Argument For and Against Protectionism

1
Argument For and Against Protectionism

• Dedicated to Pat
• Buchanan, an
• interesting modern
• proponent of
• protection.

2
PROTECTIONISMProtecting domestic industries
against foreign trade.

• Why use Tariffs,
• Quotas,
• VERs, and many other methods?

3
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

4
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.

5

• How Costly is Protectionism?
• Robert C. Feenstra, p. 3

6
Introductory Review Tariffs and Quotas
7
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
a Change from CS to PS b Production
effect c Tariff Revenues d Consumption
effect
c
Q
8
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
a Change from CS to PS
b Production effect
c
c Quota rents
d Consumption effect
Q
9

• How costly are b and d for our economy?

10

• Less than b, c, and d. (We usually transfer c
  with quotas to other countries)

11

• And less than a, b, c, d, the consumer losses.

12

• Costs and benefits of VERs. This need be your
  only exposure. (p. 6)

13

• How can quotas affect foreign investment. (p. 11)

14

• Loss of product variety. (P. 14)

15

• Bilateralism vs. Multilateralism, or
• GATT/WTO vs. EU/NAFTA

16
Now, why protect?Trade Barriers to Offset
Distortions?

• In a world of perfect allocation, wed 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 its hard to say what you have if you dont
  have optimal conditions. Externalities in the
  real world cause a divergence of social and
  private costs and benefits in numerous markets,
  as do subsidies.

17
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?

18

• Such Distortions include
• Monopoly prices
• Distorting taxes
• External costs
• External benefits

19
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.

20
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?

21
Arguments for Protectionism

• Why disadvantage consumers?
• Why postpone future, unavoidable adjustments?
  Assistance to displaced workers as an alternative
  to protection -- relocation and training

22
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.

23
Arguments for ProtectionPromote 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.

24
The Costs of Protection, especially for the poor

• See Toughest on the Poor Americas 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?

25
The Costs of Protection, especially for the poor

• See Toughest on the Poor Americas Flawed
  Tariff System. See p. 19.
• What is the gist of this article?