall | Fall |
Government | Gains revenue | No revenue unless licences are sold | Pays the subsidy | No revenue; enforcement costs |
Welfare loss | b + d | b + d (plus c if foreigners take the rent) | b only | Lost trade plus compliance costs |
Who pays | Consumers | Consumers | Taxpayers | Consumers and foreign firms |
The comparison shows why most economists see protection as costly: every type creates a welfare loss and shifts income from consumers or taxpayers to protected producers. Whether the cost is worth paying depends on the aim. Protection can preserve jobs in particular towns, keep strategic industries alive, or help a new industry grow, and these arguments are weighed against the costs in the debate on whether trade should be protected at all.
In January 2018 the United States announced a temporary “safeguard” tariff on imported large residential washing machines, following a petition by the Michigan-based manufacturer Whirlpool, which argued that rising imports were seriously harming domestic producers. The tariff, which took effect in February 2018, was 20% on the first 1.2 million imported washers each year and 50% on any imports above that, falling to 18% and 45% in the second year and 16% and 40% in the third. It was later extended, and expired in February 2023.
This combination of a low tariff up to a quantity and a high tariff above it is a tariff-rate quota, so the case combines both of the main types of protection. Earlier anti-dumping duties on washers from particular countries had simply moved production to other countries, so the 2018 safeguard applied to imports from almost every source.
A detailed study by Aaron Flaaen, Ali Hortaçsu and Felix Tintelnot estimated the effects. Washer prices rose by about 12%, or about $86 per unit, ending a long decline. Prices of clothes dryers, which were not subject to the tariff, rose by about $92 per unit, because consumers usually buy a washer and dryer together and manufacturers raised the prices of both. Domestic producers, including Whirlpool, also raised their prices.
The researchers estimated that the tariffs raised consumer prices by about $1.5 billion a year, while bringing in only $82 million of tariff revenue. The tariffs encouraged foreign companies to move more of their washer production into US factories and created about 1,800 jobs, at a cost to consumers of about $817,000 for each job. The consumer price index for laundry equipment rose from 86.3 in March 2018 to 102.0 in June 2018.
The tariff diagram predicts each of these effects. The domestic price rose towards Pw + t; domestic producers expanded output and raised their prices, gaining producer surplus (area a); imports fell; and the government collected tariff revenue (area c) on the remaining imports. Consumers lost the largest amount, a + b + c + d, and the gap between the $1.5 billion that consumers paid and the $82 million the government collected shows that most of the consumer loss went to producers or was lost as welfare loss.
The case also shows three effects that the simple diagram leaves out.
Prices of related goods. The tariff raised prices in a market it did not touch directly, because dryers are complements to washers. The cost to consumers was larger than the diagram for the washer market alone suggests.
More than full pass-through. The researchers’ estimates imply that consumer prices rose by between 110% and 230% of the tariff, so consumers paid more than the tariff itself. Domestic firms used the protection to raise their own prices, which the small-country diagram, with its fixed world price, does not show.
Tariff-jumping investment. Foreign producers, including Samsung, shifted some production into US factories, so some of the jobs created were in foreign-owned plants. Earlier duties on washers from particular countries had simply moved production elsewhere: after duties on South Korean washers, production moved to China, and after duties on Chinese washers in 2016, imports surged from Thailand and Vietnam.
The safeguard partly achieved its stated aim, because it raised domestic output and created jobs, but at a very high cost. Each job cost consumers far more than a factory worker earns in a year, and the burden fell on every household that bought a washer or dryer, including low-income households for whom these are large purchases. The tariff revenue was too small to compensate them.
A wider view adds the risk of retaliation by trading partners, and the fact that the protection was temporary: once it expired in 2023, imports could compete again. The case suggests that tariffs can protect a domestic industry in the short run, but that they do so at a high cost per job, much of which is hidden in higher prices, and that firms respond in ways that make the effects larger and harder to target than a simple diagram suggests.
Sources: Flaaen, Hortaçsu and Tintelnot, “The Production Relocation and Price Effects of US Trade Policy: The Case of Washing Machines”, NBER Working Paper 25767 (2019) and American Economic Review 110(7), 2020; Tankersley, The New York Times, 22 April 2019; Wikipedia, Tariffs in the first Trump administration (accessed 2026); US Bureau of Labor Statistics (2026).
The tariff, quota and subsidy diagrams, with their effects on stakeholders, are SL content and appear often on Paper 1 and Paper 2. Calculating the effects from a numbered diagram is HL content and is a regular Paper 3 item.
Paper 2 items often combine a definition, a diagram linked to the text and a short explanation.
The final part of a Paper 2 question is an extended evaluation that must use the text and data provided.
Trade protection consists of measures that restrict imports or favour domestic producers: tariffs, quotas, subsidies and administrative barriers.
A tariff raises the price to Pw + t: domestic output rises, consumption and imports fall; producers gain a, the government gains c, consumers lose a + b + c + d, and b + d is the welfare loss.
A quota limits imports and raises the price to Pq; its effects resemble a tariff, but area c is a quota rent for licence holders rather than government revenue.
