7.2.1 Why do countries trade and restrict trade?

Helpful prior knowledge and learning objectives

Helpful prior learning:

Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 1.3.9 Power in the economy, which explains where power comes from and how it shapes economic relationships
Section 7.1.1 Global exchange as a system, which describes global exchange as a system with parts, relationships, functions and emergence
Section 7.1.2 History of global exchanges, which describes how global exchange systems have evolved over time, shaped by changes in technology, power, and environmental factors
Section 7.1.3 What moves across borders? which describes what flows across borders and explains how visible global flows are linked to less visible social and ecological effects
Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems, and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)
Section S.3 Systems diagrams and models, which explains the systems thinking in some familiar information tools as well as the symbols used to represent parts/wholes, relationships and perspectives.
Section S.4 Stocks and flows, which explains how inflows and outflows affect stocks of things, leading to behaviour-over-time patterns
Section S.5 Causal loops, feedback and tipping points, which explains the feedback loops that can stabilise or destabilise systems
Section S.9 System traps, which explains how system structures, like reinforcing feedback, too weak or late balancing feedback, and/or pursuing flawed goals, can create persistent problems.

Learning objectives:

explain why countries trade and restrict trade with one another
describe different forms of trade protectionism

In the 1990s, bananas became the centre of a major trade dispute.

European states gave preferential treatment to imports from banana producers in their former colonies, mainly in the Caribbean, who depended heavily on banana exports for jobs and income. To protect those Caribbean producers, the European Union (EU) imposed tariffs, taxes added to the price of imported goods, on bananas from other regions. The EU also set quotas, which limited how many of those bananas could enter European markets each year.

The tariffs and quotas made Caribbean bananas relatively less expensive for European consumers than bananas from elsewhere. The United States challenged the European tariffs and quotas at the World Trade Organization (WTO). The US claimed that the EU trade restrictions were unfair to US banana companies operating in Central America because their bananas became more expensive and less accessible to European consumers.

This conflict was about a question central to all trade debates: Should countries allow goods and services to move freely across borders, or should they block some trade to protect certain industries, producers or the public? To understand this tension, we first need to look at why countries trade in the first place.

Photograph of a man reaching up to cut a bunch of bananas from a banana plant

Figure 1. Bananas are a valuable export for some countries, and became the centre of a major trade dispute between the United States and the European Union.

(Credit: Rahul, Pexels license)

Why might countries support freer trade?

Countries trade because no economy is self-sufficient. Differences in climate, natural resources, skills, technology, and infrastructure mean that some goods are easier or cost less to produce in one place than another. Trade allows countries to specialise in certain forms of production and exchange what they produce for goods and services made elsewhere.

Absolute and comparative advantage

A key economic reason for trade are the advantages of specialisation. Some countries can produce particular goods using fewer resources. This is called absolute advantage. Other countries may be relatively better at producing some goods than other countries. This is called comparative advantage.

To understand comparative advantage, you need to understand opportunity costs. Even if one country has an absolute advantage over another country in producing everything, it may still make sense for both countries to specialise and trade. The reason is opportunity cost, what you give up when you choose to produce one thing instead of another. If a country that is good at producing both wheat and textiles is relatively better at wheat, then every hour spent producing textiles costs more in terms of wheat not grown. By focusing on producing wheat and trading some wheat for textiles, the country can access more of both products. The same logic applies to its trading partner, even if that partner is less efficient at producing everything. Both can gain from specialisation.

Benefits of importing

One benefit of importing is lower prices for consumers. When goods like food, clothing and household goods can be imported from lower-cost producers, prices may also fall for consumers, making life more affordable. With imports available, consumers also have greater choice. They gain access to products that cannot be produced locally or that would be very costly to make at home, like coffee, cocoa, tropical fruit, electronics, medicines, and many other goods. Countries also benefit from imported innovations not produced in the domestic market. Finally, competition from foreign producers gives domestic firms incentives to improve production methods, reduce waste, and adopt new technologies. Over time, this can raise productivity and bring in new ideas.

Photograph of coconuts, sweet potato, ginger, and limes in a grocery store

Figure 2. Greater consumer choice of foods that may not be available locally is a benefit of trade.

