Argument For and Against Protectionism

Dedicated to Pat

Buchanan, an

interesting modern

proponent of

protection.

PROTECTIONISMProtecting 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

Q

Sd

Pt

PROW

Dd

a b d

S1 D1S0 D0

a = Change from CS to PS

b = “Production effect”

c = Tariff Revenues

d = “Consumption effect”

c

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

Q

Sd

Sd plus quota

PD w/ quota

PROW

Dd

a b d

S1 D1S0 D0

a = Change from CS to PS

cb = “Production effect”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 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.

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?