Econ 90- Chapter 9 Report

8/8/2019 Econ 90- Chapter 9 Report

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The Political Economy of Protectionism

Strategic Trade Policy

Reporter: April Mae Waban

Chapter 9

Nontariff Trade Barriers andtheNew Protectionism


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The Political Economy

of


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Fallacious Arguments for Protection

FallaciousFallacious ArgumentArgument nono.. 11:: TradeTrade restrictionsrestrictions areareneededneeded toto protect protect domesticdomestic laborlabor againstagainst cheapcheapforeignforeign laborlabor..

-This is fallacious because even if domestic wages are

higher than wages abroad, domestic labor costs canstill be lower if the productivity of labor is sufficiently

higher domestically than abroad. Even if this were not

the case, mutually beneficial trade could still be based

on comparative advantage.

Fallacious Argument no 2: Use scientific tariff toprotect domestic market.

-This would eliminate international price differences andtrade in all commodities subject to such "scientific"

tariffs.


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Questionable Arguments for Protection

ProtectionProtection isis neededneeded ((11)) toto reducereduce domesticdomestic

unemploymentunemployment andand ((22)) toto curecure aa deficitdeficit inin thethe nation'snation's

balancebalance ofof paymentspayments

--ProtectionProtection cancan reducereduce domesticdomesticunemploymentunemployment andand aa balancebalance--ofof--paymentspayments deficitdeficit.. ButBut theyretheyre beggarbeggar--thythy--neighborneighbor argumentsarguments forfor protectionprotectionbecausebecause theythey comecome atat thethe expenseexpense ofofotherother nationsnations..

AsAs aa result,result, otherother nationsnations areare likelylikelytoto retaliate,retaliate, andand allall nationsnations loselose inin thetheendend.. DomesticDomestic unemploymentunemployment andanddeficitsdeficits inin thethe nation'snation's balancebalance ofofpaymentspayments shouldshould bebe correctedcorrected withwithappropriateappropriate monetary,monetary, fiscal,fiscal, andand tradetradepoliciespolicies ratherrather thanthan withwith tradetraderestrictionsrestrictions..


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The Infant-Industry Argument

--ItIt holdsholds thatthat aa nationnation maymay havehave aa potentialpotentialcomparativecomparative edgeedge inin aa commodity,commodity, butbut becausebecauseofof lacklack ofof knowknow--howhow andand thethe initialinitial smallsmall levellevel ofofoutput,output, thethe industryindustry willwill notnot bebe setset upup or,or, ififalreadyalready started,started, cannotcannot competecompete successfullysuccessfully

withwith moremore establishedestablished foreignforeign firmsfirms..TemporaryTemporary tradetrade protectionprotection isis thenthen neededneeded toto

establishestablish andand protectprotect thethe domesticdomestic industryindustryduringduring itsits "infancy""infancy" untiluntil itit cancan meetmeet foreignforeigncompetition,competition, achieveachieve economieseconomies ofof scale,scale, andandreflectreflect thethe nation'snation's longlong--runrun comparativecomparative

advantageadvantage.. AtAt thatthat time,time, protectionprotection isis toto beberemovedremoved..

ForFor thisthis argumentargument toto bebe valid,valid, thethe returnreturn inin thethegrowngrown--upup industryindustry mustmust bebe sufficientlysufficiently highhigh alsoalsototo offsetoffset thethe higherhigher pricesprices paidpaid byby domesticdomesticconsumersconsumers ofof thethe commoditycommodity duringduring thethe infancyinfancy

periodperiod..


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The Infant-Industry Argument

QualificationsQualifications forfor ProtectionProtection

11.. ItIt isis clearclear thatthat suchsuch anan argumentargument isis moremore justified justified forfordevelopingdeveloping thanthan forfor industrialindustrial nationsnations..

22.. ItIt isis difficultdifficult toto identifyidentify whichwhich industryindustry oror potentialpotential industryindustry

qualifiesqualifies forfor thisthis treatment,treatment, andand experienceexperience hashas shownshown thatthatprotection,protection, onceonce given,given, isis difficultdifficult toto removeremove..

33.. WhatWhat tradetrade protectionprotection cancan do,do, anan equivalentequivalent productionproductionsubsidysubsidytoto thethe infantinfant industryindustry cancan dodo betterbetter..

