1. Arguments for Protection

2. Introduction First Best World Second Best World Specificity Rule
When markets are efficient, it is difficult to argue that government intervention can improve social welfare.
Second Best World
Distortions due to market failures
Distortions due to monopoly/monopsony power
Distortions due to government intervention (taxes, subsidies, environmental/labor laws)
Private markets alone may not lead to “maximized social welfare”
Better case that government intervention can improve social welfare.
Specificity Rule
use the policy tool that is closest to the true source of the distorting gap between private and social incentives.

3. Argument 1: promoting domestic production or employment
Protectionist have many reasons for maintaining production or employment
How is protection best for a nation as a whole?
Typical Argument: there are many spillovers or extra social benefits to domestic production or employment in “XXX particular import-competing industry".
Examples of spillovers to domestic production or employment:
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
Product is essential to national defense
Employment in this industry is a way to redistributed income to low-income (disadvantaged) members of society.

4. Argument 1: promoting domestic production or employment
A small country case analysis: Sweden Wheat Market
Suppose a tariff is imposed to restrict imports
1st problem:
The effect is an  in Qs by 5. but imports  by 10
The M comes from a  in domestic demand due to higher domestic prices
2nd problem:
Is it realistic to assume there is enough fixed capital, ready to be put into production once the tariff is imposed? May be, may be not.
3rd problem:
Potential retaliation by other countries Q
Price
Qd1 50 D S
Sweden
Mkt for
wheat P G
S,m,
Sweden import demand 80 Pw
Qs1 30 M 1
=20
Pw + t
Qs2 35
Qd2 45 2
=10

5. Argument 1: promoting domestic production or employment
Is promoting domestic production or employment a valid argument in this case?
It is possible that there are spillovers to production/employment
It is possible that the "spillover" benefits are greater than the DWL created by imposing a tariff (or quota).
Point: tariff may be “better” than free trade in a 2nd best world Q
Price
Qd1 50 D S
Sweden
Mkt for
wheat P G
S,m,
Sweden import demand 80 Pw
Qs1 30 M 1
=20
Pw + t
Qs2 35
Qd2 45 2
=10

6. Argument 1: promoting domestic production or employment
Is there a “better” way to achieve ↑ domestic production (and not ↓ consumption)?
Domestic subsidy – (not a tariff/quota)
Subsides encourages production without the DWL from the consumer's perspective.
What about protecting jobs? Subsides can be tied to # of jobs per unit of output.
If subsidies are more efficient, then why do we have so many tariffs?
Politics. Subsidies come from gov. budget.
Politics: Tariffs are easier to pass into law + and improve gov. budget from the tariff revenue. D G
Q of wheat P Q s1 =5 d = 15 w
subsidy S 1 2
Sweden
Wheat
Sweden Import Demand M s2 =8 =7
=10 +S a b c

7. Argument 2: Infant Industry Argument
a “temporary” tariff is justified because it reduces imports while the infant domestic industry learns how to produce at lower ATC.

8. Argument 2: Infant Industry Argument
Infant industry difficulties:
How do countries know which industries have the greatest potential? Which industries will have a Comparative Advantage in the future?
If no real CA in future, protection may be wasteful.
With protection, industries may never grow up.
Is it always true that infant industries need or should be protected? Is any gov. policy really needed?
Maybe if: market failure prevents private sector from investing in the industry (2nd best world). Countries may have poorly functioning financial laws/markets.
If the gov. provides assistance, what assistance is best?
Subsidy vs quota
Specificity rule – what government intervention is really needed?

9. Argument 2: Infant Industry Argument
Infant industry in practice
Import substitution – industrialization
Trade policy adopted by many low and middle income countries before the 1980s.
Policy aimed to encourage domestic industries by limiting import-competing goods
The principal justification of this policy was/is the infant industry argument
Goal was economic development
Subsidies for manufacturing
Tariffs/quotas to replace imported mfg. goods with domestic production
How did countries pay for this?
Export taxes on agriculture
Dilemma: a country's choice to seek substitutes for imports often corresponded with a choice to discourage export growth.
Did this work? No.

10. Argument 3: Dying Industry Argument
The protectionist argument is identical to the other arguments discussed, just a different setting.
Why do we worry about a dying industry?
Loss of production and jobs.
Protect or subsidy/assistance?
production subsidy can support import-threatened industries
trade adjustment assistance: often offered by developed countries to assist workers and firms in import-threatened industries.

11. 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.
Some LDC countries earn between 1/4 and 3/5 of gov. tax revenue from tariffs.
Developed countries earn less than 2% this way
Best case for trade protection here.

12. Argument 5: Income Redistribution
What did Stolper-Samuelson Theory say?
In the US: Who would seek protection from international trade?
Argument: It is irrelevant that free trade increases national income if you are an unskilled worker in a developed country
What are the solutions to the problem of income distribution due to trade?
Tariffs/quotas?
Subsidies?
US Trade Adjustment Assistance (TAA)?
What else?

13. Other arguments for protection
National Pride
National Defense
Closing a Trade Deficit
Countries with large balance-of-payments deficits (like US) sometimes impose import restraints as a means of reducing the trade deficit
If we assume that an import tariff does not affect exports, this argument may be valid.
But this is no guarantee. Why?:
retaliation by trading partners
reduction in national income abroad and reduced ability of foreign countries to buy the home country's products
a reduction in exports of the home country if the imports now restricted were inputs to the production of the final good exports

14. WTO group work
Put yourself into two teams per group (one on each side of your WTO case).
As a team, identify possible arguments for trade protection/trade promotion for both sides of the case.
Some cases may involve more than on trade policy