To Protect or Not to Protect?

This lesson builds on the lesson Trade for the Win!

Dig deeper into the benefits of free trade in contrast to protected trade using two videos to contrast 18th-century trade with modern times. The extension to this lesson shows graphically how tariffs decrease the overall wealth/well-being of society.  
This lesson is an extension of the lesson, “Trade for the Win!”, which demonstrated how wealth is increased as trade becomes more free. 
Graphical analysis of the contrast of free trade versus trade with tariffs (or even no trade) will take this lesson to a higher level that is applicable to Honors, IB, or AP Economics.  
This lesson can be taught using a slide deck and/or class handouts.
Time Required: One class period (50 minutes)

Concepts:

Barriers to trade (tariff)
Benefits of trade
Voluntary Exchange
*Consumer Surplus
*Producer Surplus
*Total surplus

Content Standard:

5.  Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations.

Objectives:

  1. Students will examine the impact of tariffs on individuals and nations.
  2. Students will compare free trade to protected trade in past and contemporary markets.

Materials:

Videos: An Animal That Trades Part 2 (full video); Izzit.org “Free Trade” video (first 11 minutes)

Procedure:

  1. Define tariff as a tax imposed by a government on goods and services from other countries.
  2. Ask students why they believe governments might impose tariffs on particular goods and services imported from other countries. (Answers will vary, but will likely include that tariffs are imposed to protect domestic producers and/or workers against forgeign competition.)
  3. Pose question, “How might tariffs help some and hurt others?” Tell students that the question will be revisited after the video.
  4. Show the video “An Animal That Trades Part 2” on the Free Market.
  5. Debrief the video by asking students why monarchs and political leaders in Adam Smith’s time might have opted to export as much and import as little as possible?  (They wanted to export as much as they could and import as little as possible to amass gold).  What did Adam Smith think about such practices during his time? (Adam Smith supported free trade. He believed that wealth for a nation was not based on how much gold was stockpiled, but in the labor productivity of the nation. He believed that accepting imports did not have to diminish the wealth of the nation if trading nations specialized in what is their advantage).
  6. Show the Izzit.org video “Free Trade”. Part 1 focuses on free trade and free markets in general.  (Part 2 on Creative Destruction begins at 11:10 and is an applicable extension to the lesson.)  
  7. Debrief the video by asking students how trade affected the development of Hong Kong. (The absence of natural resources necessitated trade. Free trade (no tariffs or other restrictions) has allowed economic development and a high standard of living).
  8. Once again ask students how tariffs might help some and hurt others? (While producers and workers in industries protected by tariffs might benefit by decreasing foreign competition, society as a whole bears a cost as that tariff is passed to them in the way of higher prices).
  9. To demonstrate how these issues are relevant today, ask students to research current tariff issues in their country.  How do national issues affect the local community? Who benefits?  Who bears the cost?

*Extension for Honors, IB or AP Economics:

Definitions:

Consumer surplus:  The difference between the price consumers are willing to pay and what they actually pay.
Producer surplus: The difference between the price producers are willing to accept (MC) and the price they actually collect.
Total surplus:  The sum of consumer and producer surplus.  This can also be seen as the overall benefit to society.  It can also be referred to as economic welfare.
Hint:  Consumer and producer surplus can be calculated by finding the area of each respective triangle as it relates to the demand (consumer) or supply (producer) curves.
 
  1. Calculate the consumer, producer and total surplus at the domestic market price with no trade. 
  2. Calculate the consumer, producer and total surplus if the government allows trade but enacts a tariff of $1.50 on each pound of sugar. 
  3. Calculate the consumer, producer and total surplus if free trade prevails in the sugar industry.  
  4. Under which condition are producers better off?  Why?
  5. Under which condition is society as a whole better off?  Why? 

Answers:

Calculate the consumer, producer and total surplus at the domestic market price with no trade.
CS=$20 million, PS=$25 million, TS=$45 million




CS=½ (4) (10) million
PS=½ (5) (10) million
TS=$20 million + $25 million

Calculate the consumer, producer and total surplus if the government allows trade but enacts a tariff of $1.50 on each pound of sugar.
CS=$49 million, PS=$6 million, TS=$55 million




CS=½ (7) (14) million
PS=½ (2) (6) million
TS=$49 million+ $6 million

Calculate the consumer, producer and total surplus if free trade prevails in the sugar industry. 
CS=$76.5 million, PS=$500,000, TS=$77 million




CS=½ (18)(9) million
PS=½ (.5)(2) million
TS=$76.5 + $.5 million

Under which condition are producers better off? 
No trade when producer surplus is greatest.

Under which condition is society as a whole better off? 
Free trade when the total surplus is greatest. 




Further Extensions: 

  • Additional discussion questions for the Adam Smith Works video An Animal That Trades: The Free Market can be found on the video’s page
  • Discuss the remainder of the Izzit.org video with your students. How did creative destruction contribute to the wealth of Hong Kong? Do your students believe it contributes to the wealth of all nations? What are the upsides and downsides of creative destruction? 
  • Discuss the political developments in 2019 and 2020 in Hong Kong with your students. Ask them to research the pro-democracy protests and the political situation today. Do they believe that Hong Kong’s economic growth has contributed to or hurt its aspirations for democracy? How do you believe its political governance during the time covered by the Izzit.org video helped or hurt the country’s economic growth? Using insights from Adam Smith, explain what they think will happen next and why.