(Credit: Paweł Michałowski, licensed from Adobe Stock)

Benefits of exporting

Exporting countries can also benefit from trade. When firms sell to many countries, they can produce more and lower their average costs of production, called economies of scale. This may be particularly important for industries with large upfront costs like steel, cars, and aircraft, making it more likely the firms can be profitable. Such large firms may then also create more jobs for the local population.

Spreading risk is another benefit. Firms and economies that sell to multiple markets are less exposed to downturns in any single one. If demand falls at home, export markets can help compensate for losses locally. For smaller economies whose domestic markets are limited, access to foreign markets can be essential for keeping industries viable.

Foreign currency earnings are also important for some countries. Most internationally traded goods including oil, food, and machinery are priced and traded in major currencies like the US dollar, a hard currency widely accepted for global exchanges. Countries whose currencies are not widely accepted can earn these hard currencies through selling exports. These hard currencies can then be used to import essential goods and resources, or to pay debts to international lenders.

Taken together, these benefits of importing and exporting highlight how free trade can increase efficiency, output, choice and incomes. This explains why many countries participate in global trade systems and negotiate trade agreements to reduce trade restrictions.

Limitations of free trade arguments

Many arguments for freer trade, or trade liberalisation, focus on total gains in output, lower prices, and more choice for consumers. However, these gains do not mean that everyone in society benefits. Opening up to trade usually helps consumers and export industries. Consumers can buy cheaper goods, and export industries can sell to bigger markets. But it can hurt industries that compete with imports. These industries may lose sales, and workers in them may lose their jobs. Because trade creates both winners and losers, economists cannot say for certain whether society as a whole is better off. They can only say who is likely to gain and who is likely to lose.

There is a further dimension to these debates that is explored in Subtopic 7.3. The theory of comparative advantage does not only describe trade specialisation and relationships, it has also been used to prescribe them. Economists and international institutions have used comparative advantage arguments to say that countries in the Global South should keep specialising in raw material exports, and leave manufacturing and higher-value production to other countries. Critics have point out that comparative advantage theory hides history. Many patterns of specialisation across the world developed during periods of colonisation, when colonising powers took resources from colonised countries and blocked them from developing their own industries (Section 7.1.2). Power, not just nature, has shaped what countries produce today.

Figure 3. Colonial extraction, unequal trade agreements, and other power relationships have shaped what countries produce today, like Malaysia and Indonesia’s specialisation in palm oil production.

(Credit: Creative Images, licensed from Adobe Stock)

This points to an important limitation of comparative advantage theory. What a country specialises in is not fixed. Countries can use trade barriers and state investment to support new industries and help them grow. This is called industrial policy, and it can help countries diversify their economies (Section 7.4.4 - coming soon). Countries can deliberately build new comparative advantages, so this theory should not be used to justify keeping a country locked into its current role in the world economy.

Why might countries restrict trade?

Trade restrictions, also called protectionism, are regularly used by states to achieve a variety of environmental, social, economic and geopolitical goals. There are a number of options for restricting trade, and countries will often use more than one, as the EU did with banana imports.

Tariffs: Taxes placed on imported goods, paid to the by the importer of the product. When tariffs increase, the importer may absorb these higher costs themselves, or pass them along to consumers in the form of higher prices. The more market power the importing firms have, the more likely that they pass the cost onto the consumer, a point that politicians almost never mention when they enact tariffs. Because tariffs increase the cost of the goods, the importer may also decide to stop importing them.
Quotas: Limits on the quantity of a good that can be imported. Quotas make sure domestic producers can still sell their goods in their home markets, or help the state limit how much of a good, such as clothing or steel, comes into the country.
Subsidies: Financial support given by the state to domestic producers. This can come in several forms such as grants, tax reductions, or loans with low interest rates. Subsidies aim to strengthen domestic industries, support employment, or promote products important for national security like steel or medicines.
Non-tariff barriers: Rules and requirements that affect trade without using taxes or quantity limits. These include rules about product safety and quality, rules about who is allowed to sell in a country, rules that require a certain amount of a product to be made locally, and official checks to confirm a product meets a country's standards.

All of these trade barriers reduce trade flows into the country that uses them, either as the main objective or as a side-effect of other goals.

