RATIONALES FOR GOVERNMENT
INTERVENTION
Economic Rationales
Noneconomic Rationales
- Prevent unemployment
- Maintain essential industries
- Protect infant industries
- Deal with unfriendly countries
- Promote industrialization
- Maintain spheres of influence
- Improve position compared to
- Preserve national identity
other countries
INFANT-INDUSTRY ARGUMENT
In 1792, Alexander Hamilton presented first and this has come to be one of the oldest and
most popular arguments for protectionism.From World War II until the 1970s many developing
countries attempted to accelerate their development by limiting imports of manufactured goods to
foster a manufacturing sector serving the domestic market.
Countries may have a potential comparative advantage in some industries, but these
industries can not initially compete with well-established industries in other countries.To allow these
industries to establish themselves, governments should temporarily support them
until they have grown strong enough to compete internationally. The important point is to predict
“potential comparative advantage” in an industry that cannot be realized in the short run due to foreign
competition.
The objective of infant-industry argument is to become more competitive over time with
reduction in unit cost by realizing:
-
The economies of scale
-
Learning by doing (Greater worker efficiency)
Government supports emerging industries by using tariff, import quotas.
Briefly, it makes entry barriers high. Despite the positive outcomes, it causes some problems.The
protection against import competition may be a disincentive for managers to adopt innovation needed
to make their companies globally competitive. Also, most likely consumers pay high prices because of
lack of competition. If a government can subsidize companies so that consumer prices are not
increased, but taxpayers pay for the subsidy. The largest economies formed their manufacturing base
behind the closed doors. The U.S. and Germany had high tariff rates on manufacturing in the 19th
century, and Japan had extensive import controls until the 1970s.
Analysis
- Problems: (1) Problem with identifying right industries, (2) Problem of time consistency.
(1) Problem with identifying right industries
It constitutes a difficulty for governments to identify those industries that have a high
probability of success. There could be always. uncertainty Protecting manufacturing does no good
unless the protection itself helps make industry competitive. For instance, Pakistan and India have
protected their heavy manufacturing sectors for decades and have recently begun to develop
significant exports of light manufactures like textiles.
(2) Problem of time consistency
It is a difficult question: When should government begin and finish protection?
It is not always good to try to move today into the industries that will have a comparative advantage in
the future. In the 1980s South Korea became an exporter of automobiles, whereas in the 1960s its
capital and skilled labor were still very scarce.
- Market Failure Justifications for Infant Industry Protection
Two arguments for how market failures prevent infant industries from becoming competitive:
(1) Imperfect Capital (Financial) Markets (2) Appropriability Argument
(1) Imperfect Capital (Financial) Markets
Because of poorly working financial laws and markets, new industries are not allowed
to borrow as much as they need, which results in restricted economic growth. If creating better
functioning laws and markets is not feasible, then high tariffs would be a second-best policy to
increase profits for new industries, leading to more rapid growth.
(2) Appropriability Argument
Firms may not be able to privately appropriate the benefits of their investment in new
industries because those benefits are public goods. The knowledge created when starting an industry
may be not appropriable (may be a public good) because of a lack of property rights. If establishing a
system of property rights is not feasible, then high tariffs would be a second-best policy to encourage
growth in new industries.
INDUSTRIALIZATION ARGUMENT
Industrialization is a process of social and economic change whereby a human society is
transformed from a pre-industrial (an economy where the amount of capital accumulated per capita is
low) to an industrial state Countries with a large manufacturing base generally have higher per capita
incomes than do countries without such a base. Emerging economies use protection to increase their
level of industrialization because of industrial countries’ economic success and experience.
Industrialization, provides faster growth than agriculture by increasing workers, brings in direct
foreign investment, diversifies the economy, markets for industrial products will grow faster than
markes for agricultural.
Shifing from agriculture to industry:
Use of Surplus (Extra) workers
Shifting people out of agriculture results risks and problems. High demands of workers and
social issues, agricultural sector may be overlooked government must decide which industry to
protect, when subsidizing, self-sufficiency problem in terms of agricultural production.
Promoting investment inflows
If a country seems as a very attractive, profitable market, import restrictions may even
increase foreign direct investment and employment.
Diversification
Export prices of most primary products fluctuate widely. Manufacturing shift the dependence
from a few agricultural products to a few industrial products. However, a greater dependence on
manufacturing does not guarentee diversification or stable export earnings.
Greater Growth for Manufactured Products
Prices of raw material and agricultural commodities do not rise as fast as prices of finished
goods. The terms of trade are the quantity of imports that a given quantity of a country’s exports can
buy. The objective of the terms of trade is increasing the ratio Px/Pm ( = to make imports cheaper).
Restrictive trade policy can improve country’s terms-of trade and thus increase its welfare if country is
developed. The Terms of trade for emerging economies may deteriorate because the demand for
primary products grows more slowly and cost savings passed on to consumers
IMPORT SUBSTITUTION VERSUS EXPORT PROMOTION
IMPORT SUBSTITUTION
The strategy of encouraging domestic industry by limiting imports of manufactured goods.
