Trade and Protectionism

1
Trade and Protectionism

• Session 3

2
Explaining Foreign/Domestic Price Differentials
2 Difference
Foreign 1
US 3
The S C C U D Model
Total 2.00
3

Taste for Protectionism The Economist January 2,
1999
4
Main Arguments for Protection

• Employment
• Balance of Payments
• Strategic Trade Policies
• Bargaining Tools

5
Employment Argument

• Jobs are scarce
• Jobs should be preserved in the United States
  instead of exported abroad
• Workers abroad will always work for less,
  therefore imports inherently unfair

6
Employment Counter Arguments

• Jobs exist in export sector tax on imports is a
  tax on export jobs
• Type of jobs going abroad are low wage, low
  skill
• Goal of society is increased consumption, not
  increased employment
• Increased productivity comes by eliminating jobs
• Employment is a macroeconomic responsibility

7
Balance of Payments Argument

• Protection can restore equilibrium in trade
  accountnote trade account equals difference
  between imports and exports

8
Balance of Payments Counter Argument

• Protection to imports is a tax on exports
• Macroeconomic policy instruments most efficient
  way to adjust current account
• Why worry about current account balance?

9
Protection Derived from Strategic Trade Theory
Argument

• Key industries should be subsidized
• Governments can exploit monopoly position

10
Strategic Trade Protection Counter Argument

• Failure to select correct firms or industries
• "Practically all the industries the Japanese
  Ministry of International Trade (MITI)
  picked--such as supercomputers and
  pharmaceuticals--have been also-rans. The
  Japanese businesses that succeeded, like Sony and
  the automobile industry, were opposed or ignored
  by MITI." Drucker
• National benefit requires excluding foreign
  purchases of your strategic industries equities
• Few industries qualify even in theory

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Negotiating Tool

• If you dont have tariffs, you cant negotiate
  tariff reductions with trading partners

12
Negotiating ToolCounter Argument

• Encourages higher levels of tariffs as countries
  jockey for bargaining positions
• U.S. has other tools to secure concessions

13
General Arguments Against Tariff Protection
Review

• If argument is valid at national level, it should
  apply just as well to states and localities
• Protection to import competing firms is a tax on
  exporting firms
• Explicit subsidies better than protection, which
  gets hidden
• Protection induces retaliation abroad
• Beggar-thy-neighbor ignores value of world growth
  for geo-political stability

14
Protection is Expensive
Consumer Cost thousands/job
Industry

• Textiles
• Steel
• Automobiles
• Ship Building
• Glassware
• Sugar

• 42
• 750
• 105
• 270
• 200
• 60

Hufbauer, Berliner and Eliot Trade Protection in
the United States