Reasons for protectionism

There are many legitimate reasons to restrict trade between countries, including:

protection of infant industries: New industries, sometimes called infant industries, often face high costs of production and strong competition from established foreign firms. States may use tariffs, subsidies, or regulations to support these industries while they grow, helping them become stronger and giving the state more control over key parts of the economy. South Korea, for example, used this approach in the late twentieth century to develop steel, shipbuilding, and electronics. These industries later became globally competitive, and South Korea's economy grew rapidly, moving from low-income to high-income status within a few decades.

national security: States may decide that some goods should be produced domestically to ensure reliable access during crises. Food, energy, medicine, steel, and defence equipment are often treated as strategic sectors that need protecting for national security reasons.
job protection: Trade barriers can protect industries with strong foreign competition from failing, and therefore also protect jobs in those industries.

Figure 4. Trade protection for the steel industry can ensure steel supplies for national security and protect jobs.

(Credit: maxximmm, licensed from Adobe Stock)

health, safety, and environmental standards. States may ban or limit imports that do not meet domestic rules on food safety, product labelling, or pollution. These measures protect consumers and ecosystems from harm.
unfair competition: Dumping occurs when firms sell goods abroad at very low prices, sometimes below the cost of production, in order to gain market share. This can occur, for example, when states subsidise industries, enabling them to sell their products at very low prices. States may respond with tariffs or quotas to raise the prices of those imports, counteracting the subsidies, in order to protect domestic producers from unfair competition.
intellectual property protection: When states believe that domestic firms face competition from copied technologies or weak patent enforcement abroad, they may impose trade measures or seek international rules to protect innovators.
balance of payments pressure: If a country imports much more than it exports, it must finance the difference through borrowing or selling off its assets. States may restrict imports to reduce these outflows and stabilise the economy, especially during financial crises. Balance of payments is covered in Section 7.2.4.
state revenue: Where income and corporate taxes are difficult to collect, import taxes can be an important source of tax revenues for states. This is particularly true for countries in the Global South.
sanctions and geoeconomic coercion: States may restrict trade to pressure or punish other countries. Trade sanctions are when trade barriers are explicitly used to influence or punish another country’s behaviour. For example, after Russia’s invasion of Ukraine, many countries banned some trade with Russia to weaken its economy and apply political pressure. Geoeconomic coercion is when economic power is used strategically to gain an advantage. The United States has used tariffs to pressure the European Union and other trading partners to change their trade rules and laws affecting US multinational corporations (MNCs).

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Trade connects economies, offering real benefits like lower prices, more choice, and access to larger markets. But these gains are not shared equally, and some industries and workers can lose out. This is why states use tools like tariffs, quotas, subsidies, and regulations, for reasons ranging from protecting new industries to defending national security. The banana dispute at the start of this section shows these decisions in action: the EU protected Caribbean farmers, while the US defended its own companies' access to European markets. There is rarely a single right answer to how open or closed an economy should be, only trade-offs that states must weigh for themselves and constantly reevaluate in changing global conditions.

7.2.1 Activity

Concept: Systems, power

Skills: Research skills (information literacy), Thinking skills (critical thinking, transfer)

Time: 30 minutes for each option

Type: Individual, pairs, or small group

Option 1: Data interpretation practice - How open to trade are the world's economies?

Figure 5 shows trade as a share of gross domestic product (GDP). This measure, sometimes called the trade openness index, adds together the value of a country's exports and imports and expresses this as a percentage of its GDP. A higher percentage means trade plays a larger role in that economy. The map is interactive and you can click the ‘play’ button to see how this data has changed over time.

Open the interactive graph Growth of global trade from the World bank or examine it here (Figure 10)

Figure 5. Trade as a share of GDP.

Note: This map uses the Mercator projection, which distorts relative country size. Landmasses closer to the poles (e.g. Europe, North America, Greenland) appear larger than they really are, while those nearer the equator (e.g. Africa, South America) appear smaller.

(Credit: Our World in Data)

What does the title tell you? Make sure you understand what is being measured and how.
Look at the colour scale carefully and note that the values are not evenly spaced. What does each colour range represent? What does it mean for a country if trade exceeded 100% of it’s gross domestic product (GDP)?
Identify one country with high trade openness and one with low trade openness. What might explain the difference? Think about the reasons countries trade that you read about in this section.
Is there a regional pattern? Describe what you notice about trade openness across different parts of the world.
Cllick the 'play' button to see how trade as a share of GDP has changed over time. Describe the trend. When did trade openness rise most rapidly? Can you find a period where it fell? What global events might explain these changes?
Identify one country or region that surprises you. Why does it seem unexpected, and what might explain it?