AA domesticdomestic distortiondistortion suchsuch asas thisthis shouldshould bebe overcomeovercome withwith aapurely purely domesticdomestic policypolicy ratherrather thanthan withwith aa tradetrade policypolicy thatthat alsoalso

distortsdistorts relativerelative pricesprices andand domesticdomestic consumptionconsumption.. AA productionproductionsubsidysubsidy isis alsoalso aa moremore directdirect formform ofof aidaid andand isis easiereasier toto removeremovethanthan anan importimport tarifftariff.. OneOne practicalpractical difficultydifficulty isis thatthat aa subsidysubsidyrequiresrequires revenues,revenues, ratherrather thanthan generatinggenerating themthem asas anan importimport tarifftariffdoesdoes..


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Who Gets Protected?

TradeTrade protectionprotection benefitsbenefitsproducersproducers andand harmsharms consumersconsumers

SinceSince producersproducers areare fewfew andand standstandtoto gaingain aa greatgreat dealdeal fromfrom protection,protection,theythey havehave aa strongstrong incentiveincentive toto lobbylobbythethe governmentgovernment toto adoptadopt protectionistprotectionistmeasuresmeasures..

OnOn thethe otherother hand,hand, sincesince thethe losseslossesareare diffuseddiffused amongamong manymany consumers,consumers,

eacheach ofof whomwhom losesloses veryvery littlelittle fromfrom thetheprotection,protection, theythey areare notnot likelylikely totoeffectivelyeffectively organizeorganize toto resistresistprotectionistprotectionist measuresmeasures.. Thus,Thus, therethere isisaa biasbias inin favorfavor ofof protectionismprotectionism..


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AA nationnation cancan createcreate aa comparativecomparative advantageadvantage (thru(thru temporarytemporary tradetradeprotection,protection, subsidies,subsidies, taxtax benefits,benefits, andand cooperativecooperative govtgovt--industryindustryprograms)programs) inin suchsuch fieldsfields asas semiconductors,semiconductors, computers,computers,telecommunications,telecommunications, andand otherother industriesindustries thatthat areare deemeddeemed crucialcrucial totofuturefuture growthgrowth inin thethe nationnation..TheseThese highhigh--technologytechnology industriesindustries areare

subjectsubject toto highhigh risks,risks, requirerequire largelarge--scalescale productionproduction toto achieveachieveeconomieseconomies ofof scale,scale, andand givegive riserise toto extensiveextensive externalexternal economieseconomieswhenwhen successfulsuccessful.. StrategicStrategic tradetrade policypolicy suggestssuggests thatthat bybyencouragingencouraging suchsuch industries,industries, thethe nationnation cancan reapreap thethe largelarge externalexternaleconomieseconomies thatthat resultresult fromfrom themthem andand enhanceenhance itsits futurefuture growthgrowthprospectsprospects..

ExamplesExamples:: thethe steelsteel industryindustry inin 19501950ss andand inin semiconductorssemiconductors inin19701970ss andand 19801980ss inin Japan,Japan, andand inin thethe developmentdevelopment ofof thethe ConcordeConcordeinin 19701970ss andand thethe AirbusAirbus fromfrom 19701970ss inin EuropeEurope..


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Difficulties in Implementing Strategic Trade Policy

FirstFirst,, itit isis extremelyextremely difficultdifficult toto pickpick winnerswinners andand devisedeviseappropriateappropriate policiespolicies toto successfullysuccessfully nurturenurture themthem..

SecondSecond,, sincesince mostmost leadingleading nationsnations undertakeundertake strategicstrategictradetrade policiespolicies atat thethe samesame time,time, theirtheir effortsefforts areare largelylargely

neutralized,neutralized, soso thethe potentialpotential benefitsbenefits toto eacheach maymay bebesmallsmall..

ThirdThird,, whenwhen aa countrycountry doesdoes achieveachieve substantialsubstantial successsuccesswithwith strategicstrategic tradetrade policy,policy, thisthis comescomes atat thethe expenseexpense ofofothersothers andand soso otherother countriescountries areare likelylikely toto retaliateretaliate..

FacedF

aced withwith allall thesethese practicalpractical difficulties,difficulties, evenevensupporterssupporters ofof strategicstrategic tradetrade policypolicy acknowledgeacknowledge thatthatfreefree tradetrade isis stillstill thethe bestbest policy, policy, afterafter allall.. ThatThat is,is, freefreetradetrade maymay bebe subsub--optimaloptimal inin theory,theory, butbut itit isis optimaloptimal ininpracticepractice..


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Credits to References:

http://www.economicnoise.com/2010/03/27/b

eggar-thy-neighbor-pressures-increase/

http://wps.aw.com/aw_carltonper_modernio_

4/21/5566/1425036.cw/content/index.html

http://www.framingthedialogue.com/archives/the-

chinese-are-stealing-our-jobs/http://www.cepr.org/pubs/Bulleti

n/meets/215.htm

Econ 90- Chapter 9 Report

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