A production subsidy shifts domestic supply down; the price stays at Pw, domestic output rises and imports fall; the government pays a + b and the welfare loss is b only.
An export subsidy raises the domestic price to Pw + s, increases exports and costs the government b + c + d, with a welfare loss of b + d.
Administrative barriers (standards, regulations, procedures) can serve real purposes but are often used as disguised protection.
Every type of protection creates a welfare loss and transfers income from consumers or taxpayers to protected producers.
HL: the effects on each stakeholder can be calculated from a numbered diagram as prices × quantities and areas of triangles and rectangles.
I can define trade protection and distinguish tariffs, quotas, subsidies and administrative barriers.
I can draw a fully labelled tariff diagram and explain its effects on every stakeholder, including the welfare loss.
I can draw a quota diagram, build the Sdom + quota curve and explain who receives the quota rent.
I can draw and explain diagrams for a production subsidy and an export subsidy.
I can explain how standards and regulations can act as barriers to trade, with an example.
I can evaluate each type of protection and compare them, using a real example such as the US washer tariff.
I can calculate the effects of a tariff, a quota and a subsidy on stakeholders from a diagram (HL).
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The work does not reach a standard described by the descriptors below. |
1 | 1–2 | Little understanding of the specific demands of the question. Relevant economic theory is stated but not relevant. Economic terms are stated but not relevant. |
2 | 3–4 | Some understanding of the specific demands of the question. Relevant economic theory is described. Some relevant economic terms are included. |
3 | 5–6 | The specific demands of the question are understood but only partially addressed. Relevant economic theory is partly explained. Some relevant terms are used appropriately. Where appropriate, relevant diagram(s) are included. |
4 | 7–8 | The specific demands of the question are understood and addressed. Relevant economic theory is explained. Relevant terms are used mostly appropriately. Where appropriate, relevant diagram(s) are included and explained. |
5 | 9–10 | The specific demands of the question are understood and addressed. Relevant economic theory is fully explained. Relevant terms are used appropriately throughout. Where appropriate, relevant diagram(s) are included and fully explained. |
Using real-world examples, discuss the view that trade protection is necessary to protect domestic jobs.
15 marks
Answers may include:
Terminology: trade protection, tariff, quota, subsidy, free trade, structural unemployment, retaliation, efficiency, comparative advantage.
Explanation: arguments for: tariffs and quotas raise the price of imports, so domestic producers increase output and employment; protection may preserve jobs in declining or strategic industries and give infant industries time to become competitive; it may shield workers from sudden import surges. Arguments against: protection raises prices for consumers and for firms using imported inputs, which may cost jobs elsewhere; trading partners may retaliate, reducing export jobs; protected firms lack incentives to become efficient; resources are misallocated away from comparative advantage.
Diagram(s): tariff diagram showing the rise in domestic production from Q1 to Q2 and the fall in imports, with the welfare loss; may show a circular flow diagram with lower imports.
Synthesis/evaluation: the jobs saved are often visible while jobs lost elsewhere are dispersed; the cost per job saved may be very high; alternative policies such as retraining, adjustment assistance and supply-side measures may protect workers more efficiently; short-run versus long-run effects; the word 'necessary'; a reasoned conclusion.
Examples: the US 25 % tariffs on steel imports from 2018, which supported some steel jobs but raised costs for steel-using industries and led to retaliatory tariffs by trading partners; US tariffs on Chinese tyres in 2009 and the high estimated cost per job saved; Nigeria's restrictions on imports of rice and their effect on domestic producers and prices.
N.B. Terminology, theory, diagrams and examples given in part (a) and referred to in part (b) should be rewarded.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Markbands (best fit)
Level | Marks | Descriptor |
|---|---|---|
0 | 0 | The work does not reach a standard described by the descriptors below. |
1 | 1–3 | Little understanding of the specific demands of the question. Theory is stated but not relevant. Terms are not relevant. No synthesis or evaluation. Real-world examples are identified but not relevant. |
2 | 4–6 | Some understanding of the demands. Relevant theory is described. Some relevant terms are included. Synthesis or evaluation is superficial. A relevant real-world example is identified. |
3 | 7–9 | The demands are understood but only partially addressed. Theory is partly explained. Some terms are used appropriately. Relevant diagram(s) are included where appropriate. Synthesis or evaluation is appropriate but lacks balance. Example(s) are identified and partly developed in context. |
4 | 10–12 | The demands are understood and addressed. Theory is explained. Terms are used mostly appropriately. Diagram(s) are included and explained. Synthesis or evaluation is appropriate and mostly balanced. Example(s) are identified and developed in the context of the question. |
5 | 13–15 | The demands are understood and addressed. Theory is fully explained. Terms are used appropriately throughout. Diagram(s) are included and fully explained. Synthesis or evaluation is effective and balanced. Example(s) are identified and fully developed to support the argument. |
Imported goods and domestically produced goods often compete for the same consumers.
Explain how a rise in the price of imported goods can increase the demand for domestically produced substitutes and reduce the demand for goods that are complements to the imports.
