Econ 90 - Chapter 9 Report

Chapter 9
Nontariff Trade Barriers andthe

New Protectionism
The Political Economy of Protectionism

Strategic Trade Policy
Reporter: April Mae Waban

The Political Economy of
Fallacious Arguments for Protection
Fallacious Argument no. 1: Trade restrictions are

needed to protect domestic labor against cheap
foreign labor.
-This is fallacious because even if domestic wages are
higher than wages abroad, domestic labor costs can
still 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 to
protect domestic market.
-This would eliminate international price differences and
trade in all commodities subject to such "scientific"
tariffs.
Questionable Arguments for Protection
Protection is needed (1) to reduce domestic

unemployment and (2) to cure a deficit in the nation's
balance of payments
-Protection can reduce domestic
unemployment and a balance-of-
payments deficit. But they’re beggar-
thy-neighbor arguments for protection
because they come at the expense of
other nations.
As a result, other nations are likely
to retaliate, and all nations lose in the
end. Domestic unemployment and
deficits in the nation's balance of
payments should be corrected with
appropriate monetary, fiscal, and trade
policies rather than with trade
restrictions.
The Infant-Industry Argument
-It holds that a nation may have a potential

comparative edge in a commodity, but because
of lack of know-how and the initial small level of
output, the industry will not be set up or, if
already started, cannot compete successfully
with more established foreign firms.
Temporary trade protection is then needed to
establish and protect the domestic industry
during its "infancy" until it can meet foreign
competition, achieve economies of scale, and
reflect the nation's long-run comparative
advantage. At that time, protection is to be
removed.
For this argument to be valid, the return in the
grown-up industry must be sufficiently high also
to offset the higher prices paid by domestic
consumers of the commodity during the infancy
period.
The Infant-Industry Argument
Qualifications for Protection

1. It is clear that such an argument is more justified for
developing than for industrial nations.
2. It is difficult to identify which industry or potential industry
qualifies for this treatment, and experience has shown that
protection, once given, is difficult to remove.
3. What trade protection can do, an equivalent production
subsidy to the infant industry can do better.
A domestic distortion such as this should be overcome with a
purely domestic policy rather than with a trade policy that also
distorts relative prices and domestic consumption. A production
subsidy is also a more direct form of aid and is easier to remove
than an import tariff. One practical difficulty is that a subsidy
requires revenues, rather than generating them as an import tariff
does.
Who Gets Protected?
Trade protection benefits

producers and harms consumers
Since producers are few and stand
to gain a great deal from protection,
they have a strong incentive to lobby
the government to adopt protectionist
measures.
On the other hand, since the losses
are diffused among many consumers,
each of whom loses very little from the
protection, they are not likely to
effectively organize to resist
protectionist measures. Thus, there is
a bias in favor of protectionism.
A nation can create a comparative advantage (thru temporary trade

protection, subsidies, tax benefits, and cooperative govt-industry
programs) in such fields as semiconductors, computers,
telecommunications, and other industries that are deemed crucial to
future growth in the nation.These high-technology industries are
subject to high risks, require large-scale production to achieve
economies of scale, and give rise to extensive external economies
when successful. Strategic trade policy suggests that by
encouraging such industries, the nation can reap the large external
economies that result from them and enhance its future growth
prospects.
Examples: the steel industry in 1950s and in semiconductors in
1970s and 1980s in Japan, and in the development of the Concorde
in 1970s and the Airbus from 1970s in Europe.
Difficulties in Implementing Strategic Trade Policy
First, it is extremely difficult to pick winners and devise

appropriate policies to successfully nurture them.
Second, since most leading nations undertake strategic
trade policies at the same time, their efforts are largely
neutralized, so the potential benefits to each may be
small.
Third, when a country does achieve substantial success
with strategic trade policy, this comes at the expense of
others and so other countries are likely to retaliate.
Faced with all these practical difficulties, even
supporters of strategic trade policy acknowledge that
free trade is still the best policy, after all. That is, free
trade may be sub-optimal in theory, but it is optimal in
practice.
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

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Chapter 9

Nontariff Trade Barriers andthe

The Political Economy of Protectionism

Reporter: April Mae Waban

Fallacious Argument no. 1: Trade restrictions are

Protection is needed (1) to reduce domestic

-It holds that a nation may have a potential

Qualifications for Protection

Trade protection benefits

A nation can create a comparative advantage (thru temporary trade

First, it is extremely difficult to pick winners and devise

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