Many less-developed countries have pursued this strategy. in Latin American countries worked in the
1950s and 1960s. Many economists are now harshly critical of the results of import substitution,
arguing that it has fostered high-cost, inefficient production. Many countries that have pursued import
substitution have not shown any signs of catching up with the developed countries. In India, after 20
years of economic plans between the early 1950s and the early 1970s, its per capita income was only
a few percent higher than before.
Import-substituting industrialization generated high rates of effective protection, inefficient scale of
production, higher income inequality and unemployment.
EXPORT PROMOTION
Rapid economic growth by promoting export industries, an approach known as
export-led development. This argument advocates focusing on exporting firstly. It gives more
emphasis foreign markets than domestic markets. S. Korea, Hong Kong, Singapore and Taiwan have
achieved remarkable success by promoting export industries for which export markets should logically
exist. They are criticized with the name of “Gang of Four” by China government in the past.
Economic Relationships With Other Countries
Improve Relative Economic Position
Countries may impose trade restrictions to improve their relative competitive
positions. Their primary motivations are:
•
balance-of-payments adjustments
•
comparable access, i.e., “fairness”
•
leverage as a bargaining tool
•
price-control objectives
The comparable access argument, i.e., “fairness,” promotes the idea that a country’s
firms are entitled to the same access to foreign markets as foreign firms have to its market.
Together with other standards that have grown increasingly important in recent years, the
fair and equitable treatment standard provides a useful yardstick for assessing relations
between foreign direct investors and Governments of capital-importing countries.
As a general proposition, the standard also acts as a signal from capital-importing
countries: for, if a host country provides an assurance of fair and equitable treatment, it
presumably wishes to indicate to the international community that investment within
its jurisdiction will be subject to treatment compatible with some of the main expectations
of foreign investors.
Dumping refers to the practice of pricing exports below cost, or below their homecountry prices, i.e., below their “fair market value.”
 The argument is that a firm that wants to become a global monopoly might
try to eliminate its foreign competitors by dumping.
 Once it has a global monopoly, it will raise its price.
 Dumping is usually justification for temporary countervailing duties.
OPTIMUM TARIFF ARGUMENT
If a country is large enough in the world markets, a tariff improves the country’s
terms of trade. A tariff, of course, reduces the volume of trade, generating production and
consumption costs. But a moderate tariff can
benefit a large country at the expense of the rest of the world; that is, the favorable termsof-trade effect can outweigh the unfavorable consumption and production costs. Hence,
increasing national welfare by improving the terms of trade becomes one possible motive
for tariff protection. An increase in the rate of tariff raises the production and consumption
costs as it improves the terms of trade. Eventually, the costs will predominate
because in any case free trade is better than no trade which would result from a high
enough tariff. The rate that squeezes out as much gains as possible is known as the optimum
tariff. Figure 11.4 illustrates such an optimum tariff.
The figure shows two trade indifference
curves, U and U*: the curve U is
tangent to ray OE (which represents the free
trade equilibrium international
price ratio), and the curve U* is tangent to
the foreign offer curve. The curve
U* represents the maximal utility level
possible for the home country to
obtain with the given foreign offer curve.
The home country can reach the
point E’ by levying an optimum tariff. The
optimal tariff rate is that which
leads the free trade offer curve OC to the
tariff-ridden offer curve OC*. Such
a tariff causes the equilibrium international
price of the imported good to fall.
This is shown by the smaller slope of the ray
from the origin through the
point E’ than that through the point E. The
new international equilibrium
terms of trade become P = AE’/AO;AO
imports are paid for AE’ exports.
The slope of the foreign offer curve equals
the slope of the home
country’s trade indifference curve U* at E’.
Domestic consumption (and
production) occurs at E’ only if the
(distorted) domestic relative price ratio
(the distorted domestic relative price of
imports in terms of exports) is P* =
AE’/AB. The wedge between the new
international price P and the domestic
relative price P* shows the optimal tariff rate:
The optimum rate of tariff for small country is zero. When the country is
not small, however, the above formula calls for a positive rate of tariff. The
essence of the optimum tariff is the exploitation of monopsonistic power. If a country can
influence world prices, the citizens of that country collectively
possess monopsonistic power; by restricting import demand they can force
the price down. The tariff is the instrument by which the country manipulates
the market.
The optimum tariff argument is strictly a nationalistic one. From a global
point of view the optimum rate of tariff is zero. With a tariff, the home
country inflicts a loss on the rest of the world, and the loss exceeds the home
country’s gain.
Our discussion of the optimum tariff took the foregin offer curve as fixed.
