Quick questions on Free trade, comparative advantage and protection (QCE Economics Unit 3)

The classic case for trade rests on comparative advantage, due to David Ricardo (1817). A country has comparative advantage in producing a good when it can produce that good at lower opportunity cost than another country.

Trade according to comparative advantage delivers:

1. Tariff. A tax on imports. Raises the domestic price, reduces import volume, transfers surplus from consumers to producers and government, and creates a deadweight loss.

Draw the domestic demand and supply curves intersecting at the autarky equilibrium. Add a horizontal world price line below the autarky price. Add a tariff that lifts the price by the tariff amount.

Australia maintained very high tariffs through the 1950s-1980s (motor vehicles at 50 percent, textiles and clothing at 60 percent). Tariff reductions began under the Whitlam government (1973) and accelerated under Hawke and Keating.

Australia is party to 17 FTAs as of 2026:

1. Lower tariffs on Australian exports. Beef exports to Japan face tariffs of 8.5 percent under JAEPA, down from 38.5 percent before. Australian wine exports to China grew from $4 million in 2007 to over$1 billion by 2019 under ChAFTA (then fell during the 2020-22 dispute).

China trade dispute (2020-2022). Chinese tariffs and informal restrictions hit Australian barley, beef, wine, lobster, cotton and coal worth around $20 billion per year. Most have been lifted since 2023; wine tariffs lifted in 2024.

Some arguments for limited protection have intellectual support:

Most economists conclude that the costs of protection generally exceed the benefits:

Suppose Australia and Japan can each produce wheat or cars with one unit of labour:

A tax on imports. Raises the domestic price, reduces import volume, transfers surplus from consumers to producers and government, and creates a deadweight loss.

A government payment to domestic producers. Shifts the domestic supply curve right; reduces the import gap; transfers from taxpayers to producers.

A quantitative limit on imports. Raises the domestic price like a tariff, but the revenue goes to the importer holding the quota licence rather than the government.

Require firms to use a specified percentage of domestic inputs. Common in defence and automotive procurement.