ARGUMENTS FOR PROTECTION
INTRODUCTION
First Best World
 Second Best World

Distortions due to market failure
 Distortions due to monopoly/monopsony power


Specificity Rule
ARGUMENT 1: PROMOTING DOMESTIC
PRODUCTION OR EMPLOYMENT

Protectionist have many reasons for maintaining
production or employment



How is this best for a nation as a whole?
Typical Argument: there are many spillovers or extra social
benefits to domestic production or employment in "this particular
import-competing industry". [thus we are in a 2nd best world]
Examples of spillovers to domestic production or
employment:
1.
2.
3.
4.
5.
6.
7.
Knowledge, technical know-how or management technique
spillovers
Spillovers of worker skills/attitudes
Decreases production costs in the long run
Increased costs of job search when switching industries
Home countries take pride in local production (Made in USA)
Product is essential to national defense ()
Employment in this industry is a way to redistributed income
to low-income (disadvantaged) members of society.
ARGUMENT 1: PROMOTING DOMESTIC
PRODUCTION OR EMPLOYMENT

1st problem:


2nd problem:


Some import decline comes from a  in demand due to higher prices
Is it realistic to assume there is enough fixed capital, ready to be put
into production once the tariff is imposed?
3rd problem:

Potential retaliation by other countries
German Mkt for wheat
SG
Price

A small country case analysis: German Wheat Market
Suppose a tariff is imposed to restrict imports
Price

World or Intl Mkt for wheat
PG
Pw + t
Pw
DG,m,
DG
Qs1 Qs2
30 35
Qd2 Qd1
45 50
Q
M2=10
M1=20
80
Q
ARGUMENT 1: PROMOTING DOMESTIC
PRODUCTION OR EMPLOYMENT
Now is promoting domestic production or employment a
valid argument in this case?
It is possible that there are spillovers to production/employment
 Thus it is possible that the "spillover" benefits are greater than
the DWL created by imposing a tariff or a quota.
 The tariff may be better than free trade in a 2nd best world
German Mkt for wheat
SG
Price

Price

World or Intl Mkt for wheat
PG
Pw + t
Pw
DG,m,
DG
Qs1 Qs2
30 35
Qd2 Qd1
45 50
Q
M2=10
M1=20
80
Q
ARGUMENT 1: PROMOTING DOMESTIC
PRODUCTION OR EMPLOYMENT

What is a better way to achieve more domestic
production of a good (not less consumption or fewer
units of it)?

Domestic subsidy - not a tariff

Doing so encourages production without the DWL from the
consumer’s perspective
German Wheat
World Wheat Mkt
SG1
P
SG2
P
subsidy
Pw+S
a
Pw
b
c
DG
Qs1 Qs2
=5 =8
Qd
=15
Md2
Q of wheat
M2
=7
M1
=10
Md1
Q of wheat
ARGUMENT 2: INFANT INDUSTRY
ARGUMENT

Infant Industry Argument:

a temporary tariff is justified because it cuts down on
imports while the infant domestic industry learns how to
produce at low enough costs.
$
P1
ATCswiss
P2
ATCthai
Q2
Q1
Q watches
ARGUMENT 2: INFANT INDUSTRY
ARGUMENT

Difficulties in practice:
1.
2.
3.
How do countries know which industries have the
greatest potential?
Is it always true that infant industries need or should be
protected? Is any gov. policy really needed?
If the gov. provides assistance, what assistance is best?
ARGUMENT 2: INFANT INDUSTRY
ARGUMENT

Infant Industry in Practice
Import substitution – industrialization was a trade policy
adopted by many low and middle income countries before
the 1980s.
 Policy aimed to encourage domestic industries by limiting
competing imports

1.
2.
3.
4.
The principle justification was/is the infant industry argument
Goal was economic development
How did countries pay for this?
Did it work? No…
ARGUMENT 3: DYING INDUSTRY ARGUMENT

The protectionist argument is identical to the other
arguments discussed, just a different setting.

Why do we worry about with a dying industry?

Loss of production and jobs.
ARGUMENT 4: DEVELOPING COUNTRY
PUBLIC REVENUE ARGUMENT

Developing country argument:

a poor developing country imposes tariffs to earn gov.
revenue to pay for public goods.
ARGUMENT 5: INCOME REDISTRIBUTION

Income Redistribution





What did Stolper-Samuelson Theory say?
Argument: It is irrelevant that free trade increases
national income if you are an unskilled worker in a
developed country!
Is there merit to the argument that trade hurts unskilled
workers in developed countries?
From US perspective, is there some merit to the
argument that trade hurts low skilled workers?
What are the solutions to the income distribution?
OTHER ARGUMENTS FOR PROTECTION
6.
7.
8.
National Pride
National Defense
Closing a Trade Deficit