Model essay (a): why tariffs, and who gains or loses

What this lesson teaches

• I can weigh the benefits and costs of protectionism.

  Syllabus 9570, 3.3.1(d). Globalisation, International Trade and Economic Co-operation: Benefits and costs of protectionism

Make a guess

A country puts a 25% tariff on imported washing machines. Who pays it?

1. Nobody, because it is just a government fee.
2. Mostly buyers at home, through higher prices.
3. The foreign exporters, out of their own profits.

The answer to part (a)

Introduction

A tariff is a tax on imported goods. It raises the price of imports in the domestic market. So it changes how much is bought, how much is produced at home and how much is imported. Large economies impose tariffs for several reasons, but each tariff creates winners and losers at home.

Paragraph 2: why a large economy imposes tariffs

The most common reason is to protect jobs in industries that compete with imports. When cheaper imports take sales from domestic steel or furniture makers, those firms cut output and lay off workers, often in towns with few other jobs. A tariff makes imports dearer, so buyers switch back to domestic goods. A second reason is security. A government may want factories that make semiconductors or medicines at home, so supplies cannot be cut off in a crisis or conflict. A third reason is bargaining power. A large economy buys so much that the threat of a tariff carries weight. It can push trading partners to open their own markets or change policies it sees as unfair.

Paragraph 3: effects on consumers

Figure 1 shows the market for an imported good. Under free trade, the domestic price equals the world price, Pw. Domestic firms supply Q1, consumers buy Q2, and imports fill the gap. A tariff raises the domestic price to Pw + t. Consumers pay more and cut their purchases from Q2 to Q4. Consumer surplus falls by areas a + b + c + d. Lower-income households lose most in proportion to their income, because goods such as clothing and appliances take a bigger share of their budgets.

Paragraph 4: effects on producers and the government

Domestic producers gain. At the higher price they expand output from Q1 to Q3, hire more workers and gain producer surplus equal to area a. But producers that use the imported good as an input lose. A tariff on steel raises costs for carmakers and builders, so they become less competitive at home and abroad. The government collects tariff revenue, area c, on each unit still imported, Q3 to Q4. Areas b and d go to no one. Area b is a production loss: home firms make units that could have been imported more cheaply. Area d is a consumption loss: consumers give up units they valued above the world price.

Conclusion

A large economy may impose tariffs to protect jobs, secure strategic supplies or gain bargaining power. The tariff transfers income from consumers to protected producers and the government, and harms firms that use imported inputs. It leaves a net loss to the country of areas b + d.

Margin notes: how each paragraph scores

Introduction

Defines a tariff and flags both requirements: reasons and effects.

Paragraph 2

Three reasons, each with its 'why': the chain from imports to job losses, the security risk, and why size gives bargaining power. Linking the reasons to a large economy answers the question as set.

Paragraph 3

Uses Figure 1 step by step with its labels (Pw, Pw + t, Q2, Q4). Naming the areas shows the welfare effect exactly. The point about lower-income households adds depth.

Paragraph 4

Covers both kinds of producer: protected firms gain, input users lose. Then revenue and the two deadweight losses, each explained in words. This completeness is the rigour L3 rewards.

Conclusion

Sums up both requirements in two sentences. No evaluation marks are available for a 10-mark part.

Overall: L3, 9 or 10 marks

Both requirements developed, with a correct, fully labelled tariff diagram and real context. Effects alone, with no reasons, would cap the answer at L2.

Worked example: A 3-minute plan

Two requirements: reasons, then effects on a diagram.

1. Intro: define a tariff; it raises the domestic price.
2. Reasons: protect jobs in import-competing industries; protect strategic industries; bargaining power.
3. Consumers: price Pw to Pw + t, buy Q4 not Q2, lose a + b + c + d.
4. Producers: output Q1 to Q3, gain a; but firms using imported inputs lose. Government gains c; b and d are lost.
5. Close: a transfer to producers and government, with a net loss.

Watch out for this

A tariff is paid by the foreign exporters, so the importing country's consumers are not affected.

The tax is collected on goods entering the country, and the domestic price rises to Pw + t. Consumers pay more and buy less, losing a + b + c + d.

Check your understanding

In Figure 1, why is area b a loss to the country?

1. It is the tariff revenue that the government collects on each unit still imported.
2. Domestic firms now make units that could have been imported more cheaply at Pw.
3. It is the extra producer surplus that domestic firms gain from the higher price.