Economic Changes: Open Trade Versus Protectionism (AQA A Level Business): Revision Note

Open trade

• Open trade involves removing barriers like tariffs, quotas, and subsidies to allow goods and services to move freely between countries

  • It is associated with free market principles and global competition

• International trade brings opportunities and challenges for both businesses and governments

• While open trade promotes global integration and efficiency, protectionism defends domestic industries from foreign competition

• There is no one-size-fits-all policy — the effectiveness of either approach depends on the context of the economy, its development level, and political priorities

Benefits of open trade

• Increased efficiency: Businesses can specialise and focus on areas of comparative advantage, improving productivity

• Lower prices for consumers: Increased competition drives prices down and widens product choice

• Global market access: Exporters gain access to new markets, expanding their customer base

• Innovation: Exposure to international competition encourages businesses to innovate

Drawbacks of open trade

• Structural unemployment: Domestic jobs may be lost as production relocates to cheaper overseas locations

• Unequal benefits: Gains are often concentrated in certain sectors or regions, leaving others behind

• Exploitation of developing nations: Some LEDCs become trapped as low-value raw material exporters, unable to add value due to tariffs on processed goods

• Loss of sovereignty: Nations may become reliant on volatile global markets and lose control over domestic industries

Protectionism

• Protectionism refers to policies aimed at shielding domestic industries from foreign competition using tools like tariffs, quotas, and subsidies and stricter regulations

Benefits of protectionism

• Protects domestic jobs and strategic industries

• Supports infant industries until they can compete globally

• Reduces trade imbalances and reliance on imports

  • A trade deficit happens when imports exceed exports, meaning the country is spending more on foreign goods than it earns from selling abroad

  • A trade surplus occurs when exports exceed imports, generating more income from international sales than is spent on foreign products

• Enhances national economic resilience

Drawbacks of protectionism

• Higher prices for consumers due to reduced competition

• Reduced choice and innovation

• Risk of retaliation from trade partners (trade wars).

• Inefficiency and complacency in protected industries

Interpreting trade and protection data

• To assess the real-world impact of open trade and protectionism, data can be analysed and impact on business considered

Recent UK trade data (2024–2025)

(Source: ONS, HMRC, UK Government trade statistics 2024–2025)

The impact of trade on strategic and functional decision making

• Open trade and protectionism are major influences that affect how businesses set their strategic goals (long-term direction) and make functional decisions (day-to-day operations in marketing, HR, finance, and operations)

• Global events can rapidly shift the trade landscape

  • For example: After Brexit, many UK firms faced higher export costs to the EU and were forced to either absorb costs, increase prices, or shift strategy entirely

Strategic decision making

In an open trade environment

• Expand into global markets

  • UK firms may seek growth through exports, using free trade agreements (e.g. UK–Australia) to access new customers

• Global supply chain integration

  • Businesses can source cheaper materials or components from abroad to reduce costs and improve margins

• Investment in innovation and competitiveness

  • Firms may invest in automation, R&D, or design to stand out in competitive international markets

• Example: A fashion retailer might open warehouses in the EU to reduce post-Brexit friction and maintain customer service

Under a protectionist shift

• Reshoring and localisation

  • UK businesses may bring production back home to avoid foreign tariffs or import quotas

• Diversification to reduce risk

  • Firms may reduce reliance on specific export markets to avoid geopolitical disruption or tariff exposure

• Lobbying and compliance planning

  • Businesses may work closely with industry bodies or government to adapt to trade rules or secure subsidies

• Example: A UK car manufacturer may reconsider exporting to markets with new tariffs and focus on domestic growth instead

Functional decision making