If, however, we can use tariff policy to improve our terms of trade, foreigners
can do the same to us. Suppose that country 1 is the first country to levy an
optimum tariff. The best that country 2 can do in this situation is to levy its
own optimum tariff that changes its offer curve. This will bring country 2 to
a new trade indifference curve which represents higher welfare but still lower
tP*
P 1AE’/ AB
AE’/AO1BO
AB
than the initial trade indifference curve of the free trade situation. The two
countries may continue raising their tariffs until either all trade is killed off or
a stable situation is reached, i . e., a situation in which both countries at the
same time are levying what for each of them is the optimum tariff, taken the
other country’s tariff as given. A country taken as a single unit can always
gain by levying a tariff, provided that the other country does not retaliate. If,
however, we view both as one unit, free trade will be the optimal policy,
Since one country’s gain from an optimum tariff will always be smaller than
the other’s loss from it. Optimum tariff policy is therefore tempting only to a
country that is both sizable and reasonably free of the fear of retaliation. For
example, if a large country trades with many small countries, retaliation is
unlikely.
Such an asymmetric position may also arise due to the commodity
composition of trade. For example, the home country might be the world’s
only exporter of a certain good, which many other countries import, while
importing an assortment of goods from many countries. A good example is
the policy of OPEC. OPEC’s policy instruments are not tariffs but export
taxes and quotas. However, these have basically the same economic effects
as tariffs. OPEC seems to possess the necessary asymmetry. The manufactured
goods and foodstuffs that OPEC imports are as vital to them as their
oil is to their trading partners. But they can obtain these imports from a large
number of countries, and hence, OPEC has not been seriously threatened with
retaliation.
Non - Economic Rationales for
Government Intervention
Government rationales are often noneconomic, such as;




Maintenance of essential industries (especially defense)
Prevention of shipments to unfriendly countries
Maintenance or extention of spheres of influence
Conservation of activities that help preserve a national identity
Maintenance of essential industries
Protection of essential domestic industries during peacetime helps a country not to
depend on foreign sources of supply during war.
In protecting essential industries, countries must determine which ones are
essential, should consider the costs and alternatives and also consider political
consequences. Because once an industry becomes protected, their protection is difficult to
determine because protected companies and their employees support politicians who will
support their protection from imports.
Comment
Infant industry has been the one of the oldest and most popular arguments. In 19th century
and after World War II, many countries used this approach when building their manufacturing base.
The U.S. and Germany had high tariff rates on manufacturing in the 19th century, and Japan had
extensive import controls until the 1970s. South Korea attempted to develop its automobile industry by
using this approach. South Korea was a country which has scarce capital, had built four automobile
plants. Despite rising of automobile giants such as Hyundai, South Korea shut-down many plants and
many companies went bankrupt. Because of its early policies. After all, infant-industy argument aren’t
used by countries anymore because of disadvantages.
In 1950s and 1960s, another argument became popular in Latin America Countries. It was
named import substituion. It is a domestic production approach which producing, previously import
products. Generally, export is the principal part of production in developing countries. However,
countries such as India and Brazil couldn’t improve their export with extremely reducing import. India’s
export was only 7 percent of its production in 1990. The country was under U.S.A. in the rankings.
Besides this, between the early 1950s and the early 1970s, its per capita income was only a few
percent higher than before. So, it has been realized as an inefficient approach too. On the other hand,
Asian countries developed thanks to promoting export. Recently, developing countries are following
this way. The objective is getting larger pie from the cake and catching developed economies.
Kaynakça
International Economics Theory & Policy
Paul R. Krugman, Maurice Obstfeld,
Seventh Edition 2006 Pearson
Theory, Policy and Dynamics in International Trade
Wilfred J. Ethier, Elhanan Helpman, Ronald Winthrop Jones, Peter Neary
1993 Cambridge University Press
Against the Tide: Intellectual History of Free Trade
Douglas A. Irwin
1996 Princeton University Press
“Turning the Corner”
Global Finance Magazine
July/August 2005 by Keith Loveard
International Monetary Fund
http://www.imf.org/
Wikipedia
http://wikipedia.org/
Dünya Ticaret Örgütü (DTÖ) Anti-Damping Anlaşması ve Sübvansiyonlar ve Telafi
Edici Önlemler Anlaşması (RG:25.2.1995-22213 mükerrer)
3577 Sayılı İthalatta Haksız Rekabetin Önlenmesi Hakkında Kanun
(RG: 01.07.1989-20212)
4412 Sayılı İthalatta Haksız Rekabetin Önlenmesi Hakkında Kanunda Değişiklik
Yapılmasına İlişkin Kanun (RG:25.07.1999-23766)
İthalatta Haksız Rekabetin Önlenmesi Hakkında Karar
(RG:30.10.1999-23861)
İthalatta Haksız Rekabetin Önlenmesi Hakkında Yönetmelik
(RG:30.10.1999-23861)
International Economics Theory & Policy 7th edition, Paul R. Krugman, Maurice
Obstfeld
Organization of American States, OAS TRADE UNIT STUDIES, Trade and Competition
in B2B Markets
José Tavares de Araujo Jr.
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, FAIR AND
EQUITABLE TREATMENT