Click on the arrow to reveal sample responses, but give it a go yourself first!

1. What does the title tell you? - The title tells us this map shows how large a role trade plays in each country's economy. It measures trade openness by adding the value of a country's exports and imports together and dividing this by its GDP. For example, if trade openness is 50%, trade in combined imports and exports is worth half as much as the value of GDP.

2. Colour scale - The colour bands are not evenly spaced. They jump from 0-10%, to 10-20%, to 20-50%, to 50-100%, to 100-200%, and then over 200%. This uneven spacing is used because most countries fall between 20% and 100%, so spacing the colours evenly would make it hard to see differences between them. If trade exceeds 100% of a country's GDP, it means the combined value of its exports and imports is larger than everything the country produces in a year. This can happen in small economies that import raw materials, process or assemble them, and then export the finished goods, so the same value gets counted more than once as it crosses the border.

3. High vs low trade openness - In 2025, Thailand shows high trade openness, while the United States shows relatively low trade openness. This may seem surprising, since the US is often seen as deeply connected to global trade. But the US has a very large domestic market, so it can produce and sell a lot without crossing a border. Thailand's economy is smaller, and much of its manufacturing, especially electronics and cars, is built around exporting to other countries. In general, smaller economies tend to show higher trade openness than large economies with big domestic markets, even if the larger economy still trades a lot in absolute terms.

4. Regional pattern - Small economies with strong trade links, such as many countries in Southeast Asia and Central Europe, show high trade openness. Large economies, such as the United States, China, and Brazil, tend to show lower trade openness, mainly because they have large domestic markets. Some resource-exporting countries, such as oil and gas producers in the Middle East, also show high trade openness, since they export most of what they produce.

5. Trend over time - Trade openness rose sharply in the decades after 1960, as transport costs fell, trade agreements reduced tariffs, and more countries joined institutions such as the World Trade Organization (created in 1995). Global trade openness fell sharply around 2008 to 2009, during the global financial crisis, when trade collapsed as demand fell worldwide. It fell again briefly in 2020, during the COVID-19 pandemic, when lockdowns and supply chain disruptions reduced trade.

6. A surprising country - Responses will vary.

Option 2: Tariffs as a geopolitical weapon

Read the article Weaponizing Tariffs: The US-China Trade Clash and Global Fallout (Atlas Institute, 2025) and answer the questions below.

According to the article, why did the United States impose high tariffs on Chinese imports? Give two reasons.
How did China respond to US tariffs? Identify at least three different actions China took.
The article describes tariffs as having become a "geopolitical tool" rather than only an economic one. Using evidence from the article and from this section, explain what this means.
The article mentions several effects of the US-China tariff dispute on the wider global economy. Identify two of these effects and explain how they could affect countries that are not directly involved in the dispute.
Using what you have read in this section and in this article, do you think the US tariffs on China are justified? Consider at least two reasons for your answer.
Extension, for students who have studied systems traps Section S.9. A trade war can be understood as an escalation system trap, where each side's response to the other makes the situation worse for both. Draw a causal loop diagram showing how the US-China tariff dispute escalated. Include at least four steps in the loop with an appropriate label for the feedback.

Click on the arrow for sample responses to the questions, but give it a go yourself first!

The article gives two main reasons. First, the US argued that China had engaged in long-standing unfair trading practices that disadvantaged American producers. Second, the tariffs were intended to protect American workers and support the expansion of domestic US production capacity, a goal Trump described as building a ‘new golden age’ of American industry.

2) China took at least three actions in response. It imposed a 34% tariff on imports of US goods. It added 16 US-based organisations to a sanctions list. It restricted exports of rare earth elements, which are essential materials for high-tech manufacturing. The article also notes that China began redirecting its exports towards alternative markets, including Southeast Asia and Europe.

3) Traditionally, tariffs are used as economic tools to protect domestic industries, raise government revenue, or correct trade imbalances, as described in this section. In the US-China dispute, tariffs went beyond these economic purposes. The US used tariffs to pressure China into renegotiating trade terms and to demonstrate geopolitical dominance, an example of geoeconomic coercion. China responded not only with counter-tariffs but also with restrictions on rare earth exports and sanctions, showing that trade measures were being used to signal political power and reshape the global balance of influence, not only to protect industries.

