Download PROTECTIONISM Protecting domestic industries

Argument For and Against
Protectionism
Dedicated to Pat
Buchanan, an
interesting modern
proponent of
protection.

PROTECTIONISM
Protecting domestic industries against foreign trade.
Why use Tariffs,
Quotas,
VERs, and many other
methods?
To Save Jobs!
 Any
other reasons?
 To save jobs
 To offset economic distortions
 To promote infant industries/to promote economic
development through industrial development
 To promote developing governments
 To promote the national defense
First, why not protect domestic industry?

We have already reviewed arguments for free trade.
Consider arguments against protectionism. Note the
specific economic inefficiencies of tariffs.
How
Costly is Protectionism?
Robert C. Feenstra, p. 3
Introductory Review:
Tariffs and Quotas
A tariff is a per unit tax that raises the price from the
ROW market level. It reduces imports from SoDo to
S1D1. But that permits domestic producers to
increase sales from S0 to S1.
P
Sd
a = Change from CS to PS
b = “Production effect”
a
b
S0
S1
c
Pt
d
D1
D0
PROW
Dd
Q
c = Tariff Revenues
d = “Consumption effect”
A quota is much like a tariff. Rather than raising the
price through the tax, it is raised by restricting supply.
We strictly limit imports (adding Sc plus quota to the
previous diagram.
P
Sd
Sd plus quota
a
c
b
S0
S1
d
D1
D0
a = Change from CS to PS
PD w/ quota
b = “Production effect”
PROW
Dd
Q
c = Quota rents
d = “Consumption effect”
 How
costly are b and d for our economy?
 Less
than b, c, and d. (We usually transfer
c with quotas to other countries)
 And
less than a, b, c, d, the consumer
losses.
Costs
and benefits of VERs. This
need be your only exposure. (p. 6)
How
can quotas affect foreign
investment. (p. 11)
Loss
of product variety. (P. 14)
Bilateralism
vs. Multilateralism, or
GATT/WTO vs. EU/NAFTA
Now, why protect?
Trade Barriers to Offset Distortions?
 In
a world of perfect allocation, we’d have perfect
efficiency. But we are not in such a world.
If better allocation is possible through economic
policies (e.g., tariffs), we are in a “second best”
world.
But it’s hard to say what you have if you don’t
have optimal conditions. Externalities in the real
world cause a divergence of social and private
costs and benefits in numerous markets, as do
subsidies.
Trade Barriers to Offset Distortions?
 Economic
policy distortions such as externalities
cause a divergence in the real world of social and
private costs and benefits in numerous markets.
Subsidies do the same thing.
 Could
tariffs offset market distortions?
Such Distortions
include:
 Monopoly prices
 Distorting taxes
 External costs
 External benefits
Protectionsim to offset distortions?
The “Specificity Rule” suggests tariffs are not an
optimal tool to solve social problems. The rule is:
Intervene at the source of any given problem. It is
usually more efficient to use the policy tool that
acts as directly as possible on the source of the
distortion, reducing the difference between private
and social costs and benefits.
Arguments for Protectionism
To Promote Domestic Production?
 Alexander
Hamilton and Friedrich List, fathers of
the American protectionist tradition.
 Will infant industries ever grow up?
 Why not subsidize rather than protect, or better,
 Why not borrow on future earnings potential if
industrial viability can really be expected?
Arguments for Protectionism
 Why
disadvantage consumers?
 Why postpone future, unavoidable adjustments?
Assistance to displaced workers as an alternative
to protection -- relocation and training
Arguments for Protectionism
 Tariffs
can be a reliable revenue source for
developing countries.
 This
developing government (public revenue)
argument is about the only one some economists
like. But there is evidence that countries develop
more rapidly with open economies.
Arguments for Protection
Promote the National Defense
 National
Defense was an
argument that even Adam
Smith liked.
 But every product can
demand protection on this
basis.
 Imports during the Viet
Nam war.
The Costs of Protection,
especially for the poor
 See
“Toughest on the Poor: America’s Flawed
Tariff System. See p. 19.
 What poor are referred to here? (p. 22)
 Does
it make sense for the president to trade tariffs
with congress in exchange for larger (usually free)
trade deals?
The Costs of Protection,
especially for the poor
 See
“Toughest on the Poor: America’s Flawed
Tariff System. See p. 19.
 What
is the gist of this article?