10 marks
Using real-world examples, discuss the view that tariffs are the most effective way to protect domestic producers from foreign competition.
15 marks
Read the extracts and answer the questions that follow.
Text A — Overview of Veloria
[1] Veloria is a lower-middle-income country in East Africa with a population of 38 million. Its main exports are tea, cut flowers and tourism services. Over the past decade the share of the population living in towns and cities has risen from 28 % to 34 %, and the capital, Tirraport, has become one of the fastest-growing cities in the region.
[2] Economic growth has been strong, driven mainly by household consumption and by construction. However, inflation has risen above the central bank's target of 5 %, partly because of higher prices for imported food and fuel. Unemployment remains high, especially among young people in rural areas.
[3] Imports of fuel, machinery and milk powder have grown faster than exports, and the current account deficit has widened. The Velorian shilling (VLS) floats freely and has experienced a significant depreciation against the US dollar since 2022.
[4] Around 37 % of Velorians live below the national poverty line, most of them in rural areas, where farming employs about 60 % of the labour force. Access to electricity, clean water and secondary schooling outside the cities remains limited.
Table 1: Selected economic data for Veloria
2022 | 2023 | 2024 | |
|---|---|---|---|
Real GDP growth (%) | 5.8 | 6.1 | 6.4 |
Inflation (annual % change in CPI) | 6.2 | 7.5 | 8.9 |
Unemployment (% of labour force) | 9.8 | 9.4 | 9.1 |
Exchange rate (VLS per US$) | 115 | 124 | 138 |
Current account balance (% of GDP) | −4.1 | −5.0 | −5.6 |
Text B — A growing appetite for dairy
[1] Demand for packaged milk, yoghurt and cheese in Velorian cities has grown rapidly. Market researchers point to three causes: the growing number of urban households, rising urban incomes, and a change in tastes towards convenient, packaged foods sold in supermarkets. Packaged milk is a normal good for urban households.
[2] The falling price of refrigerators, which are now produced by two large factories in Tirraport, has also allowed many more urban households to store fresh dairy products at home.
[3] Domestic supply has struggled to keep up. Most of Veloria's milk comes from 1.8 million smallholder farmers who keep two or three cows each. Yields are low, and up to a third of milk spoils before reaching market because there are few cooling centres. The average price of a litre of packaged milk in Tirraport rose from VLS 95 in 2022 to VLS 120 in 2024, and imports of milk powder rose from US$40 million to US$95 million over the same period.
[4] Supermarket chains say they would prefer to buy from domestic dairies, but supply is unreliable, so they import long-life milk and milk powder from abroad. Two large processing firms have announced plans to expand their plants if they can secure a steady supply of raw milk.
Table 2: Average monthly data for an urban household in Veloria
2022 | 2024 | |
|---|---|---|
Household income (VLS) | 48 000 | 57 600 |
Purchases of packaged milk (litres) | 12.0 | 15.0 |
Text C — The Dairy Forward programme
[1] In 2025 the government launched the Dairy Forward programme to raise domestic milk production. It will subsidize improved animal feed and the construction of 400 village cooling centres, and it will train farmers in animal health. It will also impose a 25 % tariff on imported milk powder.
[2] Supporters argue that the programme will raise the incomes of some of the poorest rural households, create jobs and reduce spending on imports. Dairy farming is labour intensive, and every additional 1 000 cows is estimated to create around 150 jobs in farming, transport and processing.
[3] Environmental groups warn that larger herds near Lake Tirra, the country's main source of drinking water, are already polluting the lake with manure and fertilizer runoff, and that forests are being cleared for pasture.
[4] Consumer groups argue that the tariff will raise milk prices for low-income urban families. The finance ministry notes that the government's budget deficit is already 6 % of GDP and that the programme will cost about 0.4 % of GDP each year for five years.
Define the term depreciation indicated in bold in the text (Text A, paragraph 3).
2 marks
Define the term normal good indicated in bold in the text (Text B, paragraph 1).
2 marks
Using information from Table 2, calculate the income elasticity of demand (YED) for packaged milk for an urban household in Veloria between 2022 and 2024.
2 marks
Using your answer to (b)(i), state whether demand for packaged milk among urban households is income elastic or income inelastic.
1 mark
Using information from Table 1, calculate the percentage change in the value of the Velorian shilling against the US dollar between 2022 and 2024.
2 marks
Using a demand and supply diagram, explain why the price of packaged milk in Tirraport rose between 2022 and 2024 (Text B, paragraphs 1 and 2).
4 marks
Using an AD/AS diagram, explain how the growth in household consumption may have contributed to the rise in Veloria's inflation rate (Text A, paragraph 2 and Table 1).
Using an exchange rate diagram, explain why the Velorian shilling depreciated against the US dollar (Text A, paragraph 3).
4 marks
Using an externalities diagram, explain why the expansion of dairy farming near Lake Tirra may lead to market failure (Text C, paragraph 3).
4 marks
Using information from the text/data and your knowledge of economics, evaluate the Dairy Forward programme as a response to the rising demand for dairy products in Veloria.
15 marks