4) Two wider effects are described in the article. First, global stock markets fell sharply, meaning investors and businesses in countries uninvolved in the dispute faced financial uncertainty and potential losses. Second, oil prices dropped, which would affect oil-exporting countries' revenues and could destabilise economies that depend heavily on oil income. Both effects illustrate how trade wars between large economies create systemic risks for smaller or less powerful countries that had no role in the dispute, a point connected to the idea in this section that trade connects economies into shared systems.

5) This is an evaluative question and there is no single correct answer. A strong response will consider arguments on both sides before reaching a reasoned conclusion.

Arguments that the tariffs may be justified: This section identifies job protection and national security as legitimate reasons for protectionism. If the US genuinely faced unfair competition from Chinese firms, responding with tariffs could be defended under the unfair competition justification. The US also has strategic interests in developing domestic capacity in sectors like technology and manufacturing.

Arguments that the tariffs are harder to justify. The article shows that the tariffs caused significant harm to third countries and global markets that had no part in the dispute. This section notes that tariffs raise prices for consumers and that politicians rarely acknowledge this cost. The article also suggests that the US lacks the infrastructure to rapidly rebuild the production capacity the tariffs are meant to support, raising questions about whether the stated goals are achievable. The escalatory dynamic also risks broader economic instability.

6) Sample reinforcing feedback loop diagram:

Ideas for longer activities and projects are listed in Subtopic 7.5

Checking for understanding

Further exploration

Planet Money’s T-Shirt Project – A video series from NPR’s Planet Money following the global supply chain of a simple cotton T-shirt, from cotton farms to factories to shipping networks. It highlights the role of globalisation, trade agreements, and labour conditions in modern manufacturing. Difficulty level: easy.
How Containerization Shaped the Modern World – A short animated video from TED-Ed explaining how the invention of shipping containers revolutionised global trade, making it faster and cheaper, but also contributing to job losses in local industries and increased global economic interdependence. Difficulty level: easy.
Tariff Wars: What’s the impact? – A lesson resource from The Economist Topical Topic series examining the global tariff war that began when President Trump imposed widespread tariffs on imports into the US in February 2025. It explores what tariffs are, how they affect prices and trade flows, and whether protectionist trade policy benefits or harms domestic economies. Difficulty level: easy.
Trade and Globalization – A data-rich research page from Our World in Data covering the history and current structure of international trade, from the first wave of globalisation in the nineteenth century to trade patterns today. It includes interactive charts on trade volumes, trade partnerships, and the relationship between trade and incomes. Useful for exploring the data behind arguments made in this section. Difficulty level: medium.
Why Are Some Countries Rich and Others Poor? — A 45-minute lecture by economist Ha-Joon Chang from the INET Economics for People series. Chang traces how today's wealthy countries built their economies using tariffs, subsidies, and state investment before adopting free trade, and examines why this history matters for how we understand trade policy today. Difficulty level: medium.
What Is Wrong With Globalization? — A 34-minute lecture by economist Ha-Joon Chang from the INET Economics for People series. Chang examines who gains and who loses from trade liberalisation, why the theory of factor mobility fails in practice, and how countries with stronger welfare states have managed globalisation's effects more fairly. Difficulty level: medium.

Sources

CORE Team. (2017). Unit 18: The nation and the world economy. In The economy 1.0. CORE Econ. https://books.core-econ.org/the-economy-v1/book/text/18.html

Edwards, B. (2026, September). Nurture, then prosper. Finance & Development, International Monetary Fund. https://www.imf.org/en/publications/fandd/issues/2026/09/cafe-economics-nurture-then-prosper-ha-joon-chang-bruce-edwards

Kognity. (n.d.). 4.3.1 Arguments for trade protectionism. IBDP Economics HL FE2024

Kognity. (n.d.). 4.1 Benefits of international trade. IBDP Economics HL FE2024.

Glick, M., & Lozada, G. A. (2025, September 6). The flawed welfare foundations of pro-free trade arguments (Working Paper No. 239). Institute for New Economic Thinking. https://www.ineteconomics.org/uploads/papers/WP-239-Glick-Lozada-Free-Trade.pdf

McDonald, B. (n.d.). International trade: Commerce among nations. Finance & Development (F&D Magazine), International Monetary Fund. https://www.imf.org/en/publications/fandd/issues/series/back-to-basics/trade

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